Paying tax on rental income often feels like a burden, but what if you could minimise it legally and keep more of your earnings?

Taxation on rental income is a concern for property owners, especially with rental yields rising continuously. If we look at the stats, residential rental values have grown by 4-9% across the top seven cities during Q1 2024. While this is great for landlords, it also means higher tax liabilities, which can seriously impact your profits if left unmanaged.

Fortunately, the Indian tax system offers several ways for landlords to save on taxes. From claiming repair deductions to deducting property management fees, this blog will cover simple strategies to help landlords reduce their tax bills and keep more of their rental income.

Understanding Rental Income Taxation

In India, rental income is taxed under the “Income from House Property” category as per the Income Tax Act 1961. This determines how taxes are calculated and what deductions landlords can claim to reduce their tax burden. Knowing these rules helps you manage your rental income and stay tax-compliant.

Income from House Property refers to earnings from renting out a property you own. Not all income is taxed equally, though, as certain exemptions and deductions can significantly reduce the taxable amount.

In the next section, we’ll explore ways to save tax on rental income. We’ll also look at key provisions of the Income Tax Act that can help you maximise these benefits.

5 Smart Ways to Save Tax on Rental Income

Here are some effective strategies to save tax on your rental income:

1. Claim 30% Standard Deduction

You can claim a 30% deduction on the net annual value of the rented property under section 24(a). This deduction covers maintenance costs, even if you don’t have receipts for repairs or maintenance. It’s a simple way to reduce your taxable rental income without needing to provide detailed proof of expenses.

2. Deduction on Home Loan Interest

You can also claim a deduction under section 24(b) on the interest paid on home loans used for constructing, purchasing, or renovating a property (self-occupied or rented). The maximum limit for interest deduction on self-occupied property is ₹2,00,000, while there’s no upper limit for rented properties.

Note: The deduction is not available for individuals opting for the new tax regime (Section 115 BAC), except for certain deductions under Sections 80CCD(2) and 80JJAA.

3. Municipal Taxes

Municipal or property taxes paid to local authorities can be deducted from your rental income tax. This deduction is available only if you, as the property owner, pay these taxes, not the tenant.

After deducting municipal taxes from the gross annual value (GAV) of the property, you calculate the net annual value (NAV) and then tax it.

(Net Annual Value (NAV) = Gross Annual Value (GAV) - Municipal Taxes Paid)

For example, if your property’s GAV is ₹5,00,000 and you’ve paid ₹50,000 in municipal taxes, your NAV would be ₹4,50,000. This ensures you don’t pay taxes on the full potential rental value but only on the income effectively earned after accounting for these mandatory expenses.

4. Deductions for Vacant Properties

If the property remained vacant for part of the year and you could not earn any rental income, you can still claim it as a deduction. Expenses such as property maintenance, home loan interest, and municipal taxes are also eligible, provided you have proof that the property was available for rent. These deductions can help reduce your taxable income, even in the absence of rental earnings.

5. Tax Benefits on Joint Ownership of Property

When a property is jointly owned, both co-owners can claim tax benefits on rental income. According to Section 26 of the Income Tax Act, each owner can claim their share of rental income and related expenses based on their ownership percentage. Here’s how it works:

• Interest on Home Loan: Under Section 24 (b), both owners can claim deductions for home loan interest based on their share of the loan. If the property is jointly financed, each owner can claim deductions up to ₹2,00,000 for self-occupied properties (if applicable) or the full amount for rental properties.

• Standard Deduction: Each co-owner can also claim the 30% standard deduction on rental income, which reduces the net taxable income.

Proper documentation, including a valid agreement and tax records, is essential for claiming these benefits.​

After understanding ways to save rental income tax, let's see how rental income taxation differs for NRIs.

Taxation for Non-Resident Indians (NRIs)

Rental income earned by non-resident Indians (NRIs) in India is taxed similarly to that of residents, with a few key differences.

Tenants who pay rent to NRIs are required to deduct 30% TDS before making the payment. As per Section 195, the tenant must submit this to the government and provide the NRI with a TDS certificate (Form 16A).

Exemptions and Deductions

Following are some of the exemptions and deductions applicable to NRIs:

• Standard Deduction: NRIs can claim a standard deduction of 30% on the property's annual fair rental value.

• Municipal Taxes: Any taxes paid on the property are fully exempt from taxation.

• Home Loan Interest: NRIs can claim a deduction for home loan interest under Section 24(b). For self-occupied properties, the deduction limit is ₹2 lakh per year. For rented properties, the interest on the home loan is fully deductible without any limit.

• Double Taxation Avoidance Agreement (DTAA): To prevent double taxation, NRIs can benefit from Double Taxation Avoidance Agreements between India and their resident countries. This ensures they are not taxed twice on the same income.

Tax Filing Process and Penalties

NRIs are required to file tax returns in India only on income earned within India. Failure to comply with tax filing obligations can result in penalties ranging from ₹250 to ₹16,000, depending on the taxable income and the duration of non-compliance.

By understanding these tax provisions, NRIs can reduce their tax liabilities through exemptions and deductions available under the Income Tax Act.

Now that we've covered the key tax benefits available to NRIs, let's move on to recent changes in rental income taxation.

Recent Changes in Rental Income Taxation 

In Budget 2024-25, a change was introduced regarding the taxation of rental income. The government clarified that income from renting residential properties will now be classified under "Income from House Property" rather than "Profits and Gains of Business or Profession." This amendment will apply starting from the 2025-26 assessment year.

This change addresses concerns where property owners had previously classified rental income as business income, allowing them to claim a broader range of business-related deductions, such as for repairs and maintenance.

This move aims to prevent landlords from misusing business expense deductions to reduce their tax liability.

Conclusion

Maximising tax savings on rental income starts with understanding and using the proper deductions effectively. By carefully tracking expenses and claims, landlords can reduce their tax liability.

However, it's always a good idea to consult a tax professional or lawyer for advice tailored to your specific situation. The rent calculations and tax regulations mentioned in this blog are based on current central government guidelines, which may change. So, stay updated with the latest tax laws and regulations.

Frequently Asked Questions

Q. How Much Rental Income is Tax-Free?

A. No tax is applicable if the Gross Annual Value (GAV) of the property is less than ₹2.5 lakh. This threshold aligns with the basic exemption limit for individual taxpayers. Additionally, deductions like the 30% standard deduction, municipal tax payments, and home loan interest can further reduce tax liability.

Q. How is Gross Annual Value (GAV) Calculated for Tax on Rental Income?

A. The Gross Annual Value (GAV) of a property is calculated as the higher of:

1. Expected Rent: Based on the highest among the municipal value, fair rent, or standard rent.

2. Actual Rent: The rent received or receivable during the year.

If the property was vacant for part of the year, the GAV is based on the actual rent received during the rented period. For self-occupied properties, the GAV is treated as zero.