If you reside in India and earn money by renting out your property, you may be liable to pay taxes on the rental earnings. Rental income is taxable under the provisions of the Indian Income Tax Act. By claiming deductions, utilizing exemptions, and planning wisely, you can maximize your rental income while staying tax-efficient.
In this blog, we’ll explore what are the Strategies by which we can save income tax on rental income.
Revision in TDS Threshold for Rental Income Taxation
In the Union Budget 2025-26, Finance Minister Nirmala Sitharaman announced an increase in the TDS threshold for rental income, providing relief to property owners and investors. This revision reduces TDS liabilities, allowing tenants access to better rental options while easing compliance for small taxpayers. Additionally, taxpayers can now consider two self-occupied properties as tax-exempt, further benefiting homeowners.
Source: Revision in TDS Threshold
Strategies to Save Income Tax on Rental Income
Saving tax is crucial for maximizing rental income returns. Here are some effective strategies to legally reduce your tax burden:
1. Claim Deductions on Municipal Taxes
Municipal taxes paid on a rented property are fully deductible from rental income, lowering your taxable amount. Ensure timely payments to avail of this benefit.
2. Deduct Home Loan Interest
If the property is financed through a home loan, you can claim a deduction on the interest paid under Section 24(b) of the Income Tax Act, helping you save significantly.
3. Consider Joint Ownership
Owning a rental property jointly allows co-owners to split the income, reducing the overall taxable income as each owner can claim individual deductions.
4. Standard Deduction of 30% on Rental Income
Under Section 24(a), a flat 30% deduction is available on rental income for maintenance and repairs, regardless of actual expenses incurred.
5. Use Rental Agreement Smartly
Structuring your rental agreement wisely by including components like separate maintenance charges can help reduce taxable rental income.
By leveraging these strategies, you can legally minimize income tax on rental income while ensuring full compliance with tax regulations.
Tax Deductions Available for Rental Income Tax
Maximizing tax deductions can help reduce your income tax liability and increase your rental income profits. Below are key deductions available for landlords to save on taxes.
1. Standard Deduction for Property Maintenance (Section 24A)
A flat 30% standard deduction is allowed under Section 24A for property maintenance, repairs, and other expenses, regardless of actual costs incurred. This benefit helps reduce taxable income and simplifies tax calculations for landlords.
2. Deduction on Home Loan Interest (Section 24B)
If you have taken a home loan for the rental property, you can claim a deduction on the interest paid under Section 24B. The maximum deduction allowed is ₹2 lakh per financial year, helping to lower the overall tax burden.
3. Deductions for First-Time Homebuyers (Sections 80EE and 80EEA)
First-time homebuyers can claim additional deductions on home loan interest under Sections 80EE and 80EEA. Section 80EE offers a deduction of up to ₹50,000, while Section 80EEA provides an additional benefit of ₹1.5 lakh for affordable housing. These deductions help reduce the financial burden for new investors in rental properties.
4. Deductions for Co-Owners of Property
If a rental property is jointly owned, each co-owner can claim tax deductions separately on home loan interest and principal repayment. This strategy helps distribute the tax burden, making it an effective way to save on income tax on rental income.
By utilizing these tax deductions wisely, landlords can legally reduce their tax liabilities while optimizing rental income returns.
How Much Rental Income is Free from Tax in India?
Rental income is a valuable passive earning, but knowing tax rules is key to maximizing exemptions.
| S.No. | Criteria | Details |
|---|---|---|
| 1. | Basic Exemption Limit | Income up to ₹2.5L (below 60), ₹3L (60-80), ₹5L (80+) is tax-free. |
| 2. | Standard Deduction (Section 24A) | Flat 30% deduction on rental income for maintenance & repairs. |
| 3. | Home Loan Interest Deduction (Section 24B) | Deduction of up to ₹2L per year on home loan interest paid. |
| 4. | Rent from Self-Occupied Property | Rental income not taxable for a single self-occupied property. |
| 5. | Deductions for Joint Ownership | Co-owners taxed only on their share, allowing separate deductions. |
Also Read: Tips to Save Income Tax on Rental Income
How is Rental Income Taxed for NRIs in India?
NRIs earning rental income from Indian properties face a 30% TDS deduction by tenants before rent is paid. While they cannot claim the basic exemption limit, they can avail deductions like a 30% standard deduction (Section 24A) and home loan interest deduction (Section 24B) to reduce taxable income.
If total income in India exceeds ₹2.5 lakh, filing an ITR is mandatory. NRIs can also use DTAA (Double Taxation Avoidance Agreement) to avoid being taxed twice on the same income.
What are the Types of Rental Income
Rental income can come from various sources, each with different tax implications. Understanding these types helps in better tax planning and compliance.
1. Residential Rental Income
Earnings from leasing out houses, apartments, or flats fall under this category. Landlords can claim deductions like a 30% standard deduction and home loan interest to reduce taxable income.
2. Commercial Rental Income
Rent from office spaces, shops, or warehouses is considered commercial rental income and often attracts GST if annual rental exceeds ₹20 lakh.
3. Subletting Income
When a tenant sublets a rented property to another occupant, the original tenant, not the property owner, is liable to pay income tax on rental income received from subletting.
4. Agricultural Land Rental Income
If agricultural land is rented for farming, it is exempt from tax. However, renting it for commercial purposes may attract taxation.
5. Rental Income from Co-Working or Shared Spaces
Earnings from leasing out shared spaces or co-working hubs are gaining popularity. Taxation depends on lease agreements and the services offered.
Identifying the type of rental income helps landlords optimize tax benefits while ensuring compliance with tax laws.
How to Calculate Income Tax on Rental Income?
Calculating income tax on rental income requires considering deductions and exemptions to arrive at the taxable amount. Follow these steps for accurate computation:
- Determine Gross Annual Rental Income
Total rent received from tenants in a financial year.
- Deduct Municipal Taxes Paid
Municipal taxes paid to local authorities can be deducted from rental income.
- Apply Standard Deduction (30% – Section 24A)
A flat 30% deduction on net rental income is allowed for maintenance and repairs, regardless of actual expenses.
- Deduct Home Loan Interest (Section 24B) – If Applicable
If the property is financed through a home loan, a deduction of up to ₹2 lakh on interest paid is available.
- Calculate Tax Based on Income Slabs
The final taxable rental income is added to total income and taxed as per individual slab rates.
Example Calculation:
Gross Annual Rental Income: ₹30,000 per month × 12 = ₹3,60,000
Less: Municipal Taxes Paid: ₹10,000
Net Income: ₹3,60,000 – ₹10,000 = ₹3,50,000
Less: Standard Deduction (30% of ₹3,50,000): ₹1,05,000
Net Income after Deduction: ₹3,50,000 – ₹1,05,000 = ₹2,45,000
Less: Home Loan Interest Paid: ₹1,50,000
Final Taxable Income: ₹2,45,000 – ₹1,50,000 = ₹95,000
The final taxable amount (₹95,000) is then added to total income and taxed as per individual tax slab rates. By leveraging these deductions, landlords can optimize their tax liability effectively.
Also Read: How to File Rental Income in Your Tax Returns
How GST Impacts Income Tax on Rental Income
The introduction of GST has significantly impacted rental income taxation, especially for commercial properties. While residential rentals are mostly exempt, certain conditions make GST applicable, influencing income tax on rental income. Here’s how GST affects taxation:
1. GST Applicability on Rental Income
- Residential properties rented for personal use are exempt from GST.
- Commercial properties rented out attract 18% GST if the total rental income exceeds ₹20 lakh per year.
- If the property owner is registered under GST, they must charge and collect GST from tenants.
2. GST on Renting to Registered Businesses
- If a residential property is rented to a GST-registered business, it falls under the GST regime, and the tenant must pay 18% GST under reverse charge.
3. Impact on Income Tax Calculation
- GST paid on rental income is not considered part of taxable income, as it is collected on behalf of the government.
- However, rent received (excluding GST) is added to total income and taxed under income tax slab rates.
- Property owners can claim deductions like standard deduction (30%) and home loan interest (Section 24B) while computing taxable rental income.
4. ITC (Input Tax Credit) Restrictions
- Landlords cannot claim ITC on GST paid for residential property rentals.
- ITC is available only for commercial properties where GST is applicable.
Is Rental Income from REITs Taxable
Real Estate Investment Trusts (REITs) distribute rental income to investors, which is taxed as “Income from Other Sources” at applicable slab rates. Some distributions, like dividends, may be tax-exempt if the REIT has paid corporate taxes. While REIT taxation differs from direct property ownership, investors must report earnings under income tax on rental income in their filings.
Read More: What is the Meaning of REITs?
Conclusion
Proper tax planning is essential to minimize liabilities on rental earnings while staying compliant with regulations. Understanding deductions, GST implications, and REIT taxation helps landlords and investors optimize their returns.
By leveraging available exemptions, one can effectively manage income tax on rental income and maximize financial benefits.
Frequently Asked Questions
Rental income is taxed after deducting municipal taxes, a 30% standard deduction (Section 24A), and home loan interest (Section 24B). The final taxable amount is added to total income and taxed as per individual slab rates.
If total income, including rental earnings, is below ₹2.5 lakh (for individuals below 60), no tax applies. Senior citizens (60-80 years) have a ₹3 lakh limit, while super seniors (80+) enjoy up to ₹5 lakh tax-free income.
There is no specific exemption limit, but deductions like 30% standard deduction, municipal taxes, and home loan interest help reduce taxable income. Salaried individuals receiving HRA can claim deductions under Section 10(13A) based on rent paid.
Section 22 to Section 27 of the Income Tax Act covers rental income taxation. Section 24A allows a 30% standard deduction, Section 24B provides home loan interest deduction, and Section 26 governs co-ownership taxation.
Non-reporting rental income may lead to penalties, interest on unpaid tax, and scrutiny by the Income Tax Department. If detected, a penalty of up to 200% of the tax due can be imposed, along with possible legal action.
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