Meenakshi Taheem
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Owning a rental property in India can be a lucrative investment, providing a steady stream of income. However, understanding how to efficiently manage the income tax on rental income is crucial to maximize your earnings. This blog will guide you through the latest rules and strategies to save tax on rental income in India, ensuring you make the most of your investment.
Understanding Income Tax on Rental Income
The income tax on rental income is calculated based on the annual rental earnings from your property. This income is added to your total taxable income and taxed according to your income tax slab rate. The rental income tax rate depends on your total income and can range from 5% to 30%.
Steps to Calculate Tax on Rental Income
Before diving into tax-saving strategies, it's essential to understand how to calculate the tax on rental income. Here’s a step-by-step guide:
- Determine Gross Annual Value (GAV): This is the total annual rent received from the property.
- Subtract Municipal Taxes: Deduct property taxes paid to the local municipal authority.
- Calculate Net Annual Value (NAV): NAV = GAV - Municipal Taxes.
- Standard Deduction: Deduct 30% of NAV as a standard deduction under Section 24A of the Income Tax Act for repairs and maintenance, regardless of the actual expenditure.
- Deduct Interest on Home Loan: If you have a home loan, deduct the interest paid on the loan as per Section 24B of the Income Tax Act.
Use a rental income tax calculator to simplify this process and get an accurate estimate of your taxable rental income.
Note: In case, the GAV is less than INR 2,50,000, the rental income tax would be zero.
Strategies to Save Tax on Rental Income (2024)
1. Claim Standard Deduction: The Income Tax Act allows a standard deduction of 30% on the NAV of your rental income. This deduction is available irrespective of your actual expenses on the property.
Example: If your NAV is ₹5,00,000, you can claim a deduction of ₹1,50,000 (30% of ₹5,00,000).
2. Deduct Municipal Taxes: Municipal taxes paid during the financial year can be deducted from the GAV to arrive at the NAV. Ensure you keep records of all property tax payments.
3. Home Loan Interest Deduction: If you have taken a loan to purchase or construct the rental property, you can deduct the interest paid on the loan from your rental income. There is no upper limit on the amount of interest that can be claimed as a deduction for rental properties.
Example: If you paid ₹2,00,000 as interest on a home loan, this amount can be deducted from your rental income.
4. Joint Ownership: If the rental property is jointly owned, the rental income can be divided among the co-owners based on their ownership share. This can help in reducing the tax liability as the income gets divided.
5. HRA and Rental Income: If you live in a rented house and also earn rental income from another property, you can claim House Rent Allowance (HRA) exemption. This helps in reducing your overall taxable income.
6. Maintenance and Repair Costs: While the standard deduction covers maintenance and repair, significant renovations or structural repairs can be claimed separately if they are not covered under the standard deduction. Ensure you maintain proper documentation for these expenses.
Recent Changes in Rental Income Taxation: Budget 2024-25 Announcements
- Simplified Filing: The Government of India has introduced a simplified process for filing rental income. Make sure to use the updated ITR forms for accurate reporting.
- Revised Standard Deduction: The standard deduction of 30% on NAV remains unchanged for the current financial year.
- Interest on Home Loans: Continued deduction of the full interest amount on home loans for rental properties, without any upper limit.
- Budget 2024: The new ruling mandates that all rental income from residential properties must be declared under 'Income from House Property' and not under 'Profits and Gains from Business and Profession'. This aims to curb excessive deductions claimed against rental income.
Using Rental Income Tax Calculators
A rental income tax calculator can be a handy tool to estimate your tax liability on rental income. These calculators take into account all allowable deductions, including standard deductions, municipal taxes, and home loan interest, to provide an accurate assessment of your taxable rental income.
Types of Properties Not Covered Under the Rental Income Computation
Owners should remember that only income from habitable property is taxed under Sections 22 and 24 of the Income Tax Act. Income generated from renting out vacant land is taxed under the category 'Income from Other Sources.
- Self-Occupied Properties: Used by the owner for residence.
- Vacant Properties: Not rented out during the year.
- Business/Professional Use: Used for the owner's business or profession.
- Agricultural Land: Used for agricultural purposes.
- Government Properties: Owned or leased by the government.
- Inheritances/Gifts: Not rented out or generating income.
- Charitable Properties: Used by registered charitable organizations.
Managing income tax on rental income efficiently requires a thorough understanding of the deductions and exemptions available under the latest rules of the Income Tax Act. By leveraging standard deductions, claiming home loan interest, and using rental income tax calculators, you can significantly reduce your tax on rental income and maximize your earnings. Always keep detailed records of all expenses and tax payments to ensure you can substantiate your claims and make the most of the available tax benefits.
Investing in rental properties can be highly rewarding, and with the right tax strategies, you can enhance your profitability while staying compliant with tax regulations. Stay updated with the latest tax rules and utilize these strategies to make the most of your rental income.
FAQs about Save Tax On Rental Income
To save tax on rental income, you can:
- Claim Standard Deduction: Deduct 30% of the Net Annual Value (NAV) for repairs and maintenance.
- Deduct Municipal Taxes: Subtract property taxes paid to local authorities from the Gross Annual Value (GAV).
- Deduct Home Loan Interest: Deduct the interest paid on a home loan used to purchase or construct the rental property.
- Joint Ownership: Share the rental income among co-owners to reduce individual tax liabilities.
- HRA Exemption: If you are also paying rent for your accommodation, you can claim House Rent Allowance (HRA) exemption.
- Maintenance and Repair Costs: Claim significant renovation or repair costs separately if not covered under the standard deduction.
As per Section 24A of the Income Tax Act, annual rental income is non-taxable till ₹2,50,000. Owners can reduce their taxable rental income by deducting municipal taxes, claiming the standard deduction of 30%, and home loan interest. After these deductions, the remaining income is added to your total income and taxed according to your income tax slab.
To avoid Tax Deducted at Source (TDS) on rental income:
- Ensure your annual rent does not exceed ₹2,50,000. TDS is applicable if the rent paid exceeds this threshold.
- Submit Form 15G or 15H to your tenant, declaring that your total income is below the taxable limit, if applicable.
- If your tenant is an individual or HUF (Hindu Undivided Family) not subject to tax audit, TDS is not applicable.
As per the Income Tax rules in India, cash transactions exceeding ₹20,000 are not allowed. Rent payments should ideally be made through non-cash modes such as bank transfers, cheques, or electronic payments to maintain proper records and avoid penalties.
The primary deductions on rental income include:
- Standard Deduction: 30% of the Net Annual Value (NAV) for repairs and maintenance.
- Municipal Taxes: 100% of the property tax paid to local authorities.
- Home Loan Interest: Deduct the entire amount of interest paid on a home loan for the rental property, without any upper limit.
- By leveraging these deductions, you can significantly reduce your taxable rental income.
Published on 8th August 2024
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