How to Save Tax on Rental Income: Tips and Strategies

With India’s rental housing market projected to grow at a CAGR of 5.3% from 2023 to 2028, more individuals are investing in rental properties. According to a recent report, around 28% of urban dwellers in India live in rented accommodations. While rental income is a lucrative source of passive earnings, it also comes with tax liabilities. Under the Income Tax Act, rental income is taxed under ‘Income from House Property,’ but strategic planning can help property owners legally reduce their tax burden.

If you’re a landlord or planning to rent out your property, here’s a detailed guide on how to minimize tax on rental income through legitimate deductions and tax-saving strategies.

Understand How Rental Income is Taxed in India

Before diving into tax-saving strategies, it's crucial to understand how rental income is taxed:

• Gross Annual Value (GAV): The total annual rental income received from the property.
• Standard Deduction: 30% deduction on net rental income under Section 24(a) for maintenance, irrespective of actual expenses.
• Municipal Taxes: Deductible if paid by the owner.
• Home Loan Interest Deduction: Unlimited deduction on interest paid for rented-out properties under Section 24(b).
• Net Taxable Income: [(GAV - Municipal Taxes) - 30% Deduction - Interest on Home Loan] = Taxable Rental Income.

Taxable Rental Income Calculation

Calculating taxable rental income involves the following steps:

1. Determine the Gross Annual Value (GAV) of the property, which is the total rent received in a year.
2. Deduct municipal taxes paid by the owner.
3. Apply the 30% standard deduction under Section 24(a) for maintenance expenses.
4. Deduct interest on a home loan under Section 24(b) (if applicable).
5. The remaining amount is the Net Taxable Income, which is taxed as per the applicable income tax slab.

Here’s a sample calculation. Let’s assume your annual rental income is ₹4,80,000 (₹40,000 monthly). Municipal taxes are deducted from the rental income to calculate the net taxable income. For simplicity, let's assume there are no municipal taxes or it's already factored into the income.

A standard deduction of 30% of the gross rental income is allowed under Section 24 of the Income Tax Act for repairs and maintenance (whether or not the property is rented out).

So, 30% of ₹4,80,000 = ₹1,44,000. So, your Net Rental Income would be ₹4,80,000 - ₹1,44,000 = ₹3,36,000. Assuming the you falls under the tax slab (old regime) for a person below 60 years of age:

• Up to ₹2.5 lakh: No tax
• ₹2.5 lakh to ₹5 lakh: 5%

For ₹3,36,000, tax will be calculated as:

• Taxable Income = ₹3,36,000
• ₹2,50,000 falls under the tax-free slab.
• Remaining ₹86,000 (₹3,36,000 - ₹2,50,000) will be taxed at 5%.

Tax on ₹86,000: ₹86,000 * 5% = ₹4,300. So, your total tax payable would be ₹4,300.

Disclaimer: Please note that the above calculation is for illustration purposes only. Ujjivan doesn’t take any responsibility for the accuracy of the information.

Effective Ways to Save Tax on Rental Income

1. Separate Maintenance Charges from Rent

If your rental agreement includes maintenance charges, ensure these are billed separately. The Income Tax Act allows maintenance charges to be excluded from taxable rental income if explicitly mentioned in the agreement.

2. Avail the 30% Standard Deduction

Section 24(a) of the Income Tax Act allows a flat 30% deduction from net rental income for maintenance, irrespective of actual expenses. Even if maintenance expenses are lower, you can still claim this fixed deduction.

3. Deduct Municipal Taxes

Municipal taxes, including property tax, sewage charges, and service taxes, are deductible from Gross Annual Value before applying the 30% standard deduction. However, these must be paid by the owner and not the tenant.

4. Claim Full Interest Deduction on Home Loan

Under Section 24(b), landlords can claim an unlimited deduction on home loan interest for rented properties. Unlike self-occupied properties, where the deduction is capped at ₹2 lakh per year, rental properties enjoy full interest deduction, significantly reducing tax liability.

5. Opt for Joint Ownership

If you co-own a property with a spouse or family member, the rental income can be divided between co-owners, reducing individual tax liability. Both co-owners can claim deductions separately, further optimizing tax savings.

6. Structure Rent Wisely for Furnished Properties

If you rent out a semi-furnished or fully furnished property, charge separately for rent and additional amenities like furniture, internet, and appliances. Only the rent portion is taxable, reducing the overall tax burden.

7. Leverage HUF (Hindu Undivided Family) Benefits

If you have a registered HUF, you can purchase property in the HUF’s name. This helps distribute rental income among multiple family members, reducing tax liability as each member gets individual tax exemptions.

8. Invest in Tax-Saving Instruments

Investing rental income in tax-saving instruments such as National Pension Scheme (NPS), ELSS, or PPF can help reduce overall taxable income under Section 80C.

9. Consider Rental Agreement Optimization

• Avoid renting property to a business you own, as it may trigger tax scrutiny.
• Opt for long-term rental agreements (12+ months) to avoid frequent tax implications.

10. Benefit from Senior Citizen Tax Exemptions

If you are a senior citizen (60+ years), rental income up to ₹3 lakh is tax-free. Planning property ownership in the name of senior family members can help optimize tax savings.

GST’s Role in Tax on Rental Income

Rental income may attract GST under the following conditions:

• Residential properties rented for residential use are exempt from GST.
• If a commercial property is rented out and annual rental income exceeds ₹20 lakh, 18% GST is applicable.
• Residential properties rented for commercial use may also attract GST if the landlord is registered under GST.
• GST is not applicable on security deposits, but advance rent may be subject to GST.

To avoid unnecessary tax burdens, landlords should clearly define the nature of their rental transactions and check their GST registration status.