How To Save Tax On Rental Income: Latest Rules and Strategies (2024)

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.

Table of Contents

• Income Tax on Rental Income
• Steps to Calculate Tax on Rental Income
• Strategies to Save Tax on Rental Income
• Recent Changes in Rental Income Taxation
• Rental Income Tax Calculators

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:

1. Determine Gross Annual Value (GAV): This is the total annual rent received from the property.
2. Subtract Municipal Taxes: Deduct property taxes paid to the local municipal authority.
3. Calculate Net Annual Value (NAV): NAV = GAV – Municipal Taxes.
4. 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.
5. 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

1. 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.
2. Revised Standard Deduction: The standard deduction of 30% on NAV remains unchanged for the current financial year.
3. Interest on Home Loans: Continued deduction of the full interest amount on home loans for rental properties, without any upper limit.
4. 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.

1. Self-Occupied Properties: Used by the owner for residence.
2. Vacant Properties: Not rented out during the year.
3. Business/Professional Use: Used for the owner’s business or profession.
4. Agricultural Land: Used for agricultural purposes.
5. Government Properties: Owned or leased by the government.
6. Inheritances/Gifts: Not rented out or generating income.
7. 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