Although it is impossible to avoid paying taxes on rental income, there is a way for homeowners to reduce their tax burden. To save a significant amount towards the tax on rental income, property owners must be aware of the various deductions available when filing an income tax return.
- Joint property: The taxpayer can save a considerable amount of money on taxes if the property is purchased jointly with a family member, such as parents or spouse. This is because the rental income is proportionally split between both parties, resulting in a significant reduction in taxable income.
- Municipal taxes: The Income Tax Act has allowed property owners to deduct municipal taxes such as sewage tax, property tax, and so on while performing house rent income tax calculations. Such payment reduces your tax liability to a decent amount. However, the deduction is allowed only if the tax is paid by the owner itself and not by the tenant.
- Maintenance charges: Another way to save money on taxes is to deduct the maintenance charges from your annual rental income. However, property owners should keep in mind that including maintenance charges in the rent will raise the overall rent, increasing the tax burden. As a result, it is best to leave such costs out of the rent and mention them separately in your rental agreement.
- Fully furnished or semi-furnished house: It is recommended that property owners who are renting out a property that is furnished with furniture, Wi-Fi, pipeline connections, and other amenities do not include the cost of such items in the rent. They should charge the cost of furnishings separately from the tenant as this will bring down the overall rental income, allowing them to save on taxes.