In India, rental properties are among the most profitable ways to generate passive income. Owing to their falling under the umbrella of the Income Tax Act of 1961, these income types are unavoidably subject to taxation. Therefore, for us to manage our tax liabilities effectively, we need a more comprehensive understanding of the Indian tax system’s rules. Generally speaking, taxes are levied on the annual value of the property, which could be either rent received or notional rent based on municipal valuations.
Deductions, however, are available to reduce taxable amounts, paving the way for precautionary measures against taxation on residential properties. These income taxes on home rentals should not place too much burden on property owners through these deductions. Let’s shed light on the various legal measures that help minimise rental income tax obligations and help taxpayers manoeuvre through regulations effectively.
Exploring Ways To Save Tax On Rental Income
Various legal paths exist to reduce the rental income tax rate in India, each with different savings potential depending on one’s circumstances. Staying aware of these various alternatives may help minimise the tax burden and improve financial planning.
Claiming deductions on home loans:
Home loans are one of the ideal strategies to cut down on one’s taxes. If a property owner has acquired a loan for buying the rental property, then the interest charged on that loan may be excluded from the rental income as per Section 24. This deduction is limited to an amount of INR 2 lakh annually for self-occupied houses. However, when such properties are rented out, there is no upper limit for such interest settling. Thus, this deduction reduces the taxable rent, which further minimises tax payment obligations.
Deduction for municipal taxes paid:
Another deduction claimable is that for municipal taxes. Landlords who remit municipal taxes such as property tax or water tax can offset these taxes against their total gross annual rent earnings. Municipal taxes decrease the overall gross rental revenues, thus leading to reduced taxable incomes. It is important that municipal taxes are paid in the financial year of claiming such deductions. Not only does this reduce a taxpayer’s liability, but it also motivates individuals owning houses to ensure they make timely remittances to local administrations through their taxation dues.
Joint property ownership benefits:
Joint property ownership allows individuals who possess real estate together to enjoy additional tax-saving benefits. When two or more people own a property, the rental income can be dispersed among the joint owners. This income division prevents any one owner from falling into a higher tax bracket. Also, each owner may claim interest deductions on a home loan obtained for property purposes separately. Therefore, joint ownership provides a critical strategic advantage in tax planning, especially where income sources vary across joint owners.
Capital Gains Exemption on Sale of Rental Property:
Capital gains exemption is a valuable method to save tax when a rental property is sold. The Income Tax Act, Section 54, allows individuals to claim an exemption on capital gains from the sale of a rental property if he/she reinvests it into another residential property. But this exemption applies elaborately if the new house is bought within two years or built within three years from the date of sale. Such reinvestment of capital gains helps in deferring or completely avoiding taxes on those gains, and making it an efficient tax-saving strategy for real estate investors.
Depreciation on property (for business income):
Depreciation can be claimed as an expense by individuals who utilise their properties for business motives. Unlike individual taxpayers, businesses can offset depreciation against their income from the property. Depreciation is assessed on the basis of costs associated with that property, so every year, this reduces taxable income and ensures an ongoing tax benefit. The Income Tax Act allows for a 10% depreciation rate on commercial properties that can be used as tax deductions in order to reduce taxes.
Using HRA to offset rental income:
A house rent allowance (HRA) is an exemption that can be availed by employees who live in a rented house while also earning rental income from another house. HRA is an allowance which is provided to the employees by their employers for living in a rented house. Therefore, HRA earners who are also landlords of rented properties can claim deductions on the rent paid for their accommodation, balancing their total rental income and reducing their overall tax liability.
Planning through family transfers:
Strategic family transfers can also be one of the best avenues to save on rental income taxes. Property owners may pass down ownership of their rental property to a family member classified under lower tax brackets through gift or partition deeds. If the transfers are genuine and fulfil proper legal requirements, such as proper documentation, this can help reduce your total tax liability.
Forming a HUF (Hindu Undivided Family):
Creating a Hindu Undivided Family (HUF) can effectively save rental income tax, especially for a large family with multiple income sources. As a whole, different legal entity from individual family members, HUF’s rental income is also taxed separately. Owing to this separation, the family can avail of the basic tax exemption limit that is open to HUF, which reduces overall rental tax liabilities.
Using Investment Strategies To Save on Tax:
Lastly, tax liabilities on rental income can be effectively managed through investment strategies. For instance, Public Provident Funds (PPF) and Equity-Linked Savings Schemes (ELSS), which are tax-saving instruments, may help counterbalance the tax implications of rental income. By doing this, one can claim deductions under Section 80C of the Income Tax Act and reduce their total taxable income.
Understanding rental income taxation for NRIs
Rental income belonging to Non-resident Indians (NRIs) in India attracts tax liability just like any other taxpayer under Section 24 of the Income Tax Act. As per the Income Tax Act, there are TDS obligations on tenants renting properties from NRI landlords at the rate of 31.2%. Additionally, they have to submit this amount in the form of TDS to tax authorities. For this reason, Form 15 CA needs to be completed and sent to the Income Tax Department.
How Can NRIs Save Tax?
When it comes to taxing rental income in India, Non-Resident Indians(NRIs) always face unique considerations.
Certificate of Exemption:
When the NRI property owner holds a certificate indicating that his total income earned from India fall below the threshold for exemption, rental income tax may be waived. The NRI owner’s tax on rent shall be reduced according to the order made by the Assessing Officer if he has this certificate under Section 197.
Double Tax Avoidance Agreement (DTAA):
Some countries have a Double Tax Avoidance Agreement (DTAA) with India. According to its terms and conditions, if the NRI property owner’s country of residence has a DTAA, there is no need to pay double tax on rental income from property located in India. This agreement exists with more than 90 countries, including the USA, Canada, the UK, and Australia, among others.
Filing of income tax return:
In India, NRIs have to report their rental earnings by filing an income tax return. They can also claim a refund if excess TDS has been deducted under Section 24(b), which deals with interest on home loans and standard deductions on collected rent.
The ever-changing taxation world is full of diverse opportunities and challenges. For instance, recent policy changes, such as the introduction of faceless assessments and the rise in digital compliance, have simplified the process of filing taxes on rental income. Thus, property owners must be cautious about possible changes in tax regulations and adjust their strategies accordingly. Besides, consulting tax advisors and using technology can significantly aid in taxpayers’ tax savings efforts as they benefit from every available deduction.
