Rental income is a type of income that you need to pay taxes on, according to the Income Tax Act. Although paying these taxes is required, there are legal ways to lower the amount you owe. Let’s explore how you can save on taxes.
Rental income is money you earn by renting out a property, which can be residential or commercial, or by subletting part of it. Under the Income Tax Act, this income is taxed as "Income from House Property."
Important: Rental income includes not just the regular rent, but also advance rent, non-refundable security deposits, and any other money from renting out the property.
Rental income is taxed after subtracting certain expenses and allowances. The amount left after these deductions is called the Net Annual Value (NAV) of the property, which is then taxed based on your income tax bracket.
Here’s how NAV is calculated:
Gross Annual Value (GAV): This is the higher of the actual rent received or the reasonable expected rent of the property.
Municipal Taxes Paid: Deduct any municipal taxes (like property tax) paid from the GAV.
Standard Deduction: A flat 30% of the NAV is allowed as a standard deduction.
Interest on Home Loan: Deduct interest paid on a home loan, if applicable, under Section 24(b).
Gross Annual Value (GAV): ₹6 lakh (₹50,000 per month)
Municipal Taxes Paid: ₹20,000
Net Annual Value (NAV): ₹5.8 lakh (₹6 lakh - ₹20,000)
Standard Deduction (30%): ₹1.74 lakh (30% of ₹5.8 lakh)
Interest on Home Loan: ₹2 lakh
Taxable Rental Income: ₹2.06 lakh (₹5.8 lakh - ₹1.74 lakh - ₹2 lakh)
Important: The tax you’ll pay depends on your total income, including rental income, which is taxed as per your applicable income tax slab.
As mentioned, the Income Tax Act allows a standard deduction of 30% on the Net Annual Value (NAV) of the property. This deduction is automatic and does not require any specific expenses to be incurred. It covers repairs, maintenance, and other related costs.
Key Takeaway: Ensure you claim the 30% standard deduction as it’s a substantial relief and helps reduce taxable income significantly.
Any municipal taxes (like property tax) paid by the property owner can be deducted from the Gross Annual Value (GAV) of the property. This reduces the Net Annual Value (NAV), thereby lowering the taxable rental income.
Example: If you pay ₹20,000 as property tax annually, this amount is directly deducted from the GAV before calculating NAV.
If you have taken a home loan to purchase or construct the property that you are renting out, you can claim a deduction for the interest paid on the loan under Section 24(b). The maximum limit for deduction is ₹2 lakh per annum.
If the property is self-occupied, you can claim a deduction of up to ₹2 lakh on the interest paid on the home loan.
Example:
Interest paid on home loan: ₹2.50 lakhs
Deduction claimed: ₹2 lakh(Maximum allowed under Section 24(b) for self-occupied property)
Key Takeaway: For rented properties, the entire interest on the home loan is deductible, which can significantly reduce your taxable rental income.
If you share ownership of a property with your spouse or a family member, you can divide the rental income based on each person's share. Both of you can then claim deductions separately, which can lower the total amount of tax you owe.
Example: If a property is co-owned by husband and wife in a 50:50 ratio, the rental income and associated deductions are split between the two.
Important: Joint ownership allows each owner to avail of the full benefits of the deductions available under the Income Tax Act, thus reducing the taxable income for both parties.
If your expenses and deductions for a rental property are more than the rental income you earn, you have a loss. You can use this loss to reduce your taxes on other types of income, like salary or business profits.
Example: If your loss from house property is ₹50,000, and your salary income is ₹5 lakhs, you can reduce your taxable salary income to ₹4.5 lakhs.
Key Takeaway: Make sure to carry forward and set off any losses from house property against other income heads to maximize tax savings.
If you have a salary and get House Rent Allowance (HRA) while also earning rental income from another property, you can claim an HRA exemption under Section 10(13A). This exemption is based on the rent you pay for your own home and is separate from the rent you earn.
Example: If you pay rent for your residence in one city but own and rent out another property, you can still claim HRA for the rent you pay while also reporting rental income.
The standard 30% deduction is meant to cover maintenance and repairs, but if your actual expenses are higher, you might be able to claim the full amount in some cases, especially for commercial properties. This usually doesn’t apply to residential properties, but knowing these limits can help with tax planning.
Key Takeaway: Plan your maintenance and repair expenses to align with the 30% standard deduction to maximize tax benefits.
Renting to family members can be a tax-saving strategy, but it must be done correctly. Ensure that:
Rent is Reasonable: The rent should be in line with market rates.
Actual Payments: The rent should be paid through bank transfers, and proper receipts should be maintained.
Important: The rental income from family members will be taxed like any other rent, but this strategy can still be beneficial if managed correctly, especially when splitting income among family members.
If you use a property for business, you can claim depreciation on the building and its furniture or fittings. Depreciation lowers the amount of taxable income from that property.
Depreciation Rate: The rate for buildings is 10% for residential and 40% for furniture/fittings.
| Strategy | Details |
|---|---|
| Standard Deduction | 30% deduction on Net Annual Value (NAV) to cover repairs and maintenance. |
| Municipal Taxes | Deduct municipal taxes paid from Gross Annual Value (GAV). |
| Interest on Home Loan (Section 24) | Deduct home loan interest; no limit for rented properties; ₹2 lakh limit for self-occupied properties. |
| Joint Ownership | Split rental income and deductions between co-owners to reduce tax liability. |
| Setting Off Losses | Set off losses from house property against other income heads like salary. |
| HRA and Rental Income | Claim HRA exemption for rent paid for accommodation while earning rental income from another property. |
| Maintenance and Repairs | Plan expenses to align with the 30% standard deduction or actual expenses for commercial properties. |
| Renting to Family Members | Rent to family members at market rates with proper documentation to manage tax liability effectively. |
| Depreciation (Commercial Property) | Claim depreciation on the building and assets for commercial properties to reduce taxable income. |
You have to pay taxes on rental income, but you can lower your tax bill with the right strategies. Knowing how to use deductions and exemptions can help you save money and manage your rental income better. Make sure to keep good records and receipts so you can claim all the deductions you're entitled to.
1. Can I claim a deduction for the full interest paid on a home loan for a rented property?
Yes, for rented properties, there is no limit on the interest deduction under Section 24(b). However, the overall loss from house property that can be set off against other income is capped at ₹2 lakhs.
Joint ownership allows the rental income and deductions to be split between co-owners, which can reduce the overall tax liability for each owner.
Yes, you can claim HRA for the rent paid for your accommodation even if you are earning rental income from another property, provided you meet the necessary conditions.
The standard deduction on rental income is a flat 30% of the Net Annual Value (NAV) of the property, regardless of the actual expenses incurred.
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