Everybody wants to invest in a real estate project which gives them a steady flow of income. Each of us dreams of owning an asset that is capable of generating income rather than generating expenses. Rental income has been identified as one of the most common ways of income in India after regular salary. However, rental incomes earned on commercial properties or residential properties are taxed according to the individual’s income tax slab rate. In this article, we will provide you with a list of legitimate ways to save tax on your rental yield.
How to save tax on your rental income?
The income received on renting your house can be exempted from tax liability under different sections of the Income Tax Act. The Act provides investors with legitimate tips to claim deductions on their rental expenditures and makes their investment even more desirable.
Claim Municipal Taxes paid & Standard Deduction
You as a landlord can claim deduction on the municipal taxes paid by you and also claim a standard tax deduction of 30%. The 30% deduction on the tax amount is granted under section 24 of the Income Tax Act for all properties (residential or commercial). The standard deduction is applied to the repair and maintenance of the property. The standard deduction is granted to NRIs as well.
The municipal taxes so paid by the landlord can be deducted from their gross annual value. However, to claim a deduction of municipal taxes, the landlord should make the payment himself. In simple words, if the tenant pays the tax amount then the landlord cannot claim the deduction.
Home loan tax benefits
This is one of the most common ways to claim deduction on your rental properties is by investing through leverage. When you invest in your property by acquiring a loan, you can claim a deduction on the interest which is paid on the home loan. However, this deduction is only granted on the purchase of residential property and not on commercial. Under section 24(b) you can claim a deduction up to Rs.2 Lakh on the interest which is paid. However, the benefits provided under the section cannot be claimed before the completion of the construction or before getting possession of the property. If you are paying EMI during the pre-construction times, then you may claim a deduction in 5 equal installments after the completion of construction.
The government in its 2019 Budget introduced an additional tax deduction for those investing through a loan under section 80EEA whereby deduction can be claimed to an amount up to Rs. 1.5 Lakhs on the interest paid. However, it is recommended that you don’t take a loan just to claim tax deductions.
Bifurcation of maintenance amount from the rent amount
You can also reduce the amount payable as tax by bifurcating the rental amount and the maintenance amount. The tax amount is charged on the total rental income and thus by differentiating the same will help in reducing tax expenses. You can ask the tenants to pay the maintenance fee directly to the society and the rent to you as well.
The landlord can claim deduction on the expense
The landlord can claim a deduction based on various expenses incurred by him on the property. Some of the common grounds on which the deduction can be claimed includes:
- Costs incurred when traveling back and to the rental property
- Advertisement costs
- Expenses incurred on calls and text messages sent in relation to the rental property
- Cost of safety certificates
- Cost of bank charges (i.e. overdraft)
- Advisory fees e.g. legal and accountancy
- Subscription to property investment related magazines, products, and services
Other grounds to claim a deduction
The landlord can also claim a deduction if the property is left empty for some time but has incurred utility expenses. You can also invest through joint or fractional ownership options to reduce the tax burden. Assetmonk can be your investment partner if you are looking for a fractional ownership project to invest in. We offer commercial real estate properties with rental income under or Yield Category products with an expected rental yield of 8%.
Rental incomes are common investment options for those looking to earn passive income. However, nobody wants to pay tax and is looking forward to avoiding tax payable on their rental yield. There are various methods to claim deduction on the tax amount based on the property chosen to invest in. Efficient financial planning can help in reducing the tax burden and increasing profit.
Assetmonk is an online platform offering investment opportunities in top Indian cities like Bangalore, Chennai, and Hyderabad. We offer properties for different budget groups and in different categories. We offer projects under the Yield category which include the GMR Airport project, our senior living project in Chennai, our industrial facility, etc. for rental returns. All our offering under the Yield category is expected to earn a return of 8%. Visit our website to know more!
How to save tax on rental investment FAQ's:
Some of the ways to save tax include investing through a home loan, bifurcation of the maintenance fee and rent, claim deduction on grounds of municipal tax and standard deduction, etc. You can claim deduction on expenses such as costs incurred by you when traveling back and to the rental property, the advertisement costs, telephone calls made in connection with the rental property, cost of safety certificates, etc.
Yes, rental income is taxable in India under the head ‘Income from house property’.
The rental income is added to the tax filing by filling out Form 1040, Schedule E. You are required to fill in details such as the property’s rental revenue, expenses, and depreciation. If you own more than one rental property, then you should fill multiple Schedule E forms.
You cannot deduct rental expenses without any rental income.