Saving tax on Rental income from House Property

Rental income from house property can be a useful source of passive income, especially during retirement. Many people buy more than one residential property with the primary objective of earning rental income or using it post retirement. The Income Tax Act requires an assessee to disclose all house properties owned by him at the time of filing his income tax returns. In case of multiple house properties, only one property can be considered as self occupied. The others would be considered as deemed to be let-out even if they are vacant and no rent is earned on it. The notional rent would be computed based on market rental value. So, the owner is liable to pay tax on deemed rental income.

Many people fail to fully understand the tax implications of owning more than one property and earning house rent and end up paying huge tax on it. Here is how one can reduce the tax burden on rent received from house property:

  • Municipal taxes: Municipal tax in the form of property tax is levied on housing in every city. Not many people are aware that this can be deducted from rental income to lower the tax liability. This is essentially paid by the owner of the property in most cases.
  • Standard Deduction: It is assumed that some amount on repair and maintenance is usually incurred by the owner on a house property. So, a further reduction is available in the form of standard deduction. Irrespective of the actual expenditure incurred, a flat 30 per cent deduction can be availed to reduce the rental income and consequently the tax thereof.
  • Loan on let-out property: Rental income can also be adjusted against any interest paid on loan taken on let-out property. The best part is there is no limit on claiming the interest deduction unlike the Rs.2 lakh limit in a self-occupied property.
  • Carry forward of losses: In the event of a loss incurred from house property in a particular year, it can be forwarded to the subsequent years and can be set off against total income. For this, it is essential to file income tax returns before 31st July.
  • Higher rental income consideration: As per Income Tax Act provisions, if a person owns multiple properties in a city, he can declare the property having the highest rental value as self-occupied even though he might not be staying in it. He can compute notional rent on other properties with comparatively low rental value, declare them as let-out and accordingly work out the calculations and lower the tax liability.

These are some of the legal ways to lower tax liability on income from house property.

Should house property be bought in wife’s name to save tax on rental income?

Buying property in wife’s name to evade tax is not a good idea as one can land in trouble with the tax authorities. Especially, post demonetisation the Modi government has strongly resolved to deal with benami properties and curb black money in the economy. So, if a person buys a second house property in wife’s name but with own funds, it would be considered a benami transaction and hence illegal.

Even if the transaction is conducted legally by gifting money to wife to enable her to purchase property in her name, the clubbing provision will apply. This implies that rental income will be added to the husband’s total income and taxed accordingly. So, the purpose of saving tax is not served here too.

Conclusion: It is important to fully understand the tax implications before buying a second house property. Adequate knowledge of how rental income is computed, and the legal ways to lower the tax liability can be beneficial in tax planning.

 



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