How Can you Save Income Tax on your Rental Income?

Rental income can be a great source of passive earnings, but it also brings along tax obligations. However, with the right knowledge and planning, you can significantly reduce your tax burden on rental income. In India, several legal provisions allow you to claim deductions, which can help you save taxes and maximize your income. Let’s explore the top strategies you can use in 2024 to save income tax on rental income.

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Taxation of Rental Income

• As per the Income Tax Act, rent from a house or building falls under the “Income from House Property” category.
• When you lease out your property and earn rent, it is treated as rental income and added to your total taxable income.
• If you lease vacant land and generate income, the tax categorizes it under “Income from Other Sources.”

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Tax on Vacant Properties

For tax purposes, if you own more than one property, you can classify one as a Self-Occupied Property (SOP). You must treat any additional properties as Deemed Let Out Properties (DLOP) under Section 24.

Even if you don’t rent out these additional properties, the tax authorities will consider their estimated rental value as part of your taxable income.

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Income Tax Benefits for Rent Paid by Tenants

If you’re a salaried employee living in rented accommodation, you may be able to claim tax deductions on the rent you pay, provided you meet certain conditions. There are two main ways to get tax relief on rent payments: through House Rent Allowance (HRA) or Section 80GG.

A. House Rent Allowance (HRA)

HRA is a component of your salary that is designed to help cover your rental expenses. You can only claim HRA tax benefits if you live in a rented property and are paying rent.

How HRA is Calculated: The deduction you can claim for HRA will be the lowest of these three amounts:

1. The HRA amount provided by your employer.
2. Rent paid minus 10% of your basic salary.
3. 50% of your basic salary if you live in a metro city (Delhi, Mumbai, Chennai, Kolkata) or 40% if you live in a non-metro city.

Key Points to Remember:

• To claim HRA deductions, you must submit rent receipts to your employer.
• If your annual rent exceeds ₹1 lakh, you must provide your landlord’s PAN details.
• If your salary doesn’t include HRA, you can still claim rent deductions under Section 80GG.

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B. Section 80GG: Rent Deduction for Those Without HRA

Section 80GG is specifically for individuals who don’t receive HRA as part of their salary. It allows them to claim deductions on rent paid, which is especially helpful for the self-employed or those who don’t get HRA from their employer.

Eligibility for Section 80GG:

• You must be living in rented accommodation.
• Neither you, your spouse, nor your minor children should own residential property in the city where you live.
• You must not be claiming HRA deductions elsewhere.

How the Deduction is Calculated: The deduction under Section 80GG is the lowest of the following amounts:

1. ₹5,000 per month (₹60,000 per year).
2. Rent paid minus 10% of your total income.
3. 25% of your total annual income.

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Tax on Rent Earned by Landlords

For landlords, rental income is considered taxable under the “Income from House Property” category. However, you can lower your tax liability by claiming certain deductions.

A. Gross Annual Value (GAV) of the Property

The taxable rental income is based on the Gross Annual Value (GAV) of the property. This is either the actual rent received or the market value—whichever is higher. If your property was vacant for part of the year, the GAV can be adjusted to reflect that.

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B. Deductions for Landlords

Landlords can claim several deductions under Section 24 of the Income Tax Act to reduce their taxable income from rent.

i. Standard Deduction of 30%: Landlords can claim a flat 30% deduction on the net annual value (after deducting property taxes) of the property, regardless of actual maintenance or repair expenses.

For example, if you receive ₹3,00,000 in annual rent and pay ₹30,000 in property taxes, your net annual value would be ₹2,70,000. Applying a 30% deduction (₹81,000), your taxable income would be reduced to ₹1,89,000.

ii. Deduction on Home Loan Interest: If you’ve taken a home loan for purchasing or constructing the rented property, you can claim a deduction on the interest paid. Unlike self-occupied properties, there’s no upper limit on the amount of interest you can claim for a rented property.

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C. Vacant Property

If your property remains vacant for part of the year, the GAV can be adjusted, reducing your tax liability.

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D. Tax Treatment of Security Deposits

Security deposits collected from tenants are generally not taxable unless they are non-refundable or adjusted as rent. If adjusted, they are treated as part of your rental income and taxed accordingly.

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TDS on Rent Paid by Tenants

If you pay more than ₹50,000 in rent per month as a tenant, you must deduct Tax Deducted at Source (TDS) at the rate of 5% on the total annual rent.

Key Points to Note:

• Tenants are responsible for deducting and depositing the TDS.
• You need to file Form 26QC and provide your landlord with Form 16C.
• TDS is deposited once a year, not monthly.

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4. Joint Ownership and Rental Income

If co-owners jointly own a property, they divide the rental income based on their ownership share. Each co-owner claims their respective share of deductions under Section 24.

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Conclusion

Understanding how rental income is taxed and knowing the deductions available under the Income Tax Act can significantly reduce your tax burden. As a tenant, claiming deductions through House Rent Allowance (HRA) or Section 80GG can lower your taxable income.

By staying informed and planning carefully, both tenants and landlords can make the most of the tax-saving opportunities on rent.

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Frequently Asked Questions