How to reduce income tax on rental income or deemed rental income?

How to reduce tax on rental income in IndiaHow 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

Also Read: Tax on FD Interest – How to save tax or avoid?

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?

Also Read: How employees can save income tax through 80c and beyond?

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

Also read: Ways to save income tax on long term capital gains from sale of house property

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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Suresh
How to reduce tax on rental income or deemed rental income

Suresh KP

65 comments

  1. Dear Suresh kp sir,  i have been a good reader of ur website myinvestmentideas , my knowledge regarding investments have been improved. sir now i have got a job and i can save 5k per month. my parents are asking me to save in recurring deposits of bank as they are safe. but i want to try my luck in mutual funds. my age is 23.  i am already investing 10% of my salary in NPS. so can u give me suggestions on how and where to invest those 5k rupees. i can invest regularly for 10years.           

    1. Dheeraz, Thanks for your appreciation. To satisfy every one, what you do is open a RD with any bank where you have account and invest for Rs 2,000 per month. Select 3 mutual funds in large cap segment like like ICICI Pru focussed blue chip fund,BNPP Equity fund, UTI Opps fund and Quantum long term equity fund etc. and invest them. BTW, as a young investor, what suggestions do you give to improve this blog. Do you recommend any of the articles to your friends. If yes, please share some of the good articles by copying the URL and pasting this in FB and share them. Your friends might be searching for such info and you may be a saver for them.

  2. Nice article. To claim “8) Benefit from joint home loan”

    We need to submit “Joint owners declaration”. Both applicants should clearly mention, how much % of amount each of them paying as EMI. The claim % depends on how much EMI each applicant paid during current Financial year.

  3. I don't agree with your last statement. Till the date, I didn't have an idea about Deemed rental income; not just me but everyone in my surrounding. So, none had added this income in their final IT returns but still, everyone is roaming freely. Actually, income tax acts are great on papers but their application at practical level is a joke. So, let's laugh over the matter. Hahahahaha!

    It's impossible for the department to trace each & every individual when the population of the country is so high.

    1. Looks Mohit is not in good mood today. What really happens is every one things the same. However what may really happen is IT dept may catch one person in a random and once they caught, they would really go round robin and dig out last few years IT returns and ask for unaccounted money. What I really felt is instead of thinking that no one catches us, if we can plan these things, we can really avoid the tax itself legally. What do you say Mohit? Respond to me when you are in cool mood. You can still pin point in case you are not happy with my answer.

      1. Sorry for the late reply! I was really in great mood that day as well as today. I had not written the above comment in ironical manner but was my opinion for the same. From my experience, I can confirm that IT department never catches anyone randomly but catches only those person whose enemies had given the details about the illegal properties & black money. Again, those enemies had to fund the IT department to take action against that particular person. One more point, those enemies had to be strong enough to proceed to the IT department, a normal enemy cannot even complaint about a person & department will never take action, even their information is true.

        In short, if a person have a large set of strong enemies, he/she should make sure that his profile is clean on papers & should plan everything before acting in any manner before IT department. This article will be very helpful for such sort of people. I too appreciate this article as beforehand, I had no information about this case.

        One more point, I would like to add here, IT department pose a very weak infrastructure & limitations. If they raid someone & was unable to find any clues or evidences against the person, that person can easily file chargesheet against the officers. Even, the person is a culprit, it's the officers who had to bear the pain.

        Again, because of poor infrastructure, it's too hard for the officers to find clues/evidences against a person; if their enemies report to the department, it becomes an easire task but if there's no one to report, it becomes a tedious & infeasible task. An idiom is applicable in this case, "Search a needle inside the heap of sand".

        The major question remains in front of the department, where are the properties of a person; even a person had given his PAN number during registration of property, there's almost no database for it; leave about the cases, when a person had purchased a property 20 years back!

          1. I agree with suresh. They do not check every record. But they do check several and take actions.

            FYI, starting from this year, all housing loans should be registered with central registry. This is applicable for all new as well as old Housing loans.

          2. This doesn't happen everywhere. If you belong to some high-end metro Cities, things are better for IT department & most of the properties are added in the database. It's an easier task for officer to trace the details. One should be aware in such cases.

            But if you belong to some of the unorganized states like Bihar, UP, Orissa, WB, interior parts of Andhra Pradesh, you are the king & IT department cannot harm you in that case; it's impossible for officers to trace each & every person. Another fact, no officer love to move to metros & places like Bihar & UP are their favorite destination. You can understand the reasons behind this. Only those who want to have a stress-free but poor life opt for metros where system is organized. Noida has best organized database of properties. Great for good people; curse for bad people.

            What I told you in above comments can be considered as street knowledge & true in most of the cases. What I told you is confirmed from my side; from my experience. Truly speaking, I am a regular reader of your blog from last July; Since July, I had read ALL the articles that you posted on your blog; even some of the past blogs also. Your blog had converted me from a dull person of financial world to one of the most intelligent person in my surrounding related to the financial world. So, I will not provide any misleading information from my side.

            I had seen that you reply to everyone & that's a unique feature of your blog. You always give free & genuine assistance to everyone. Keep doing good work! You might never know that this feature of your blog might give a substantial boost to the number of audience & thus increased ad rates.

            I would recommend you to add an EMI calculator to your website.

          3. @Sri: You guys think IT department as a solid organization but it consists of officers who are actually human beings who don't like to work. Major question is who will check the records; it's boring & non-productive. Information are present but none is wiling to take action. These Bollywood movies had created superb hype about the department; in reality, they sucks.

            In order to get into IT department, one need to crack SSC with top position & for that, you have to risk your entire 1 year life; if cracked, it's great but if not selected, you will stand at middle of nowhere. After doing so much hard work, you will get just 30K/month initially & agian, promotions are too slow that the guys who are on the verge of retirement & are on the post of Joint Commissioner of Income Tax Department are getting 75K-80K/month; this post sounds great but salary is too slim compared to similar hard workers of private sectors. In such a case, you expect the officers to work in an ideal way as one percieves from Bollywoord Movies. Not just the salary but the number of enemies grow exponentially as you get more experience.

            If you raid someone or even send a notice, that person is likely to become your enemy. It's better to avoid such situations & live a peaceful life. This is the reason, officers love to sleep rather than making an analysis.

  4. Hi.its a great detailed post.
    I have a query regarding considering the high value property as self occupied. In my case the house I actually stay in has a lower market rental value than my factory/ warehouse which is actually rented out. so can I still consider a factory as self occupied and pay deemed rent in my lower value house property?

    1. Pratik, When you gave your high value property as factory, this should have been considered as commercial property. I don’t think you can adjust commercial Vs residential. 

      1. Your article is informatic. I need your help for investment.  It seems you are from Hyd .  Iam residing at Ameerpet, Hyd. Can you give your phone no. for regular consultation on investment. My phone No is 9440409983.

        1. Hi Suresh, Since I provide free service, I would not like to provide my contact details. Please post your query, you would get response in 2-3 days time.

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