How to reduce income tax on rental income in India
You might be having more than one property and getting rental income. However, you need to pay income tax on such rental income or deemed rental income. If you are wondering how to reduce income tax on such rental income in India, this article is for you. I would provide insights about rental income, its components, deductions applicable and various ways and means to reduce income tax on such rental income or rent received.
What is Rental Income?
If you have any commercial or residential property and let out to tenants, you would get rent. Such income is termed as Rental income. You need to show such income under “Income from house property” in your income tax returns and pay necessary tax. However, if you are doing this as part of business, it would be termed as “Business income”.
What is Deemed Rental Income?
If you have more than one property, you can only consider one property as self occupied property. For remaining properties, whether you are getting any rent or not, you need to pay tax on deemed rental income. It is immaterial whether you are getting any rent or not. You need to all such property and their deemed rental value which would be based on market value.
Important points to note for tax on rental income
1) Rent received: It is the actual rent received by you from your tenants during the financial year starting from Apr to Mar.
2) Notional Rent / Deemed Rental income: Other than your self occupied property, for other properties notional rent / deemed rental income needs to be computed. Notional rent is based on market rental value.
3) Property Taxes: Any municipal tax / property taxes paid during the financial year is allowed as deduction.
4) Standard Deduction of 30%: Income tax Act allows 30% of the rent received / deemed rental income (after reducing property taxes) as a standard deduction towards repairs and maintenance. It is immaterial whether you have incurred such expenses or not, but you are eligible to claim this as deductions from rental income.
Let me illustrate with some examples.
Example no. 1 – Let out a property – Rent received
Akhil has self occupied property in the outskirts of Hyderabad (low rental value) and second property at Ameerpet, Hyderabad (Prime locality). For second property, he is receiving good rent of Rs 10,000 per month. He is paying Rs 20,000 municipal taxes per annum. The income from house property for the financial year would be as follows:
- Rent received = 120,000
- Municipal taxes = 20,000
- Standard deduction = (120,000 – 20,000) x 30% = 30,000
- Income from house property = Rs 120,000 – 20,000 – 30,000 = Rs 70,000
Example no. 2 – Second house – No rent received
Akhil has self occupied property in the outskirts of Hyderabad (low rental value) and second property at Ameerpet, Hyderabad (Prime locality). The second property has just been locked and not let-out. For second property, the market rental value is Rs 5,000 per month. He is paying Rs 10,000 as municipal taxes per annum. The income from house property for the financial year would be as follows:
- Deemed rental income = Rs 5,000 x 12 = Rs 60,000
- Municipal taxes = 10,000
- Standard deduction = (60,000 – 10,000) x 30% = 15,000
- Income from house property = Rs 60,000 – 10,000 – 15,000 = Rs 35,000
How to reduce tax on rental income or deemed rental income?
Now let us come to our main point on how to reduce income tax on rents received or rental income or deemed rental value. There are several ways where you can plan and reduce income tax burden on such rental income.
1) Consider higher rental value as self occupied: Income tax act provides provision for tax payers regarding this. You can declare high rental value property as self occupied. It is immaterial whether you are staying in such property or not. Many tax payers opt their property as self occupied which has high rental value. Other properties where rents are low, they declare as other properties and compute the notional rent and pay the income tax. In the above example, Akhil can opt second property as self occupied which has high rental value and save tax. This is one of the best ways to reduce income tax burden on rental income.
2) Pay municipal or property tax on time: You can get a reduction for municipal or property taxes for rental income only after you pay during the financial year. Since you cannot escape from Govt taxes, it is better to pay it on time and claim it as a reduction. In the above example-1 assume that Akhil has not paid municipal taxes, his income from house property would increase to that extent.
3) Interest on housing loan / mortgage loan for self occupied: If you have housing loan / mortgage loan for self occupied, you can claim interest on housing loan up to Rs 1.5Lakhs per annum. This can be shown as loss in “Income from house property”.
4) Interest on housing loan / mortgage loan for let-out property: In case of let-out property, you can claim interest on housing loan / mortgage loan without any limit. Means Rs 1.5 Lakhs limit would not apply here. E.g. Continuing with the above example, if Akhil would have taken housing loan on the second house and interest on such loan is Rs 70,000 in a financial year, his income from house property would be nil as rental income is getting adjusted with loss from housing loan interest. What an idea?
5) Carry Forward loss by filling IT returns before 31st July: In case your loss from house property is not set-off against total income, you may still carry forward such loss to subsequent years. However, you need to file IT returns before 31st July to claim such exemptions. E.g. continuing from the above example, assuming that Akhil housing loan interest is Rs 1.5 Lakhs. However, income from rental income is only Rs 70,000. Still, there is Rs 80,000 to be adjusted. Assuming that Akhil does not have any other income, this loss can be carry forwarded to subsequent years provided he files income tax returns before 31st July of that year.
6) Interest paid pre-possession: Many of us do not know how to handle this. Interest paid on any housing loan where possession is yet to take place, you can claim such exemption in 5 equal installments starting from the year when the position taken place. E.g. Continuing above example, Akhil has purchased the property in Apr-2013. He is paying interest of Rs 150,000 per annum. He took the possession of property after 2 years i.e. Apr-2015. Now the interest paid for Rs two years totals to Rs 3,00,000 can be claimed for Financial year 2015-16 onwards in 5 equal installments per year. I.e. Rs 60,000 per year can be claimed for next 5 years.
7) Principal amount of housing loan: Section 80C allows an individual to claim principal as an exemption. However, there is a limit of Rs 100,000 under section 80C. If you have already exhausted, you may not benefit much.
8) Benefit from joint home loan: This is another best way to reduce taxes on rental income. If your spouse is working, you can consider taking a joint home loan to buy property. The advantage is you and your spouse can claim upto Rs 1.5 Lakhs per person as interest on housing loan exemption. Means you can claim up to Rs 3 Lakhs as an exemption for interest on housing loan by both of you. Similarly, the housing loan principal amount can be claimed as an exemption up to Rs 1 Lakhs per person u/s 80c
How NRI’s can reduce taxes on rental income?
There are no special provisions for NRI’s. The above rules would apply to NRI’s to. However, any rental income received can be deposited in NRO account only and this cannot be repatriated.
Conclusion: I felt one can reduce the tax on rental income if he or she knows how they would be computed, its components and various ways where one can reduce income tax on such rents received or notional rent. Knowing such things up front would help you to plan well and save income tax. One should note that we cannot avoid tax, but we can reduce taxes by planning well.
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How to reduce tax on rental income or deemed rental income