Real estate is one of the most popular investment avenues for Indians. Passive income and capital appreciation are two main drivers of the real estate sector. Rental property investment is one of the most common ways to earn passive income. It is considered to be more stable and sustainable. A decline in the rental value is often a rare scenario and currently, there is a huge demand for the rental spaces as potential buyers are postponing their purchase or the sellers are hesitating due to the depressed market rates.
Did you know passive incomes are taxable? Yes, like all your other incomes, passive income earned from rental properties and other sources, too is taxable. Tips to save tax is one of the most searched questions on the web as we all want to save our hard-earned money tax as much as possible. To gain deductions on your passive income will be icing on the cake as you will be able to increase your Net Rental Income. Here are some legitimate tips for you to save tax on your passive income options.
Tips to save tax on passive income from real estate investments
Passive income from real estate can be earned using rental properties, REITs dividend, crowdfunding income, or private-equity income. Passive income is taxed at a similar rate at which earned incomes are taxed. However, there are some methods to reduce the net taxable income made through real estate investments. Here are some of the simple tips to save tax on passive income in India:
One of the easiest ways to save tax on your rental income is by deducting the maintenance charge. In most case scenarios, the society maintenance is charged on the rent and thus the landlord ends up paying tax on the maintenance fee as well. To save tax, the landlords are required to segregate the rental amount into two parts. Let’s say, the rental amount on a flat in Bangalore is set at Rs. 30,000 out of which Rs. 27,000 is the rent and the remaining Rs. 3,000 is the society maintenance charge. In such a situation, you can simply add a clause in the rental agreement directing the tenant to pay the maintenance fee directly to the association and if the tenant does not agree to this, then you can also collect the amount separately. In doing so, you can save tax by deducing the maintenance cost.
Deduction on Municipal Tax
The next simple but not very popular way to reduce your tax is by deducting your municipal taxes. These taxes include property tax, sewerage tax, etc. However, for the landlord to avail the benefits of municipal tax deductions, they must pay these taxes themselves. In most cases, the landlords ask the tenants to settle the municipal taxes and thus end up being ineligible to claim the deduction. The municipal taxes will reduce the passive income from the property and in turn reduce your tax liability.
When you purchase a property, it is common that you carry out some repair and maintenance work before letting it on rent. You can also claim deduction on these expenses along with the advertisement expenses, legal and professional expenses. You can claim a deduction of 30% of the Net Annual Value as Standard Deduction irrespective of the actual expenditure incurred on the repair and maintenance. The Net Annual Value is calculated by deducting the municipal tax from the gross annual value.
Deductions on Home Loan interest
You can claim a tax deduction based on the interest paid on your home loan. Under Section 24(b) of the Income Tax Act, you are eligible to claim a full deduction on the interest paid upon let out properties. However, the deductions cannot be claimed if the property is still under construction. If you are investing in under-construction projects, then you can claim a tax deduction on pre-construction period interest payment on five equal instalments, once the construction works are completed. Further, you can also claim deduction under Section 80 EEA on the interest paid up to a value of Rs. 1.5 Lakhs. However, interest deduction under this section can be claimed only for affordable housing for property worth up to 45 lakhs and if other applicable conditions are met. An NRI investing in real estate for passive income in India can also avail of the benefits mentioned under these sections.
Deduction on Principal Repayment
Section 80C of the Income Tax Act provides for tax deductions on the principal portion of the EMI paid for the year. You may also claim a deduction of Rs. 1.5 Lakhs on your investment, however, to apply this deduction, you must not sell off your property for the next 5 years. If you are investing through crowdfunding options, you can also save tax based on the principal repayment made to you by the developer according to the provisions of the Income Tax Act.
Deduction on TDS
According to TDS, a person who is making the payment to another is eligible for tax deduction at the source. If you are investing in rental real estate investments, then you can claim a 1% tax deduction on TDS on the total amount paid by you at the time of investing. If you invest through crowdfunding options, a TDS deduction can be claimed on the interest paid by the property manager or developers. This deduction is granted on an interest that exceeds Rs. 5000 annually.
Deduction for joint owners & fractional owners
If you are investing through joint ownership methods, then you are liable to pay tax on the rental income as well as capital gains on the sale of the property. You are required to pay tax the same as though you are individually owning the property. However, let’s say you’re jointly owning a rental property with your spouse who is unemployed, in such a situation, you can save tax by making a certain adjustment. When a property is co-owned, the income is taxed only based on the ratio of their ownership as provided in the title deed of the property. All the owners of the property can claim standard deduction individually and thus you can reduce the tax burden.
You can easily reduce your tax on your passive income by taking advantage of the expenses incurred on the property. You can deduct tax on the insurance amount that is paid on your rental property if it is not your residence. You can claim a deduction on your property management fee as well. Any property repair, including capital improvements, are eligible for a tax deduction.
Passive income opportunities are plenty out there. Real estate may seem just one of them. However, by making investments in real estate, you can claim several tax benefits along with stability. By taking some simple steps like differentiating your maintenance charges and rent, paying the municipal tax, doing some maintenance and repair works, etc. you can claim deductions on your tax amount. You can also claim deductions if investments are made through leverage. Joint and fractional ownership also carry benefits of tax reduction.
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Methods to reduce tax on your passive income from real estate FAQ’s:
Passive incomes are taxed just like your regular income. If you are earning passive income from rental property, it is taxable under the head’s income from house property. You are also taxed on the capital gains earned on the sale of the property.
How is passive income not taxed?
Some of the methods to avoid tax on your passive income includes payment of municipal taxes, joint ownership, deductions on home loan interest rates as specified under section 24 and 80EEA, etc. You can claim a standard deduction on the repair and maintenance work carried out on the property.
How should I invest to earn good passive income?
Some of the best ways to earn passive income from the real estate sector include rental property investments, REITs, Real estate crowdfunding, etc.