Tax on Rental Income: How To File & Claim To Save Rental Income Tax

Do we all not desire to own a property that brings in a consistent rental income? Owning assets that create income is a superior financial plan. Sounds good and all set, right? However, I wish I did not have to bear this bad news with you. Three letters, T-A-X!

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Landlords in India, like everybody else, must pay taxes on their rental income. A significant portion of your rental revenue may get lost due to taxation. Do you wish you could unhear it all? Hold on. I bring you good tidings too. Evade tax? No. Tax planning? Yes. The Income Tax Act provides you with appealing deductions on rental income. It means that you can still save a portion of your rental income.

Read: 7 Tips to keep rental income consistent year-round!

Real estate is always a high-value investment. You may either invest in the property for your personal use or rent it to a needy renter. One can also invest in either residential real estate property or commercial real estate property. Real estate gives owners a sense of security. It also allows them to generate money if it gets rented out. Under Indian law, the rent generated by the owner is considered income. After salary, one of the most prevalent forms of income in India is rental income or revenue from the property. Many households (particularly pensioners) rely on rental income as their primary source of income. However, anyone generating a lot of money is required to pay taxes on it. Rental income, residential residence, or commercial real estate gets taxed at the individual’s income tax slab rate. Landlords in India, like everybody else, must pay taxes on their rental income. Also, if adequate planning gets not implemented, a significant portion of your rental income may get lost due to taxation. However, you can reduce your tax burden via the deductions provided by India’s income tax rules. In this article, we will define rental income, examine the taxes that your rental income may incur, and how to limit this burden to a minimum.

So, what defines tax on rental income in India?

According to the Income Tax Act, rental income from property – a building and the land – is taxed under Section 24. It gets taxed under the heading income from house property.

According to India’s current tax laws, if a property is leased or rented, the sum received in exchange for the property is referred to as “Rental Income.” It includes any advance payment made as a security deposit. The rental income is considerable, according to the IPC, and should get taxed under Section 24 of the Income Tax Law. Also, the government makes no distinction between residential and commercial property. Even the parking lot attached to your business or home is considered a house property and is taxed if rented out. A home property is any property in the shape of a structure that may be taxed. As a standard deduction, 30 percent of your rental income gets taxed in India under the head income from dwelling property. For this standard deduction rate, the applicant must be the legal owner of a property. While income tax regulations impose some taxes on a person who earns rent from a property he has rented out, the taxpayer is also entitled to certain deductions from such income.

And what is the tax rate on rental income in India?

It is not the case that the gross rent received is taxed.

The municipal taxes payable for the property may get deducted from the rental income for the property. Because rent gets taxed on an accrual basis, the law permits you to claim a deduction for rent that you were unable to realize, subject to criteria. So, after subtracting the two elements, you receive the yearly value, from which you can take a standard deduction of 30% of the annual value to fund repairs, etc.

The 30% deduction is a standard deduction, regardless of whether you spent money on repairs or renovations to the property during the tax year in question.

Here is Understand the Impact of GST on Rental Income Under GST?

So, how do save tax on rental income in India?

Rental income or income from real estate property is a prevalent kind of income in India. Many households rely only on rental revenue to make ends meet. However, if you are interested in investing money in real estate and earning interest on it, you should be aware of tax planning so that their tax burden gets kept to a minimum. It is also necessary to grasp the distinction between tax planning and tax evasion. Tax evasion is prohibited and, in any case, not encouraged. Tax planning, on the other hand, is a legal phrase. It falls under the purview of the law. Proper tax planning can aid in the reduction of tax on rental income.

Here’s: How to invest in real estate smartly to save tax.

So, the following are some strategies that you can follow to save tax on rentals in India.

  • Maintenance charges: One of the simplest methods to avoid tax is to remove maintenance expenses from the rental income collected. It is a piece of low-hanging fruit. In your rental agreement, you only need to mention a one-liner. In most situations, society maintenance fees get included in the rent. As a result, landlords must pay taxes on maintenance expenses that are not considered rental income. Therefore, an owner can avoid tax on rental income by dividing the amount received into two portions. To illustrate, if you rent Rs 30,000 and society maintenance expenses are Rs 3,000, you should only earn Rs 27,000. You might include a language in the lease that requires the renter to pay maintenance fees directly to the association. However, if the renter does not agree to this arrangement, you should obtain these two components from the tenant individually. In short, he will pay with two checks. So, any contribution to the association should be made directly by the renter or separately collected.
  • Joint property ownership: Another excellent technique to avoid tax is co-joining property. I recommend that you only do this with your spouse since you cannot trust everyone. It is the best-case situation if your partner is not working. In this case, you have the choice of acquiring property jointly or simply in your husband’s name. The rental income will get allocated following the proportion of ownership of the property. Thus, you may be able to avoid paying taxes on Rental Income assigned to your spouse. So, let us assume that both the husband and wife are employed. This arrangement is advantageous in this circumstance if the husband and wife are in separate tax brackets. As a result, you can utilize one of the spouse’s lower tax brackets to reduce the tax on rental income. Rental revenue gets distributed under the proportion of ownership in the property.
  • Municipal tax: Many individuals are unaware that they may deduct municipal taxes such as property taxes, sewage taxes, and so on from their rental revenue. The only caveat is that the owner must pay all local taxes. Tenants are frequently required to pay municipal taxes. As a result, the owner cannot claim a deduction for the tenant’s payment. The deduction for municipal taxes reduces your income from residential property, lowering your tax burden.
  • Standard Deduction: If you buy a house for investment and rent it out, it gets expected that you would spend money on repairs and maintenance. It is, by definition, subjective. Thus, regardless of actual repair and maintenance expenditures, you can claim a Standard Deduction of 30% of Net-Annual Value.
  • Semi-furnished and Fully Furnished Properties: The owners of such properties supply various amenities like WiFi, Piped Gas Connection, DTH/Cable TV, Newspaper, and so on. The owner collects these charges as part of the rent and gives them to the proper authorities. In such instances, you might request the renter to pay the bills and deduct an equal amount from the rent. Alternatively, you may collect it separately from the renter, making it a separate payment that gets not included in the rent. As a result, your rental income will decrease.
  • Bifurcation of maintenance amount from the rent amount: You can also reduce the amount payable as tax by bifurcating the rental amount and the maintenance amount. The tax amount is charged on the total rental income and thus differentiating the same will help in reducing tax expenses. You can ask the tenants to pay the maintenance fee directly to the society and the rent to you as well.
  • Other grounds to claim a deduction: The landlord can also claim a deduction if the property is left empty for some time but has incurred utility expenses. You can also invest through joint or fractional ownership options to reduce the tax Assetmonk can be your investment partner if you are looking for a fractional ownership project to invest in. We offer commercial real estate properties with rental income under or Yield Category products with an expected rental yield of 8%.
  • The landlord can claim a deduction on the expenses: The landlord can claim a deduction based on various expenses incurred by him on the property. Some of the common grounds on which the deduction can be claimed include:
  1. Costs incurred when traveling back and to the rental property
  2. Advertisement costs
  3. Expenses incurred on calls and text messages sent about the rental property
  4. Cost of safety certificates
  5. Cost of bank charges (i.e. overdraft)
  6. Advisory fees e.g. legal and accountancy
  7. Subscription to property investment-related magazines, products, and services

There are various ways to save money on taxes depending on the circumstances. We have prepared a list of the most common methods to save money on taxes.

Assetmonk is a well-known real estate marketplace in India. We offer real estate investment opportunities in Bangalore, Chennai, and Hyderabad. We also provide quality assets with better rental income and an IRR ranging from 14 to 21 percent. If you’re still looking for a good investment partner, go to Assetmonk and start investing right away.

Tax on Rental Income FAQ'S:

The municipal taxes payable for the property may get deducted from the rent received for the property. Because rent gets taxed on an accrual basis, the law permits you to claim a deduction for rent that you were unable to realize, subject to criteria. After subtracting the two elements, you receive the yearly value, from which you can take a standard deduction of 30% of the annual value to fund repairs, etc. The 30% deduction is a standard deduction, regardless of whether you spent money on repairs or renovations to the property during the tax year in question.

The yearly taxable value of the property is determined by subtracting municipal taxes paid and section 24 deductions from the actual rent collected. And the two deductions allowed under section 24 are a standard deduction of 30% of the value obtained after deducting taxes from the rent and a special deduction of 10% of the value obtained after taxes from the rent. The interest on a house loan is the second deduction permitted under Section 24.

You cannot avoid paying tax on rental income. However, you can enforce tax planning to save tax on your rental income. And you can save tax on rental income by following the approaches below.

  • Maintenance charges
  • Municipal tax
  • Avail Standard Deduction
  • Joint ownership

Yes, you have to pay income tax on rental income. Rental income from a property gets taxed under Section 24 in the hands of the owner. It gets classified and taxed under the heading ‘income from home property.’ Also, the rental income gets taxed in your hands on an accrual basis rather than a receipt basis. Only the owner gets taxed on the rent received.

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