Income Tax on Rental Income: Essential Tips to Maximise Tax Savings

Managing rental income effectively can have a significant impact on your overall tax liability. Whether you are renting out a property to generate additional income or simply covering mortgage costs, understanding the tax implications is essential. Fortunately, with the right strategies, such as leveraging home loan interest deductions and other allowable tax benefits, you can reduce your taxable rental income significantly. This guide explores key ways to save tax on rental income, from home loan advantages to useful deductions, helping you make the most of your property investment.

Understanding rental income taxation

Rental income is considered a taxable source of income in India, and understanding how it is taxed is essential if you are a landlord. The Income Tax Act governs how you report and pay taxes on rental income, ensuring that you declare it under the 'income from house property' category. This means that whether you rent out your residential or commercial property, you are liable to pay taxes on the net income earned after permissible deductions.

Rental income tax is calculated based on the property's annual value, which is either the actual rent received or the fair market rent, whichever is higher. The tax implications vary depending on whether the property is self-occupied or rented out. For rented properties, the government allows certain deductions, which can help reduce your taxable income. However, failing to report rental income accurately can lead to penalties, making it essential to fully understand how rental income taxation works in India.

Additionally, if you have taken a home loan to finance the property, you may be eligible for tax benefits under specific sections of the Income Tax Act, which can further help reduce your taxable liability.

Tax benefits for home loan borrowers

If you are a home loan borrower, you can take advantage of several home loan tax benefits, especially if the loan has been taken for a property you plan to rent out. The interest paid on a home loan qualifies for a tax deduction under Section 24(b) of the Income Tax Act. You can claim a deduction of up to Rs. 2 lakh per financial year for self-occupied properties, but for rental properties, there is no upper limit on the interest deduction.

Moreover, under Section 80C, you can claim a deduction of up to Rs. 1.5 lakh on the principal repayment of the home loan. These tax benefits significantly reduce your taxable income, making home loans a powerful tool for tax planning. The good news is that these deductions are not just limited to residential properties but also apply if you are renting out a commercial property.

By optimising your home loan benefits and managing your rental income wisely, you can lower your overall tax liability.

Permissible deductions on rental income

Here are some key deductions that can help you reduce your taxable rental income:

• Standard deduction: You can claim a standard deduction of 30% on the net annual value of the property. This deduction covers repairs, maintenance, and other related expenses, irrespective of whether you incur them.

• Interest on home loan: As mentioned earlier, if you have taken a home loan, the interest paid on the loan is deductible under Section 24(b). This can be claimed without any upper limit for rented properties.

• Municipal taxes: You can deduct property taxes or municipal taxes paid to the local authority from the gross rental income, as long as these taxes are borne by you and not by the tenant.

• Vacancy loss: If the property remained vacant for a part of the year and you could not find a tenant, you can claim this loss as a deduction, provided you were unable to earn rental income for that duration.

By taking advantage of these allowable deductions, you can effectively reduce the taxable portion of your rental income, thereby lowering your tax liability.

Tax-saving tips for rental income

Here are some practical tips that can help you save tax on rental income:

• Joint ownership: If you own the property jointly with another person, you can split the rental income, which could place you in a lower tax bracket, resulting in less tax payable for each person.

• Repairs and maintenance: Keep track of all repair and maintenance work done on the property. Although you cannot claim the actual repair expenses separately due to the 30% standard deduction, proper record-keeping ensures compliance.

• Pre-construction period interest: You can claim a deduction for the interest paid during the pre-construction period in five equal instalments, starting from the year the construction is completed.

• Home loan interest: Do not forget to claim the deduction on home loan interest under Section 24(b). This can significantly reduce your taxable rental income, especially for rented properties where there is no cap on the deduction.

By using these tips wisely, you can optimise your rental income tax savings and manage your property more effectively.

Impact of home loan on rental income taxation

Home loans can have a significant impact on how your rental income is taxed. As a borrower, you can claim deductions on the interest paid on the home loan, which reduces your taxable rental income. Section 24(b) of the Income Tax Act allows you to claim the actual interest paid on the loan as a deduction without any upper limit for properties that are rented out. This means that the more interest that you pay, the more deductions you can claim, ultimately lowering your tax liability.

However, if you are repaying a home loan for a self-occupied property, the tax benefit is capped at Rs. 2 lakh per financial year. On the other hand, for rental properties, there is no such restriction, making it a favourable tax-saving strategy for landlords. If your rental income is higher than the interest paid, the remaining rental income is added to your taxable income. However, if the interest on the loan exceeds your rental income, the loss can be carried forward for eight years, allowing further tax relief in the future.

Claiming home loan interest as a deduction

Claiming home loan interest as a deduction is one of the most effective ways to save tax on your rental income. Under Section 24(b), you can claim the entire interest paid on your home loan as a deduction for properties that are rented out. This interest deduction on a home loan can be particularly useful if you are servicing a large loan, as the interest payments may outweigh the rental income, helping you reduce your taxable income significantly.

Additionally, you can also claim the interest paid during the pre-construction period, which is allowed in five equal instalments starting from the year the property is completed. This provision can be particularly beneficial for those who have taken a loan for constructing a house or buying an under-construction property.

Explore Bajaj Housing Finance Home Loan

If you are exploring options for a home loan, the Bajaj Housing Finance Home Loan could be your ideal choice. With its competitive interest rates and flexible features such as part-prepayment, balance transfer, and top-up loans, Bajaj Housing Finance helps you manage your loan effectively while maintaining control over your finances.

1. Competitive interest rates: Take advantage of attractive interest rates that make homeownership more affordable.

2. Flexible repayment tenure: Choose a repayment period that suits your financial situation, ensuring hassle-free loan management.

3. Quick disbursal: Benefit from a swift and smooth loan approval and disbursal process, so you can settle into your new home quicker.

4. Streamlined documentation: Experience a simplified documentation process that makes applying for a home loan easy and convenient.

With Bajaj Housing Finance, securing your dream home is straightforward and stress-free. Apply today and enjoy a home loan process designed to fit your needs with ease and efficiency.