If you wish to save tax on rental income, here are some points that you should keep in mind while filing your income tax in India.
Exclude maintenance charges from the rent received. In most cases, it is observed that society maintenance charges are part of the rent received. Therefore, the landlord pays tax even on maintenance charges.
An owner can save tax on rental income by splitting the amount as rental and maintenance separately.
For instance, if you fix the rent at Rs 35,000 and the society’s maintenance charges are Rs 3,500, the net value you will receive is only Rs 31,000. To offset this, you can include a clause in the rental agreement mandating the tenant to pay maintenance fees directly to the society.
If the tenant is hesitant to do this, you can arrange to receive these two payments separately from the tenant. In simple terms, he will reimburse you with two separate checks or other forms of payment. Any fee to the society should be made directly by the tenant.
Save Taxes on Rental Income by Joint Registration of your Property.
If your spouse does not work or has a lower income, register joint property in his or her name. The rental income will be split in terms of the ratio of ownership, and you will save tax on your rental income.
Even if both spouses are working, this is useful if they are in different tax brackets. As a result, you can use one of the spouses’ lower tax brackets to reduce your tax on rental income.
This holds true even when the EMI is funded by either of them; the rental income is still divided proportionally to the percentage of property ownership.
Exclude Municipal Taxes
You can also deduct municipal taxes, such as property taxes and sewerage taxes, and save tax on rental income. This is, however, subject to the owner’s having to pay these municipal taxes. In the event that the tenants pay these municipal taxes, the owner cannot deduct these taxes from the tenant’s payment.
Apply Standard Deduction
The standard deduction is 30% of the net annual value of the rent received. This amount is assumed for repair and maintenance, and under the IT rules, you can still make a claim no matter how much repair and maintenance really cost and save tax on rental income.
Properties that are Semi-Furnished or Fully Furnished.
As a landlord, you provide amenities such as piped gas, DTH or cable TV, WiFi, newspapers, and so on. To save tax on rental income, you can request the tenant to pay their bills directly and reduce the amount in the rent agreement accordingly. Optionally, you can collect it independently from the tenant, delinking it from the rent. As a result, your rental income will be reduced.
In simpler terms, you should separate core rent from municipal taxes and property expenses. You can ask the tenant to reimburse you separately for your other expenses.
At the time of New Purchase of Property
Certain Section 80C tax deductions are applicable to a newly purchased house. These are the registration fees, stamp duty, and brokerage during the year you purchase the property. You can save tax on rental income by deducting these amounts, which may well go up to 10% of the cost of your property.
But remember that the most you can deduct under Section 80C of the Income Tax Act is Rs 1.5 lakh.
Declaring Self-Occupied Properties
If a taxpayer owns several residential properties, he/she can declare up to two of them as “self-occupied properties.” The remaining properties must be treated as “deemed to be let out.”
Factor the Negative Rental Income
This is applicable if you have availed of a house loan. Since the rent in the case of self-occupied properties is zero, the house property income will become negative after deducting home loan interest. When you file your taxes, you can make up for this negative amount with other income and save tax .