Rental Income is one of the most favorite retirement planning tools in India. As i keep highlighting that Property and Gold are two most popular investment avenues for Indians. With the grace of God, i am currently staying in my house, but my previous landlord has seven properties in Mumbai. An average rental income of Rs 30,000 means monthly rental income of Rs 2,10,000. A good enough amount to live a peaceful and luxurious life. The best part is to leave an asset to legal heirs.
Besides, retirement planning i keep getting queries from my readers on taxability of rental income. Many readers have bought 2nd property purely for investment purpose. Rental Income is one of the primary consideration for 2nd property. As i keep suggesting to avoid property investment through Home Loan. Secondly, it is not advisable to buy under construction property for investment as it blocks your capital. Moreover, you are subjected to risks of under construction property. The important point favorable to real estate investors is that Rental Income is quite stable and sustainable. A drop in rental value is a very rare scenario. In fact, as i highlighted in my other posts that property prices are either stable or are on the decline in cities like Delhi, Hyderabad, etc. On the contrary based on my interaction with clients in these cities, their Rental Income is increasing :). There can be two possible reasons either potential buyers are postponing purchase or existing owners are not selling due to depressed markets :). Whatever be the reason, investors are enjoying good appreciation in Rental Income.
Like all other incomes, Rental Income is also subject to tax. To know how to calculate rental income, please check my post on Income from house property. To save tax is one of the most searched topics on the web. If you save tax on Rental Income, then it will be icing on the cake. In short, your Net Rental Income will further increase. As the objective of my blog is to benefit readers, therefore, i thought of writing a post on this topic. All the points mentioned are legitimate, and you can save tax on Rental Income.
Rental Income – How to save tax on it?
(a) Maintenance Charges: To exclude maintenance charges from rent received is one of the easiest ways to save tax. It is one of the low hanging fruit. You only need to include one liner in your rent agreement. In most of the cases, i observed that society maintenance charges are part of rent received. Therefore, landlord pays tax even on maintenance charges that are not a Rental Income. By segregating amount received into two parts, an owner can save tax on Rental Income. To share an example, if you finalize rent of Rs 30,000 and society maintenance charges is Rs 3,000, then you should receive only Rs 27,000. You can add a clause in rent agreement that tenant will pay maintenance charges directly to the association. If the tenant does not agree to this arrangement, then you should receive these two components separately from the tenant. In short, he will pay through two cheques. Any payment to association should be either directly paid by the tenant or collected separately.
(b) Joint Property: Another effective way to save tax. I suggest this arrangement only with your spouse as you cannot trust everyone. The best case is if your spouse is not working. In this case, you can buy either joint property or only in the name of your spouse. The Rental Income will be divided in the proportion of ownership in the property. Therefore, you can save tax on Rental Income apportioned to your spouse.
Assuming a scenario both husband and wife are working. In this scenario, this arrangement is beneficial if the husband and wife are in different tax slabs. Therefore, you can take advantage of lower tax slab of one of the spouse to lower the tax on rental income. Also to clarify that rental income is divided in the proportion of ownership in the property even if EMI is paid by either Husband or a Wife.
PN: You can avoid provisions of “Clubbing of Income” in case of joint property/non-earning wife. A husband can transfer/purchase a share in the property in exchange for wife’s jewellery or Streedhan.
(c) Municipal Taxes: Not many people are aware that you can deduct Municipal taxes like property tax, sewerage tax, etc. from your rental income. The only catch is that all these municipal taxes should be paid by the owner. In many cases, tenants pay municipal taxes. Therefore, the owner cannot claim a deduction for payment by the tenant. Municipal taxes deduction will reduce your income from house property thus lower tax liability.
(d) Standard Deduction: If you have bought a property for investment and put it on rent then it is assumed that you will spend some amount on repair and maintenance. It is subjective in nature. Therefore, irrespective of actual expenditure on repair and maintenance, you can claim 30% of Net Annual Value as Standard Deduction. To check how to arrive at a net annual value, please check my post on income from house property.
(e) Semi Furnished/Fully Furnished Properties: In such properties, owners provide certain facilities like WiFi Connection, Piped Gas Connection, DTH/Cable TV, Newspaper, etc. Normally such charges are collected under rent and paid by the owner to concerned authorities. In such cases, you can ask the tenant to clear the bills and reduce the equivalent amount from rent. Alternatively, you can collect the same separately from the tenant thus not a part of the rent. Therefore, it will reduce your rental income.
Words of Wisdom: Depending on the case to case basis, there are some other ways to save tax. In this post, i have listed down commonly used options to save tax. In layman terms, you should segregate core rent + municipal taxes and expenses attached to the property. You can request the tenant to pay expenses directly or reimburse to you. It will have another psychology advantage; the rent will appear comparatively LOW for the property. For example, i tell my potential tenant that Rent of the property is Rs 30,000 per month. Alternatively, i will say that Rent is only Rs 24,000 and balance Rs 6,000 is towards maintenance and other expenses. The probability of deal closure is high in the second scenario. Therefore, it is a win-win situation for both the owner and the tenant. Hope you liked the post.
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