Generating a tax-free rental income of ₹ 20,50,000 is a financial goal that many property owners aim for. With the latest tax reforms introduced in the Union Budget 2025, it is now possible to minimize tax liabilities through strategic tax planning. This article explores the key provisions, including deductions under Section 24 of the Income Tax Act, 1961, and leveraging rebates under Section 87A to achieve zero tax liability on rental earnings of over ₹ 20 Lakhs.
Understanding the Union Budget 2025 Reforms
The Union Budget 2025 has brought several tax relief measures, particularly benefiting the middle class. A significant reform is the increase in the income tax exemption limit, allowing individuals with an annual income of up to ₹12,00,000 to be exempt from tax under the new tax regime. This change is expected to boost disposable income, increase consumer spending, and promote economic growth.
Leveraging Section 24 of the Income Tax Act, 1961
Section 24 of the Income Tax Act provides key deductions that can significantly reduce taxable rental income. The two primary deductions are:
#1 – Standard Deduction [Section 24(a)]
A flat 30% deduction is allowed on the Net Annual Value (NAV) of the rental income. This helps in reducing the taxable rental income considerably.
#2 – Interest on Housing Loan [Section 24(b)]
If a property is rented out and has an active home loan, the taxpayer can claim a deduction of up to ₹2,00,000 on the interest paid on the loan. This deduction is applicable only if the property is let out; self-occupied properties are not eligible under the new tax regime.
You can also explore on How to Minimize Taxes through Tax Loss Harvesting.
Step-by-Step Guide to Minimize Tax on Rental Income
By carefully applying these deductions and rebates, property owners can legally reduce their taxable rental income and even achieve a tax-free status.
Step 1: Calculate Gross Rent Received
For instance, let’s assume Mr. X earns an annual rental income of ₹20,50,000 from his property.
Step 2: Apply Deductions Under Section 24
A) Standard Deduction (Section 24(a))
The standard deduction is 30% of the Net Annual Rent (gross rent received minus municipal taxes paid).
- Gross Rent Received = ₹20,50,000
- Municipal Taxes Paid = ₹50,000 (assumed)
- Standard Deduction = 30% of ₹20,50,000 = ₹6,00,000
- Net Rental Income after Standard Deduction = ₹20,50,000 – ₹50,000 – ₹6,00,000 = ₹14,00,000
B) Interest on Housing Loan (Section 24(b))
If Mr. X has a housing loan and pays interest on it, he can claim an additional deduction under this section.
- Interest on Housing Loan = ₹2,00,000
- Net Rental Income after Section 24(b) Deduction = ₹14,00,000 – ₹2,00,000 = ₹12,00,000
Note: Deduction under Section 24(b) is allowed only if the house is let out. If the house is self-occupied and the taxpayer has opted for the new tax regime, this deduction cannot be claimed.
Step 3: Apply Tax Rebate Under Section 87A
As per the Union Budget 2025, taxpayers with a net taxable income of up to ₹12,00,000 can claim a rebate of up to ₹60,000 under Section 87A.
- Net Taxable Income = ₹12,00,000
- Rebate under Section 87A = ₹60,000
- Final Tax Payable = ₹0
If you are wondering how much income tax you can save with new income tax slabs, you can check this in just 2 minutes using ChatGPT.
Cases Where You May Not Achieve Tax-Free Rental Income
While the above steps work in most cases, there are certain situations where you may still have to pay tax on rental income:
✔ No Housing Loan: If you do not have an ongoing home loan, you cannot claim the ₹2,00,000 deduction under Section 24(b), leading to a higher taxable income. ✔ Multiple Rental Properties: If you own multiple rental properties, the total taxable rental income may exceed ₹12,00,000 even after deductions, making you ineligible for a complete tax rebate under Section 87A.
✔ Old Tax Regime: If you opt for the old tax regime, the rebate under Section 87A may not apply, increasing your tax liability.
✔ Other Income Sources: If you have additional income from sources like salary, business, or capital gains, your total taxable income may exceed the exemption limit, leading to a tax liability.
Summary
By strategically utilizing deductions under Sections 24(a) and 24(b), along with the rebate under Section 87A, Mr. X successfully reduces his taxable rental income to ₹12,00,000, ensuring that his final tax liability is zero.
Final Outcome: Mr. X earns a tax-free rental income of ₹20,50,000 annually.
If you are a property owner earning rental income, adopting these smart tax-saving strategies can help you achieve tax-free earnings legally. Happy investing!
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Dear Sir
Please advice whether “loss from housing rental income (means if the interest on housing loan is more than Rs. 200,000/-, then the balance amount of interest) will be adjusted against income from salary/other sources or not.
Hello Kamalji, As per Budget 2025, the existing rules for loss from house property remain unchanged. You can set off a maximum of ₹2,00,000 per year against salary/other income, and any excess loss can be carried forward for up to 8 years, but only against future house property income