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Rental Income – How to save tax on it?

Rental Income
Rental Income

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.

Copyright © Nitin Bhatia. All Rights Reserved.

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Rahul
Rahul
8 years ago

Hi Nitin

Very informative. Regarding Point (b): Joint Property, whether “Clubbing of Income” section will get applied if spouse is not working and property is held jointly.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Rahul

A husband can buy a share in the property in exchange for wife’s jewellery or Streedhan. The clubbing of income provisions will not be applicable in this case.

Om Tiwari
Om Tiwari
8 years ago
Reply to  Nitin Bhatia

Hi Nitin,
Your article is very insightful.
My wife is a housewife but has a doctor’s license. We have purchased a property on both our names. The down payment and loan EMI are fully paid by me. How do we go about exact declaring proportion of property held jointly ( my name is first and then hers in the sale deed) and save on tax on rental income. And what is the process of buying a share of her assets or streedhan. Our rental income is 5.4 lakh and we pay 1.1 Lakh as maintenance to the society, which includes all govt taxes as well as sinking fund.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Om Tiwari

The order in sale deed i.e. first/second owner does not make any difference. If proportion of ownership is not specified in sale deed then it is considered 50:50 only i.e. equal ownership.

You may sign a simple agreement with your wife. The key highlight will be that she is transferring her assets i.e. streedhan to you in lieu of share in the property bought jointly. You can get this agreement notarized.

Om Tiwari
Om Tiwari
8 years ago
Reply to  Nitin Bhatia

Understood. Thank you so much. One last question. Our home loan annual interest component for the first year is 12.6 Lakh, then 11.7 and 10.7 lakh. While this is fully paid by me, can we use this half of this amount on each of our names to deduct tax? Meaning first year, both my wife and I show 6.3 lakh interest paid each for the home loan part for returns?

Om Tiwari
Om Tiwari
8 years ago
Reply to  Om Tiwari

Further to above, the 12.6 lakh is only the interest component of year 1of emi payment ( principal component is 10.1 lakh). Is there a further deduction possible on principal amount paid as well?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Om Tiwari

It is not clear whether the property is self occupied or let out. Tax deduction will depend on same.

Om Tiwari
Om Tiwari
8 years ago
Reply to  Nitin Bhatia

This is a let out property, with same details of income and tax given in the first query.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Om Tiwari

Normally, tax deduction is available in proportion of EMI payment. As you are paying 100% EMI therefore only you can claim 100% tax deduction. Still you can check with your CA or tax consultant as i don’t have your complete details.

Om Tiwari
Om Tiwari
8 years ago
Reply to  Nitin Bhatia

Understood Sir,
Will I be able to get a complete refund of interest component of the home loan each year of payment of home EMIs?
I’m asking this question despite your clear explanation in the article above, as the interest component is as high as 12.6 Lakh in the first year and so on.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Om Tiwari

Your understanding is correct but if you are staying in same city then you should have valid justification, why you are not staying in own property. If you have another property in same city then there is no problem as you are staying in one property and have put second on rent.

Om Tiwari
Om Tiwari
8 years ago
Reply to  Nitin Bhatia

Thank you so much for the guidance. This is a really great service you are providing.

Ajay Kumar
Ajay Kumar
7 years ago
Reply to  Nitin Bhatia

Nitin Ji , is the opposite possible like there is joint name property and bought by wife’s earning only and husband has no income . Can rental income and home loan interest deduction can be 50 – 50 in their separate ITRs so as to save on tax as husband has no other income ?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Ajay Kumar

The reverse is also not possible as the rule is same. The clubbing of income provisions will be applicable.

Suhas Krishna
Suhas Krishna
8 years ago

I bought a flat in joint name in 2007 with my wife at Pune. My wife is a homemaker and entire EMI and tax benefits were taken by me so far since last 9 years. Now the home loan is repaid and we are settled in North and given the flat on rent. From this year onwards, is it OK if I show the rental income in her name and file the returns accordingly?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Suhas Krishna

Clubbing of income provisions might be applicable. Either the 100% rental income will be clubbed in your income or it will be divided in the proportion of ownership. You may check with your CA.

harish gupta
harish gupta
7 years ago

kindly advise how to take Rent on Flat jointly owned & joint loan.Wife in non working & I am availing the Home loan benefits in by tax. can i show full rent to wife .Pl advise.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  harish gupta

Rent is considered as income in the proportion of ownership in the property.

Kaustubh
Kaustubh
7 years ago

Hello Nitin, Point (a) in your article is worth a shot! I believe it is applicable for flat owners only. Can you please suggest some tax saving solutions to landlords of independent houses on rent. Thanks!

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Kaustubh

Thanks for suggesting topic. I will write a post on the same.

Maloy
Maloy
7 years ago

Dear Nitin,

I have a flat (self occupied) under home loan. In this financial year, during Sept-Oct 2016, I put the flat on maintenance (some civil work in kitchen and bathroom and some wall repairing). That time, I was in rent on a Studio apartment and the bill of both maintenance work and rent are with me. Can I get Tax benefits on those?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Maloy

You can claim HRA.

Monil Hathi
Monil Hathi
7 years ago

1) Can I transfer the monthly rental income received in my wife’s account? The property is under my name only. However her income is exempt from taxation.
2) If I need to add my wife’s name to the property, should I do a Gift deed or should I go for a new sale deed? What is cheaper and better?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Monil Hathi

1. You have not mentioned the reason why you want’s to transfer the rental income in wife’s name.
2. You may execute gift deed.

Monil Hathi
Monil Hathi
7 years ago
Reply to  Nitin Bhatia

1. This is for saving tax. Need to know if its possible as my wife’s income falls below 2.5L annually. If I transfer the rental income to her a/c, would I be able to save tax?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Monil Hathi

You can transfer in your wife’s account but it will be taxed in your hand only.You cannot save tax.

gourav panda
gourav panda
7 years ago

Can you tell Mr Nitin about the new scheme announced by PM MODI where the loans would be subsidize (depending on annual income). I would like to know if this can be claimed by both husband and wife when you take joint loan. And by the meaning of annual income ( what all does it include).

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  gourav panda

I will share a separate post on the same.

chaitali
chaitali
7 years ago

Can U tell Mt Nitin, Can I buy a property with my Brother. I am working female and taxpayer and my brother is doing small business and not under tax paying range. and benefit can share by my brother ?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  chaitali

Yes. You can buy.

prady
prady
7 years ago

Hi Nitin,

we husband wifes are NRIs and have rented our jointly owned apartment in Pune since last year but in the whole financial year it was rented twice since 6 months for 19k and now for past 2 months for 20k. while showing it in ITR I have following questions.
1. for the total 8 months of rental in a FY should I show the total rent received in 8 months?
2. while filling the name of tenants how do i show the tenants for first 6 months and tenants for the past 2 months
3. none of my tenants deducted the 30.9% TDS. will that be issue?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  prady

You have not mentioned whether you availed any home loan against the property.

prady
prady
7 years ago
Reply to  Nitin Bhatia

Yes, we have taken loan from SBI

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  prady

1. You can declare actual rent received.
2. Please let me know which ITR you are filing
3. No. It is tenants problem. You pay your tax.

prady
prady
7 years ago
Reply to  Nitin Bhatia

I am filing ITR2 as I also invest in equity and am confused how to show the 2 seperate rents received and how to fill the 2 separate tenants info in the form?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  prady

You may mention the declare the details of existing tenant and declare the 100% rental income.

prady
prady
7 years ago
Reply to  Nitin Bhatia

thanks Nitin but the earlier rental was 19k for 6m and now its 20k/m for 2m in FY dont i need to declare them seperately if the rental value has changed?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  prady

You need not worry about the breakup of rental income. You can calculate consolidated rental income during the FY, declare and can pay the applicable tax. The breakup is not important.

Ajay Kumar
Ajay Kumar
7 years ago

As per your above example , the landlord can take Rs.27,000 as rent and ask tenant to pay monthly association maintenance bill of Rs.3,000 and stil landlord can take 30% Standard Deduction on Rs.27,000 for repairs & maintenance in his ITR , ……………. am i getting right or is it not double benefit for same maintenance thing ? and what about if tenant does not agree to directly pay the monthly maintenance bill and just want to pay me ?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Ajay Kumar

The maintenance paid to the association is for common areas. The standard deduction mentioned in the post is repair and maintenance of property. Both are different and there is NO question of double benefit. Whether tenant agree or not is mutual understanding between tenant and the owner.

Swati Pendurkar
Swati Pendurkar
7 years ago

Hi Nitin, I have a query. The flat is in husband’s name and the tenant pay the cheque in wife’s account. can this be considered legal? Or if the registration is in the husband’s name can teh cheque be collected in wife’s name?

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