Tax Savings on Rental Income or Deemed Rental Income

Tax Savings on Rental Income or Deemed Rental Income

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Tax Savings on Rental Income or Deemed Rental Income

Tax Savings on 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.

Smita Kapil
Smita Kapil
Smita has been associated with H&R Block India advisory services for past 2 years. She is a MBA (Finance) from Mumbai University and has been working in taxation field for more than 6 years. In her free time she enjoys reading fiction and non-fiction books.

8 Comments

  1. Dr Komal Chopra says:

    very informative. I liked reading it

  2. chetan says:

    I own a property in one city, which is currently self occupied and in another city, which is let out. I am taking tax benefits on both properties home loan interest.

    Now I am renting out the property which is self occupied and moving on rent near to my office (in the same city).

    In this case, can I still take tax benefits on both my properties and HRA for rented property also? I am going to show rent also from my rented out property (which was self occupied).

    • HRBlockIndia says:

      Yes, you can still take the benefit of both HRA and the two actually let out properties. The only thing to keep in mind is that you should be able to prove that the rented property in which you are staying is really near to the office as compared to the self –occupied property which you actually let-out.

  3. Ahmed says:

    Very well explained encompassing all the deductions.

    Great approach!

  4. Sanjoy Acharjee says:

    My son has flat bought jointly with me on bank loan.
    Myself is co-loanee of my son, but he is primary loanee
    and re-payment of loan is being made by him as I am
    a retired person, although a co-borrower.
    None of us are at present residing in the flat.
    Should the flat be taken as deemed let-out property?
    How much of tax deduction he can claim on account of repayment of
    loan amount (interest & principal)?

  5. Raps says:

    Hi, suppose I have a multi storeyed property registered on my name and I assign one or two of the floor rents to my dependants [mom/dad/grand parents] etc for their living expenses with a notarised agreement and ask our tenant to transfer the rent to those accounts, then is it true that the rent received from those assigned floors will not be taken in to account in my income tax calculation?
    Secondly, I have a wellwisher person X who doesn’t have any considerable income on his name. Suppose I show that I have let out the property to person X for a very low rent and the person X sub-lets the property for a high rental income to the actual tenant, then can I save some amount of tax?

  6. Shailesh says:

    I have a commercial property rented out to a public sector company. I have kept a manager to take care if the property ? Can i claim deduction of his salary ? Apart from that i live in a different city and need to go to see the property and for other adminstartive purposes every month. Can i claim deduction of travel expenses ? I am a retired person and so as part of individual taxation , can i claim medical expenses for 15000 ?

  7. Anshuman Gupta says:

    how does the whole calculation change with new income tax laws introduced in the budget?

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