Know how to save tax on rental income

You may have to pay taxes on the home you live in or rent out, whether you are a tenant or a landlord. essential know-how of the subject and how to save tax on rental income is crucial for both landlords and tenants.

Real estate investing is viewed as a particularly lucrative investment option in India. Investing in homes or apartments is popular among those who seek to generate passive income from rent. But you also have obligations to fulfil in addition to the advantages. Rental revenue is subject to taxes. The income from a house or building that is rented out is subject to taxation under the Income from House and Property section of the Income Tax Act of 1961. Hence, It is taxable under Revenue from Other Sources if the owner of the property receives any earnings from letting out their unoccupied land or any other property.

This is why understanding rental taxes is essential for both owners and tenants.

Taxes on Rental Income for Owners

The rental income received by the property owner or owners is subject to tax as income from real estate. Nevertheless, regardless of the year in question, some deductions are permitted from the same for municipal taxes that have been paid. On the net annual value, which is calculated by deducting municipal taxes from gross rent, an additional standard deduction of 30% is permitted.

Taxes Paid By Tenants On Rentals

When it comes to salaried employees, the Income Tax Law only permits a deduction for House Rent Allowance (HRA) if and only if it is included in the wage. The employee must reside in a rented home and pay the rent in order to be eligible for this HRA (rent payment) deduction. The maximum deduction is limited to the lesser of the real HRA received, the rent paid beyond 10% of pay, or 50% (or 40% in the case of non-metro locations) of salary. If the individual resides in a space that he owns, this reduction is not valid.

What deductions are permitted under Section 24 that will help you save tax on rental income?

There are two exemptions that are permitted as specified below: –

1. Standard deduction: For repairs and maintenance, the marginal rate is 30% of the gross value of the property. The sum is determined after subtracting local taxes. If your actual expense is larger or lower than this amount, you may still deduct 30% of it. If you pay your municipal taxes during a fiscal year, you can lower them.
2. Deduction for actual interest paid on a mortgage: This deduction is allowable for self-occupied, rented, or property that is presumed to be rented properties. Interest on borrowed money spent for construction, purchase, repair, or renovation is fully deductible from taxes on an accrual basis. If the net income exceeds the net annual value (NAV), it can be carried forward for up to 8 years to offset taxable income or adjusted to other income headings.

How much of your rent is tax-free?

If a property’s Gross Annual Value (GAV) is less than Rs 2.5 lakh, a person will not be required to pay tax on their rental income. However, if renting out a home is a person’s main source of income, taxes may be due.

Which kinds of properties are exempted from taxes?

In the following case, if you receive money, you will not be required to pay taxes:

Implementable tips about how to save tax on rental income

By using the following advice, you can reduce your rental income’s tax liability:

Maintenance fees: One of the simplest methods to reduce your tax liability is to deduct maintenance fees from the rent you get. Some renters boost the total rent by including maintenance fees, which in a sense raises the tax rate on rental income.

Joint ownership: You can save money on taxes by choosing to buy a home with a family member you trust (such as your Spouse or parents). In this scenario, the rental revenue is split in half, and you can avoid paying taxes on the amount of the rental income allocated to the other family member.

Municipal fees: You can reduce municipal fees from your rental income tax, such as sewage fees and property taxes. But keep in mind that the property owner, not the tenant, is responsible for paying all of these municipal taxes. These payments will lower your rental income, which will lower your tax obligation.

Partially or completely furnished: If you are renting out a property that includes amenities like WiFi, DTH, gas and water connection, etc., you can ask the tenant to pay those costs separately rather than adding them to the rent. Since the rental revenue would be lower, as a result, the tax you owe will also be lower.

Recent Information on Tax Savings on Rental Income

Property owners now have relief thanks to the Income Tax Appellate Tribunal’s decision to make unrealised rental tax-free. The amount of unrealised rental that has not yet been paid to the landlord is equal to the amount of unrealised rent.

This fee is not paid by tenants and may be deemed irrecoverable in some circumstances, such as when the tenant has left the rental property or was forced to leave due to unavoidable events and the landlord has pursued all legal remedies.

According to the regulation, tax is only levied on rent payments made to property owners. Therefore, property owners are not responsible for paying taxes on any unpaid rent.

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