In India, a home is more than simply a place to live; it is an investment that will last for generations. Everyone wants to own at least one property, regardless of income, because no one wants to be stuck paying rent for years. Home loans and EMIs are becoming more commonplace every day. The truth is that paying down a home loan requires a sizable amount of one’s income. Those who earn money through rentals, however, try to find tax breaks.
Property insurance and loans are both seen as burdens by Indian homeowners. If enough planning is done, a property owner could be exempt from paying some taxes on rental income. Let’s look into the taxes of rental income in India. Under Section 24, the government has offered many tax benefits for residential property.
Tax on Rental Income
According to the Income-tax Act, the money collected as rent from the home or building is taxed under the heading “Income from House Property.” You will be judged as having income from other sources if you have rented out a property to someone and earned rent from doing so. Additionally, if you get revenue from unoccupied land, it will be taxed under the category of “Income from Other Sources.”
How Is Rental Income Taxed?
In India, the rental income is taxed under the heading “Income from House Property.” Anyone earning rent from a residential property, a business in a building, or a manufacturing facility is subject to taxation. The property is taxed on its gross annual value (GAV), which is calculated after subtracting municipal taxes, the standard deduction, and interest paid on a mortgage (if any). For expenses like renovations, repairs, and other costs, you can deduct 30% of the yearly value.
According to the Income Tax Act, any rent that the authorised property owner receives in exchange for renting out a property (a building or adjacent land) is referred to as rental income. The annual rental value obtained by the property owner is used to compute the tax on rental income. Based on its yearly worth, the property is taxed in India. By estimating the property’s yearly rental revenue or the anticipated rental price, the property owners can ascertain the annual worth of the asset.
What Deductions are offered under Section 24?
Section 24 of the Income Tax Act allows for two exemptions. The following two exclusions are listed:-
1. Standard Deduction: For repairs and maintenance, the standard deduction is 30% of the gross value of the property. After subtracting municipal taxes, this sum is determined. If your actual expense is larger or lower than the 30% deduction, it is still permitted. Municipal taxes, however, are refundable if paid within a fiscal year.
2. A deduction for the actual interest paid on a Mortgage: can be made for real estate that is rented, presumed to be rented, or that is inhabited by the owner. Interest on borrowed funds used for construction, purchase, repair, or renovation is entirely deductible from taxes on an accrual basis.
How to Save Tax on Rental Income?
1. Maintenance Fees
One of the simplest methods to reduce your tax liability is to subtract maintenance fees from the rent you earn. One of the easy pickings is this. In your rental agreement, only one liner is required. The majority of the time, I saw that maintenance fees for the community were included in the rent. As a result, even maintenance fees that are not considered rental income are taxed by the landlord. An owner can reduce their tax burden on rental income by dividing the amount received into two portions. For instance, you should only receive Rs 27,000 if your final rent is Rs 30,000 and your society’s maintenance costs are Rs 3,000. You might include a provision in the lease stating that the renter will pay maintenance fees directly to the association.
These two items should be paid for individually from the renter if the tenant rejects this agreement. He will essentially pay with two checks. The renter must personally pay the association any fees or have them collected separately.
2. Joint Property
Another efficient tax-saving strategy. I advise you to just employ this arrangement with your spouse because you can’t rely on everyone. Ideally, your spouse would not be employed. In this situation, you have the option of buying either joint property or only in your spouse’s name. The percentage of ownership in the property will determine how the rental income is split. As a result, you might pay less tax on the rental income allocated to your spouse.
3. 30% is the maximum allowed under this rule.
Conditional Deduction Under section 24, the owner or his family may deduct up to Rs 2 lakh from their home loan interest if they reside in the property (b). The same method is applied when no one is home. The whole mortgage interest can be written off if the property was rented out. On a self-occupied property, this deduction is also possible. If any one of the three requirements is not satisfied, your interest deduction is limited to Rs. 30,000 rather than Rs. 2 lakhs.
4. Claim a Deduction In The Amount Of Rent
In other words, even if the rent is not paid to the owner, the owner may still deduct the cost of that rent since the Gross Annual Value (GAV) is only recognised for income tax purposes on rent received. Additionally, under some situations, the owner may deduct the cost of a rental from the property’s GAV if it is for a period of time shorter than 14. The GAV of the property must be calculated by subtracting any rent loss due to vacancy or unrealized rent from the actual rent received.
5. Municipal Taxes
Few people are aware that you may deduct municipal taxes from your rental revenue, including things like property taxes and sewage taxes. The only caveat is that the owner must cover all of these local taxes. Tenants frequently pay local taxes. Therefore, the tenant’s payment cannot be deducted by the owner. Your revenue from real estate will be less after deducting municipal taxes, which will result in a lesser tax obligation.
6. Standard Deduction of 30%
A standard deduction of 30% on the NAV of the property is allowed by Section 24(a) of the Income Tax Act of 1961. Additional expenses, such as painting and repairs, cannot be deducted from your taxes.
7. Property Types: Fully/Semi Furnished
Such homes’ owners offer amenities like WiFi, piped gas, DTH/cable TV, newspapers, and so on. Usually, the owner pays the relevant authorities the fees that were collected as part of the rent. You can ask the renter to pay the bills in these situations so that you can lower the rent by the appropriate amount. Alternately, you may get the renter to pay you for it individually, making it a distinct payment from the rent. It will therefore lower your rental revenue.