Rental income: tax benefits available to owners

Rental income falls within the scope of income tax laws in India. If you own a property and have rented it out to someone, you need to understand how to reduce your tax burden. Rental income from property investments can make a big difference to your portfolio returns. So, as a landlord, you should be aware of the tax benefits that maximize your returns.

Before looking at the various tax benefits available to landlords, let’s see how rental income is taxed in India.

Tax liability on rental income

Rental income from the property is taxed at the individual’s computer slab rate. For example, if a person has no other income and only earns rental income of less than Rs 2.5 lakh in a financial year, no tax will be charged as the income is below the taxable limit . What happens if the rental income increases by 20% in the following financial year? Will it then be taxed? It may still not be taxed due to certain tax benefits available on rental income. Let’s discover the tax advantages that can help owners reduce their tax obligations.

Standard deduction available on rental income

The owner can reduce his taxable income using a standard deduction. You can apply a standard deduction of 30% on the net asset value (gross rent received “minus” the property taxes paid by the landlord) to obtain the net income of the house and the property. For example, an individual’s rental income is Rs 3.2 lakh and the municipal taxes he pays are Rs 20,000. The net asset value would be Rs 3 lakh (Rs 320,000 “minus” Rs 20,000) , and the standard deduction of 30% on the net asset value will be Rs 90,000. Therefore, the net income of the house and property will be Rs 300,000 “minus” Rs 90,000, i.e. Rs 210,000, below taxable income.

NRIs can also claim the standard deduction on income from housing and property.

Tax benefit on home loan

If you bought residential property on a home loan and rented it out, you can claim the tax deduction on the interest paid on the home loan. Under Section 24(b) of the Information Technology Act, a homeowner can claim a tax deduction of up to Rs 2 lakh on interest paid on a home loan. If the home loan borrower is also eligible for a tax benefit under Section 80EEA, he can claim a benefit of up to Rs 1.5 lakh, which exceeds the deduction benefit available at Article 24. So, if you earn rental income from a property purchased on a house loan, you can get a deduction of up to Rs 3.5 lakh on the interest paid.

Tax benefit for real estate co-owners

If you have purchased a condominium property, this can help reduce your tax burden on rental income. In co-ownership, where the share in the property is clearly defined in the deed of transfer, all co-owners can benefit from the tax benefit according to their ownership ratio. Thus, each co-owner of the property may claim the tax benefit under Sections 24 and 80EEA subject to the applicable maximum deduction limits. The total of the combined deduction claimed by the co-owners must not exceed the interest incurred on the mortgage during that fiscal year.

When considering claiming the tax benefits as a landlord, you should keep documents such as the tenancy agreement and the deed of ownership handy; you may need it as proof when IT sends a rental income query.

(The author is CEO, Bankbazaar)

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