Tax Benefits Of Rental Income: A Quick Guide

Passive income through renting out properties is one of the best opportunities to rely on. Whether you rent out a residential or commercial place, knowing how rental income taxes are generated can help you save money. This guide helps you understand tax exemptions on rental income and how you can minimise tax liabilities.

Before diving into tax calculations, it's essential to know whether any part of your rental income is exempt from taxation.

The Income Tax Act offers several tax relief options if you are earning income from your real estate investments. These include: 

• Municipal taxes paid to local authorities are deductible from rental income

• Standard deduction of 30% on rental income under Section 24 for maintenance and repairs

• Interest on home loans is deductible up to ₹2 lakh per year under Section 24(b)

• A tax benefit of up to ₹50,000 if you are a first-time homeowner under Section 80EE

• Deduction for interest on low-cost housing loans under Section 80EEA

• If the property remains vacant for part of the year, you pay tax only on the actual rent received

Claiming tax exemption on let-out property requires an understanding of how it affects your overall tax liability. To claim tax benefits for let-out properties in India, follow these steps:

1. Report rental income under "Income from House Property" in your Income Tax Return (ITR)

2. Deduct municipal/property taxes paid from the rental income

3. Claim a standard deduction of 30% on the net annual value (after municipal tax) for maintenance and repairs

4. Deduct the full interest paid on a home loan related to the rented property with no upper limit

5. Claim deductions for vacancy loss if the property was vacant during the year

6. Maintain documentation like rent receipts, municipal tax receipts, home loan interest certificates, and rental agreements

7. Use these deductions to reduce your taxable rental income and file your ITR accordingly

Rental income is added to your total income and taxed based on your applicable slab. Taxable rental income is calculated as:

Gross Annual Value (GAV) - Municipal Taxes - Standard Deduction - Home Loan Interest = Taxable Income

If you have multiple properties, only one can be claimed as self-occupied, while others are considered let out and taxable.

Investing in rental properties can be a great way to generate income, but understanding the taxation process is crucial to avoid unexpected liabilities. Check out how to compute your tax liabilities below:

1. Determine Gross Annual Value (GAV): Actual rent received or expected market rent, whichever is higher.

2. Deduct Municipal Taxes: Minus the municipal tax amount from GAV. 

3. Apply Standard Deduction (30%): Deduct 30% from Net Annual Value (NAV).

4. Subtract Home Loan Interest: If applicable, deduct up to ₹2 lakh on loan interest.

5. Arrive at Taxable Rental Income: The final amount is taxed as per your income slab.

The standard deduction of 30% covers painting, plumbing, structural repairs, and general maintenance. You cannot claim additional repair costs beyond the 30% deduction. If you own multiple let-out properties, deductions apply separately for each property.

Effective tax planning can help you retain more rental income by using available deductions smartly.

As a let-out property owner, understanding effective tax planning strategies can help you maximise deductions, reduce liabilities, and optimise your rental income. Some of the strategies include:

• Opt for a Joint Home Loan: If a property is co-owned, both owners can claim separate deductions on interest payments.

• Ensure Rent Agreement Compliance: Always document rental agreements to avoid disputes and ensure proper tax filings.

• Claim HRA Alongside Rental Income: If you pay rent and also earn rental income, you can claim HRA if conditions are met.

• Offset Losses Against Other Income: If total expenses on rental property exceed income, you can adjust losses against other earnings up to ₹2 lakh per year.

Here are a few practical tips to help you maximise your rental property deductions effectively.

• Prepay Your Home Loan: Reducing the loan’s tenure can help you save interest over time.

• Invest Rental Income in Tax-Saving Schemes: Depositing rent in PPF, ELSS, or tax-saving FDs can reduce your overall taxable income.

• Rent Out to Businesses for GST Benefits: If renting commercial property, ensure GST compliance to claim the input tax credit.

Letting out a property comes with tax obligations, but knowing your exemptions, deductions, and tax-saving strategies can help you minimise your tax burden. By understanding Section 24 deductions, tax exemptions on rental income, and strategic tax planning, you can maximise your rental income while staying compliant with tax laws.

If you’re unsure about specific tax exemptions, consulting a tax advisor can help you ensure smooth tax filings.

• Under Section 24, a 30% standard deduction applies to rental income for maintenance and repairs

• You can also claim deductions for municipal taxes and home loan interest (up to ₹2 lakh)

• Additional tax exemptions on rental income under Section 80EE & 80EEA may apply for first-time or affordable housing loans

Rental income isn’t fully exempt, but you can claim deductions like 30% standard deduction, municipal taxes, and home loan interest under Section 24.

Yes, if you are salaried and don’t own a home in the city, you can claim HRA benefits or a Section 80GG deduction (if self-employed).

Under Section 24(a) of the Income Tax Act, you get a standard deduction of 30% on the net annual value. Additionally, if you have taken a loan for the property, you can claim a deduction on home loan interest under Section 24(b) up to ₹2 lakh.

Rental income is added to your total taxable income after deductions and taxed as per your income slab.

You can claim a 30% standard deduction, deduction on municipal taxes paid, and an exemption of up to ₹2 lakh on home loan interest (if applicable).

Yes, the second property is considered deemed let-out even if vacant, and you must pay tax on its notional rent.

Optimise tax savings by claiming deductions, splitting rental income with co-owners, and strategically managing home loans.

Return to Goal