Maximize your rental earnings: Decode India's tax guideline
What's the story
Taxation on rental income is a crucial consideration for property owners in India.
It encompasses numerous clauses and sections of the Income Tax Act, stipulating how rental income needs to be reported and taxed.
This article intends to demystify the key aspects of rental income taxation, equipping property owners with the knowledge to streamline their tax liabilities effectively.
Taxable income
Know your taxable income
Understanding how rental income is taxed in India starts with knowing what counts as taxable income.
The gross annual value of a rented property, encompassing rent and tenant-paid charges such as maintenance fees, is taxable.
Deductions on municipal taxes and a standard deduction of 30% on net annual value drastically cut the taxable sum.
Section 24
Deductions under Section 24
Section 24 of the Income Tax Act provides two key deductions on rental income for property owners:
A standard deduction is set at 30% of the property's net annual value. This deduction accounts for expenses like repairs and maintenance.
Additionally, interest on loans for buying or building the property can be deducted from taxable rental income. This can significantly reduce the tax burden.
Joint ownership
Joint property ownership benefits
Co-ownership of rental properties provides a major tax benefit.
When a property is jointly owned by two or more people and its rental income is shared, each co-owner's portion of the income is taxed separately in their respective tax brackets.
This can result in significant savings as it effectively reduces the overall tax burden by spreading it across multiple taxpayers.
Vacancy factor
Impact of vacancy periods
Vacant periods impact how taxable rental income is calculated.
If a property was vacant for any period during the year, its gross annual value can be reduced.
Effectively, this ensures the vacant period isn't included in the taxable income, saving landlords from being taxed unfairly during periods when they weren't earning rental income.
Loan strategy
Utilizing loan benefits wisely
Landlords with loans for their rental properties can maximize tax benefits under Section 24(b) by choosing a different repayment plan.
Selecting a higher EMI in the initial years boosts interest deductions against rental income.
This approach, aimed at paying more interest when other expenses are minimal, ensures the best tax benefits throughout the loan tenure.