Here's how you can reduce taxes on your rental income

Rent from any property such as house, shops, offices or warehouse, etc., received by the owner is chargeable to tax as income from house property. However, while computing the rental income, one can claim certain deductions to minimise the tax outgo.

One of the deductions allowed is municipal taxes. It is allowed in the year of payment, for example, if the taxes for 2019 and 2020 are paid in February 2021, the entire amount can be claimed for deduction in the FY21.

Secondly, a standard deduction of 30 per cent of the net rental income (Rent minus municipal taxes) can be claimed towards the maintenance of the property, irrespective of whether you have actually incurred any expense or not.

Thirdly, interest on loans taken for the purchase, construction, repair, renewal, or reconstruction of the property is also allowed as a deduction. The Act also provides for deduction of interest incurred during the construction period, in five equal annual installments, commencing from the year in which the house property is acquired or constructed.

There is no limit on the quantum of interest that can be claimed as a deduction against rental income. For instance, if the rental income is Rs 6 lakh, interest payout is Rs 4 lakh, the entire amount can be reduced from the rental income.

Apart from the above, no expenses such as building insurance, security charges, maintenance fees, etc., are allowed as a deduction from the rental income.

TDS on rent

As per Section 194IB, when a house is let out for individuals or Hindu Undivided Families (HUF), the tenants are obliged to deduct tax at 5 per cent, if the monthly rent exceeds Rs 50,000. Suppose, A pays a rent of Rs 6,24,000 per year (monthly rent being, Rs 52,000) for a flat. He has to deduct Rs 31,200 as TDS, remit to the Government, and then issue a TDS Certificate in Form 16C.

If the property is let out to companies, firms, or business entities, irrespective of whether the premises are used for business or as a residence, the tenant is obliged to deduct tax at 10 per cent, if the annual rent exceeds Rs 2,40,000. In the case of joint owners, this limit would apply to each co-owner.

However, this rule has an exception. Individual or HUF tenants, whose sales, gross receipts, or turnover from the business or profession carried on by him/it does not exceed Rs 1 crore in case of business and Rs 50 lakh in case of the profession during the preceding financial year, shall be exempt from TDS provisions.

Sub-letting of the premises

In case a tenant sub-lets the property, such income cannot be charged to tax under income from house property, and thereby, a standard deduction of 30 per cent is not allowed against such income. Likewise, renting vacant plots is also not eligible for the standard deduction.

I have come across cases of NRI owners who through a power of attorney in favour of their parents or family members, collect the rent in their name. However, the tenants have paid the rent to the owner of the property and hence, have to follow TDS u/s 195 as applicable to the NRI owner.

Composite rent

In case the rent of a building includes letting out of machinery or furniture or charges towards facilities like security, air conditioning, etc., which are inseparable, then such income has to be taxed as income from business or other sources.

Notional rent

Can a person show multiple houses as self-occupied if they are not let out or should he pay tax on notional rent? With effect from Assessment Year 2020-21, a person can claim two properties, if not let out, as self-occupied and offer tax on the remaining houses declaring as deemed to be let out.

Lastly, watch on the applicability of GST on Rent. Any rent received from letting properties for residential use is exempt and rentals from commercial or industrial properties are taxed at 18 per cent GST, once the income crosses the threshold limit of Rs 20 lakh.

(The writer is a Chartered Accountant and Registered Valuer)