Tax Savings on Rental Income or Deemed Rental Income

  • Let’s start with understanding ‘Rental Income’. When you rent out your house or a commercial property or a land appurtenant and the income earned is known as rental income. This rental income which is not used for business or profession is added under the ‘Income from House Property’ is subject to Income tax.
  • Income tax act requires an assessee to disclose all house properties owned by him in his Income tax return. In case of multiple house properties, only one property can be claimed as self-occupied (if not rented out) and others are to be compulsorily considered as let out (i.e. deemed let out). The deemed let out declaration is a rule even if the said house property is vacant or self/family occupied and no rental income is earned on it.
  • Are you looking for saving tax on such a rental income generated from house property owned in India? This blog shares some insight about rental income, its components and various ways to reduce the tax with the deductions available on such rent received.
  • Let us discuss how to plan and reduce your tax burden on rental income.
    1. Higher rental income consideration : Based on Income tax act, taxpayers can declare a higher rental value property as his self-occupied property if he owns multiple ones in the same city. One can compute notional or deemed rental value on the other properties on declaration and pay the income tax.
    2. Municipal Taxes : Remember paying your municipal or property taxes for rental income on time. The benefit is getting a reduction from your rental income in the financial year of the payment.
    3. Standard deduction : After reducing the municipal taxes paid in the year from the gross rental income, a further deduction is available @ 30%. Use this to reduce your net rental income further.
    4. Loan on a Self-occupied house : In case you have a loan on a self-occupied house, you can claim up to Rs. 2 lakhs interest paid per annum as loss from self-occupied house under ‘Income from house property’.
    5. Loan on Let-out property : There is no limit on claiming the paid interest on a let out/deemed let out property. This can be a decision area for deciding which house property to declare as self-occupied and which one as deemed let out. Example: Mr A having 2 house properties in the same city and the interest amount of one of them is more than 2 lakhs after reducing the net rental income. The other house has interest amount of up to Rs. 2 Lakhs or below. Mr A can choose the house with higher rental income as deemed let out.
    6. Carry forward of losses : Always file your Income tax return in time i.e., before 31st July so that you can carry forward the losses to subsequent years, if they were not set off against your total taxable income for the year.
    7. Interest on pre-possession : Do not forget to include the interest paid before the possession during the year you receive the possession and the year onwards. You can claim deduction on such paid interest in 5 equal instalments starting the year when the possession has taken place subject to rules of possession/construction period. The interest paid during the pre-construction period can be claimed in 5 equal annual instalments after you get the possession on the house.
    8. Principal amount on housing loan : You can bundle up the total principal amount paid for the housing properties during the financial year and include them as a deduction under 80C with a limit of INR 1.5 lakhs. You may not benefit much if the limit is already exhausted.
    9. Joint Home loan : When you and your spouse take a joint loan and contribute financially towards acquiring the house property, the tax burden on rental income can be reduced considerably by sharing the rental income based on the co-ownership. In addition, you can claim the deduction for interest paid jointly up to Rs. 2 lakhs each for you and your spouse for a self-occupied house, (more in case of a let out house property). Similar benefit can be taken u/s 80C for the principle amount paid.
    10. NRIs : With no special provisions, the above rules apply to NRIs too. With an exception, that the rental income received is to be deposited in NRO account only to facilitate repatriation of income.
  • In conclusion, if you know how to compute your rental income on rented or deemed to be rented house property, we believe the burden of tax can be reduced considerably.

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Financial Management