Gold, Mutual Funds, FDs, Stocks, land, etc. The list of investment options in India is limitless. Yet the majority of Indians consider real estate as the safest tangible asset because of its lower volatility quotient among other popular options like equities. As an investor, you can expect higher returns whether you buy residential property or commercial.
The Indian real estate market is thriving and is expected to become a significant contributor to the GDP by the end of 2025. As this sector shows minimal fluctuations with a high potential for growth and price appreciation, knowing how to maximize this source of passive income can help.
In other words, if you own rental property or are interested in investing in one, this blog will help you learn how to minimize Income tax liabilities on House Rent in India on your income.
5 Ways to Maximize Rental Income Returns
Income generated from rental properties is taxable under Income Tax Act 1961. Often known as Income from House Property, the income from any type of property, whether residential, a shop, a factory, or a building, comes under the purview of taxable income. To learn more about how taxes and rent are calculated, refer to our blog–Taxes and TDS on Rent in India: A Comprehensive Guide. The taxes are determined based on the property’s Gross Annual Value (GAV), and the conditions vary according to property type.
Nonetheless, the following are five ways to reduce tax liabilities on rental income and generate more returns.
Opting for Joint Ownership of Properties
The easiest way to save taxes is by jointly owning a property. In other words, when two parties (persons) purchase a property as co-owners. This way, tariff rental income will be divided into two, and the tax burden will be shared equally. Furthermore, if one of the parties in the joint-ownership agreement does not have an active source of income, i.e., unemployed, the tax liability will reduce more.
For example, suppose you and your spouse or family member are employed with incomes taxed under different slabs. In that case, you can benefit more from the provisions of a lower tax slab.
Municipal Tax Deductions
Another way owners can reduce their tax liability is by paying municipal taxes like sewerage taxes directly to the respective authorities. You can deduct this from the GAV and pay the remaining to the IT department.
However, when the tenants pay these taxes, owners cannot leverage this option.
Standard Deductions
The biggest relaxation by the government is offered to salaried employees who are using a purchased property for rental purposes. Under this provision, you, as a property owner, can claim a standard 30% deduction on GAV in lieu of the money spent on repairs and maintenance.
Even if there are no major expenses, owners can still file a claim under this provision.
Renting Semi-furnished or Fully-furnished Properties
In rental properties like apartments, owners usually pay for several facilities. These include piped gas, WIFI, water bill, newspaper, and DTH. As an owner, if you choose to collect these bills with the rent, it increases your rental income and hence the taxes.
On the other hand, if your tenant pays these bills directly to service providers and deposits the total rental amount after deducting these charges from your account, you may benefit. Another option is to collect payments, like AC bills, separately.
Any Maintenance Charges
Like the fourth point, you ultimately increase the taxes if you collect maintenance charges related to wear and tear, plumbing issues, or anything else within the rent. Here’s an example—
Suppose you own house rentals in Bangalore. The total monthly rent for your property is 25,000. However, due to fixtures and fittings, you charged your tenant another 5,000 with the rent. Now, while filing your taxes, you’ll be paying taxes on 30,000 instead of the previous amount.
In other words, you have escalated your tax liability with great margins.
Therefore, the best solution is to either add a clause stating that the tenants will pay all maintenance charges directly to service providers or other authorities or collect separately from them.
Steps to Compute Tax on Income from Rental Properties
Step 1: Calculate GAV by multiplying monthly rent by 12.
Step 2: Keep a record of taxes you have already paid, like property tax, municipal tax, etc.
Step 3: Determine the Net Annual Value by subtracting paid taxes (mentioned in step 2) and the standard deductions at the rate of 30% (listed under section 24 (a) of the IT Act) from the GAV.
Step 4: Section 24(b) allows owners to deduct the interest amount paid in lieu of the housing loan taken on the rental property. This rebate has to be calculated on the interest paid during one financial year after allowing standard deductions.
Step 5: Result(Income from rental property) = GAV – Municipal Taxes – Standard Deductions – Interest on home loans (taken on rental property)
The final amount in step 5 will be applicable for tax cuts per the IT Act’s conditions.
Exceptions listed under Income Tax Act Section 24
Here are the scenarios where properties are exempted from tax liabilities:
- Properties owned by self, confined to local authorities, rented to charitable trusts, and the ones used for own business.
- Income from educational institutions, religious places, palaces of ex-rulers of Indian states, research facilities, farmhouses, godowns, etc.
Summary
In a nutshell, owners can save on income tax on house rent in India by following the strategies mentioned in this blog. Additionally, owners need to be well informed about the changes in tax obligations and any respective changes happening in their states. It will help keep the tax burden low and avoid penalties on late payments.
If you need more information, feel free to contact us.