Got shifted to another city or state for work purposes? Then you need to know a few facts about how to save tax on rental income. The income gained from rent is just another part-time income. In this article, we’ll know various ways how we can save tax on rental income?
Why Go For Tax Saving On Rental Income?
Be it that you’re in a job or retired. People own 3 or more flats. If on an average per month rent comes Rs. 25,000, and you have 4 such flats, then you’re lucky. You have a heavy pocket of 1 lakh at the end of the month. This is more than enough to live a luxurious life. At the same time, the best part is leaving beautiful assets for your legal heirs.
Be you salaried or retired person; rental income holds good, isn’t it? Tell me, who doesn’t like to generate a steady but lump sum amount from rental income? Sitting at your home, enjoying movies with your spouse, and getting paid at the end of the month. Who doesn’t want it? Rental income has been the most relied on income over the years. If you’ve got the option, go through this article, and learn how to save tax on rental incomes.
Thus it is essential to know how to save tax on rental income. This might add to the heaviness of your pocket, right? You might invest that amount in the sale of another property. There are so many other profitable investments you can gain.
The subtraction of municipal taxes computes the tax value of a year gained from the rental property. The subtraction u/s 24 gained from the rent. Two subtraction of taxes is permissible as per section 24. One is the interest that you gain from the property loans. The other being standard deduction of the 30% value subtracting from rent.
From the year 2019-20, according to the revised laws, changes made in tax exemption. For the taxpayers below 60 yrs of age, income up to Rs. 2.5 lakh is tax-free.
For example, the rent per month is Rs. 10,000. So, the total rental income received per annum would be Rs. 1,20,000. This is clearly less than Rs. 2.5 lakh. So it’s tax-free!!
Now, for instance, let your rental income be Rs. 3 lakh. In this case, it exceeds the scale by Rs. 50,000. Is it still taxable? Well, you can avoid it. Let’s see how!
Income Tax On Rental Income
The Income Tax department has a separate section for Income from house property. It’s based on the tax payable from rental income. Thus, any rent received is taxable under this section. Be it a property you’re purchasing for home or commercial purposes. Even letting out your single spare room for a private shop’s purpose is taxable.
The income tax on your rental income imposition depends on its annual value. It’s determined by-
- The rental income you, in reality, gained.
- Total value you require to lease your property.
Suppose imagine you lease your property for a formal value. The amount considered for taxation would be the market rent and not what you have received. You receive a rent higher than the market rent. The rent actually received gets the imposition of tax.
Point to note: The rental income becomes taxable on an accrual basis and not a receipt basis.
It is the owner, levied of tax payment. So, if you lease your rented property, the tax gets levied on money received from it. It’s mentioned under the head, “Income from other sources.” Even if you have encroached under a property, you’re taxable under this head.
Even if you gift a property to your spouse, you’re treated as the owner of the property. You have to pay the tax for that property.
Suppose your 16 yrs old son is living far away and prefers a homely environment. You think of gifting him a house. Since he is minor, you must have to bear the taxable amounts.
How Can I Put a Limit On The Tax Imposition Over Rental Income?
1. Maintenance Charges
Well, it is the easiest and most preferred way to save tax on rental income. The maintenance fee is the amount you pay for the maintenance of the property. This includes your operating expense, property tax, depreciation, and repair. However, the amount you spent on the renovation can’t get subtracted. Make sure you mention it in your agreement.
Well, it is applicable only if you rent your timeshare. In other words, maintenance charges are the lowest hanging fruit. Pluck it and enjoy it!
For instance, you finish a rental amount to be Rs. 25,000. The society maintenance charges are Rs. 2,000. So, you would receive a net amount of Rs. 23,000. There is one agreement you’ve made with the tenant. He has to pay the society maintenance amount to the association. You will receive the net rental amount, i.e., Rs. 23,000. If he doesn’t agree to it, ask him to make two different cheques. You should receive these two deposits. See, it is so easy and relaxing.
2. Joint Property
This is another tax-saving way where you can save money on tax. Joint property means 50-50 ownership of a property. One 50% owner can be you, whereas the other 50% can be your mother, brother, spouse, anyone trustworthy. In most cases, it is the spouse. Especially when she is a housewife, you’ve more to save. In this case, you can either make her 50% owner or buy the property in her name. This divides the rental property into two proportions, depending on ownership. But, if you transfer in your spouse’s name without taking any consideration from your wife. The rental income generated is clubbed to your taxable income.
In another scenario, if both are working, it is more beneficial if both are under different tax slabs. Here tax slabs refer to the tax rate imposed on income. In this case, the one with lower takes advantage. It helps in lowering the tax on rental income. For example, you earn Rs. 50,000 per month. Your wife earns Rs. 80,000 per month. Okay! Don’t take me in otherwise and get jealous. You can show your income and get a lower tax on rental income.
Point to note: The clubbing of income is avoided if your spouse is a housewife. You can purchase a share of your wife’s jewelry.
Even if anyone pays EMI, the rental income is divided into two based on the ownership.
3. Municipal Taxes
The municipal tax includes property tax, sewage tax, water tax, etc. from your rental income. All these municipal taxes the owner pays. Isn’t it? So, catch hold of it, and don’t let this go out of your hand.
I have seen many cases where tenants pay these taxes. Why? In this case, the owner cannot claim a deduction for payment by the tenant. So, no doubt, following these measures, you can reduce the tax expenditure on rental income.
4. Standard Deduction
In case you’ve bought a property for investment. No doubt, you have to spend some amount on making it better. For its renovation, repairing work, you have to spend some amount. So, irrespective of what you’ve actually spent, you can claim a 30% deduction of Net Annual Value. Its regarded as Standard Deduction. Even the NRIs are eligible to avail of standard or minimum discounting.
For example, you earn Rs. 3 lakh income from a property on rent. You can take off the taxes on property, i.e., Rs. 10,000. Out of remaining Rs. 2.9 lakh, the standard deduction is 30%, i.e., Rs. 90,000. So the net rental income from house property received is Rs. 2,03,000. Now, since it’s much little than 2.5 lakh, it is tax-free!!
5. Semi-Furnished Properties
Semi-furnished properties are under construction properties. In this case, owners provide certain attractive facilities. Facilities like Wi-Fi, piped gas connection, DTH TV, etc. are provided.
These charges owners collect with rent and pay to the respective authorities. In such a situation, you can ask the tenant to clear the bills. It will reduce some amount from the rent. If not, you can collect this from your tenant. Your income from hiring decreases as a result.
Planning For A Second Home When You Already Have One?
While coming home from your office, you came across a beautiful property ON SALE. Its price was too reasonable to let it go. But your name is already are preoccupied with the present home. So what to do? Go through the keys words of how to save tax on rental income and grab the property.
Don’t think twice. If the property is a beautiful choice, get hold of it. Thinking about buying in whose name? Look to your side and buy it in her name. Isn’t that a beautiful surprise gift for her? So confusion over. By this, the property is in your hand with a lower tax rate on rental income. (Of course, you’ve to rent your present house, right).
Calculating Tax From Rental Income
Tensed about calculating tax from rental income? Going to retire and rental income is the only source of income after pension? Then you need to know about calculating tax from rental income. You can know how to save tax on rental income.
The amount of money you receive from a provident fund after retirement is exempt from tax—pension income taxable like the salary income. Yet, the computed value is taken into account. Under Section 10A of the Income Tax Act, the tax-free amount depends on your gratuity amount, which is always received after retirement. In the case gratuity amount received, 33% of the pension is tax-free. In case you don’t receive any gratuity, the commuted value of a 50% exemption is made from your pension.
Impact Of GST On Rental Income
Monthly rent is one of the most important expenses. Isn’t it? The implementation of GST has illustrated the collection of taxes. It’s collected from all possible fields. Thus, you must know about how to save tax on rental income to tackle this.
The new GST law says pricing an immovable property is always considered as a continuation of services. GST imposition depends on a few conditions. In situations, if your property is licensed to occupy or at rent, GST will add on. Otherwise, if your property’s let out, including a commercial, residential property, in such cases, GST gets added up.
When you rent a homely property, GST is not imposed. Any other type, then GST, at 18% added up. In such cases, it comes to undersupply of services.
1. Is it necessary to pay tax on rental income?
The total rent you receive is not taxable. There are certain deductions available like-
i. The standard deduction, i.e., 30% of the taxable amount.
ii. Municipal taxes like the water tax, sewage tax, etc.
iii. Joint property (if any)
2. Is there any way to get a tax discount?
You can only go for a tax discount after you make sure that your tax amount exceeds your income tax slabs. You can get it deducted while filing your ITR at the source.
3. What is the minimum amount for taxable?
After the above two deductions, the leftover is the annual value. Out of the annual value, you can deduct 30% to cover the expense of repairing work. Whether you have any need of repairing work or not, this 30% deduction is a standard deduction.
Suppose you have borrowed some amount for construction purposes. You’re can also claim a deduction for the interest payable on the borrowed amount. The borrower can be a person or bank.
4. Is rental income counted from the jointly owned property?
5. Is the apartment maintenance tax exempted in India?
For instance, if the total interest paid is Rs. 2 lakh. You can subtract Rs. 40,000 from your tax for five years.
If the apartment is not constructed completely or not completed within 3 yrs, a deduction of Rs. 30,000 is acceptable every year. If you do not occupy the apartment, you can claim the total amount paid on interest as a deduction. Yet you’ve to show the rental income in a tax return.
6. Does rental income come under business income in India?
However, recently Madras High Court has released a different lash. It varies from different perspectives.
For instance, Mr. Sharma, a salaried fellow, rented his commercial property. In this case, the rented property is not his main business, as he is already salaried. Thus, in this regard, it’s treated as a house property income and not business income.
The situation varies in the case of Mr. Mishra. He owns a guest house, and the major part of income comes from there. So, in this case, its regarded as business income.
The reason for so many controversies lies due to many factors. If the income received from the property holds a major part and he is not salaried, it comes under business income.
7. Can you show rent from a husband’s house in the wife’s name if she is 50% owner?
Make sure the amount is received partly in your and your wife’s account. Even if the TDS gets deducted, it will get deducted as well.
8. What are the different kinds of properties that come under rental income tax?
Property and gold are the two most demanded investments presently. Be it property or gold; the best part is to leave beautiful assets for your legal heir. Be it retirement or any part-time income for homemakers, rental income is most preferred. Likewise, it is wise enough to gain a few ideas about how to save tax on rental income. The above-mentioned criteria are the golden words to keep in mind for every investor. Follow that golden advice and make a deal for another investment. Rental income investment is always a win-win and pocket full scenario. Isn’t it? Cheers for the best! I hope you like this article!