How to Save Tax on Rental Income up to ₹20 Lakhs
How
Rental Income Up to ₹20 Lakh Becomes Tax-Free
Example 1: Rental Income
₹20 Lakh with Home Loan
|
Income Component |
Amount
(₹) |
|
Gross Annual Rent Received |
₹20,00,000 |
|
(-) Standard Deduction @
30% |
₹6,00,000 |
|
(-) Home Loan Interest
Deduction |
₹2,00,000 |
|
Taxable Rental Income |
₹12,00,000 |
|
Tax Liability (New Regime) |
0 (Due to ₹12 Lakh Rebate) |
No tax payable because taxable
income is below ₹12 lakh!
Note: there is not limit on amount
of interest to claim in case of let out property so you can save tax on above
20 Lakh rental income too
Example
2: Rental Income ₹18 Lakh (Without Home Loan)
|
Income Component |
Amount (₹) |
|
Gross Annual Rent Received |
₹18,00,000 |
|
(-) Standard Deduction @ 30% |
₹5,40,000 |
|
Taxable Rental Income |
₹12,60,000 |
|
Tax Liability (New Regime) |
₹3,000 |
Minimal tax payable because income
exceeds ₹12 lakh slightly.
Important Restrictions Under Section 115BAC(2) (New Tax Regime)
Under the new tax regime, certain deductions and set-offs are not allowed, including:
No deduction for loss from house property against other income.
No additional exemptions like HRA, Deductions under Chapter VIA
Example: If your taxable income from salary is ₹10 lakh and rental income has a loss of ₹1 lakh (after deductions), you CANNOT set off this ₹1 lakh loss against salary under the new tax regime.
However, the standard deduction (30%) on rental income and home loan interest (without any limit) are still available.
Changes Introduced in the Budget
The new tax regime has undergone significant changes in slab rates, which will be applicable from the financial year 2025–26. The new tax slabs apply to individuals, HUFs (Hindu Undivided Families), AOPs (Association of Persons), BOIs (Body of Individuals), and Artificial Juridical Persons.
According to the new regime, income up to ₹12 lakh is tax-free for resident individuals due to the rebate under Section 87A. Here’s how the slab rates are structured:
₹0 – ₹4 lakh → No tax
₹4 – ₹8 lakh → 5% tax → ₹20,000
₹8 – ₹12 lakh → 10% tax → ₹40,000
Total tax on ₹12 lakh → ₹60,000
Rebate under Section 87A → ₹60,000
Final tax payable on ₹12 lakh → ₹0
Thus, for resident individuals, taxable income up to ₹12 lakh results in zero tax liability.
How ₹20 Lakh Rental Income Becomes Tax-Free
Let’s consider an example:
Ram owns a house property that he has rented out and earns ₹20 lakh in rental income annually. Now, let’s break down the tax calculations:
Standard Deduction (30%) under Section 24(a)
As per the Income Tax Act, 30% of rental income is allowed as a standard deduction.
₹20 lakh – 30% (₹6 lakh) = ₹14 lakh taxable income
Housing Loan Interest Deduction (₹2 lakh)
Under the new tax regime, if the property is rented out, interest on a housing loan (up to ₹2 lakh) is deductible.
If Ram has taken a home loan on the property, he can deduct ₹2 lakh as interest expense.
₹14 lakh – ₹2 lakh = ₹12 lakh taxable income
Municipal Taxes Deduction
Municipal taxes paid on the property are deductible before calculating rental income.
If Ram claims this deduction, his taxable rental income can further reduce.
Thus, after applying all deductions, Ram’s taxable income becomes ₹12 lakh, which is completely tax-free due to the rebate under Section 87A.
Key Takeaways
If you have no home loan, rental income up to ₹18 lakh can be tax-free.
If you have a home loan, rental income up to ₹20 lakh can be tax-free.
Municipal taxes further reduce taxable income, making rental income nearly tax-free.
Proof from Income Tax Act
Many people mistakenly believe that housing loan interest deduction is not allowed under the new tax regime. However, Section 115BAC clarifies that this deduction is allowed only for let-out properties (rented properties) and not for self-occupied properties.
If you refer to the Income Tax Act (India), it states:
Self-occupied property loan interest deduction is not allowed under the new regime.
Let-out property loan interest deduction (up to ₹2 lakh) is allowed under the new regime.
Additionally, set-off and carry-forward of rental losses is not permitted under the new tax regime. This means that if a loss occurs in rental income, it cannot be adjusted against salary or other income.
TDS on Rental Income – New Limits
The TDS (Tax Deducted at Source) threshold for rental income has been increased in the budget.
Under Section 194A, earlier, TDS was applicable if rental income exceeded ₹2,40,000 per year.
Now, this threshold is increased to ₹50,000 per month (i.e., ₹6 lakh per year).
TDS will only be deducted if rental income exceeds ₹50,000 per month.
Conclusion
By using standard deductions, municipal tax deductions, and home loan interest deductions, rental income up to ₹20 lakh can become tax-free. If there is no home loan, rental income up to ₹18 lakh can be tax-free.
This is a significant tax-saving opportunity for those earning rental income. If you or someone you know rents out properties, share this important information with them!
DISCLAIMER
Airfinac.com, its author/writer and associates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.