With India’s rental property market steadily expanding, rental income is becoming an increasingly attractive source of passive earnings. Let’s have a look at the statistics below:

India’s rental housing market was valued at USD 20.31 billion in 2024 and is expected to reach USD 26.78 billion by 2030, according to TechSci Research. This represents a projected growth of 4.56% CAGR during the forecast period. 

As a fee-only financial advisor, one of the most frequent questions I receive is: “How to save tax on rental income in India?”  With the proper planning, landlords can significantly reduce their tax liability without breaking any rules.

Whether you’re a landlord or you’ve recently rented out a property or are planning to in the near future, this guide will walk you through the strategies to save rental income tax through legitimate tax-saving hacks.

Key Insights

• The 30% standard deduction is automatic and doesn’t require any documentation. It’s the easiest way to reduce taxable rental income significantly.
• Unlike self-occupied properties, rental properties allow you to claim the entire home loan interest as deduction, which can save thousands in taxes annually.
• Splitting house property income between family members (based on ownership percentage) in different tax brackets can substantially lower your overall taxable income.
• Keep maintenance charges, amenities, and basic rent separate in your agreements to optimize taxation on rental income.
• If your monthly rent exceeds ₹50,000, ensure you claim credit for TDS deducted by tenants to avoid double taxation.
• Choose between old and new tax regimes based on your total deductions and income sources to minimize your overall taxable income.
• Maintain proper records of all expenses and tax payments to support your deductions during income tax filing.

Understand how Rental Income is Taxed in India

Before diving into tax-saving strategies, let’s understand the basics. The Income Tax Act treats rental income under the “Income from House Property” category. Understanding income tax on rental income is crucial because this classification comes with its own set of rules, deductions, and calculations that we need to master.

The taxation process starts with calculating your Gross Annual Value (GAV), which is simply the sum of rent you collect in one year. From this GAV, various deductions are applied to reach your taxable rental income. 

What is interesting about rental property taxation is that unlike income from salary, where one has limited deductions, rental income presents numerous legitimate avenues for lowering your tax burden. The key is having knowledge of these provisions and applying them properly to reduce rental income taxation.

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Taxable Rental Income Calculation

Here’s a quick explanation of how your taxable rental income is calculated:

Gross Annual Value (GAV): the total amount of money the property generates annually.

Standard Deduction: Regardless of actual costs, a 30% deduction for maintenance is permissible under Section 24(a) on net rental income.

Municipal Taxes: Deductible if the owner pays them.

Home Loan Interest Deduction: Section 24(b) allows for an unlimited deduction of interest paid on properties that are rented out.

[(GAV – Municipal Taxes) – 30% Deduction – Home Loan Interest] = Taxable Rental Income is the net taxable income.

8 Ways to Save Tax on Rental Income

1) Standard Deductions on Rental Income (30%)

Under Section 24(a) of the Income Tax Act, a standard deduction of 30% from net rental income for maintenance, irrespective of actual expenses. You can still take advantage of this fixed deduction even if your maintenance costs are lower.

2) Interest on Home Loan -Section 24(b)

If you’ve taken a home loan for a property that is rented out, the entire interest paid on the loan is deductible under Section 24(b), unlike self-occupied properties, where the deduction is capped at Rs. 2 lakhs annually under the old tax regime. This can substantially bring down your overall tax liability. However, if you have opted for the new tax regime, which is beneficial to you, then you can’t take this benefit for a self-occupied property.

3) Municipal Taxes Deduction

Municipal taxes, including property tax, water tax, or sewerage charges, are allowed as a deduction only if they are paid by the property owner. These must also be paid by the owner and not the tenant.

4) Joint Ownership of Property

If you own a property jointly with your spouse or a family member, the rental income must be split. The rental income can be divided between co-owners, reducing individual tax liability on rental income.

5) Split Rent & Amenities Charges for Furnished Properties

If your property is semi-furnished or fully furnished, you may be providing amenities like furniture, air conditioners, DTH, or Wi-Fi.  Instead of clubbing everything into the rent, break down the charges in the rental agreement. The total tax burden is decreased because only the rent portion is subject to taxation.

6) Separate Maintenance Charges in the Agreement

Maintenance fees are frequently covered by the rent. However, maintenance is not included in your taxable income if the rental agreement specifically states that the tenant is responsible for paying it separately or directly to the society. 

7) Optimize HRA and Rental Income

This applies if you live in a rented home and also earn rental income from a different property. With the proper tax planning, you can claim House Rent Allowance (HRA) exemption and still declare rental income under the “Income from House Property” head. However, be careful with disclosures and avoid renting to close relatives to minimize scrutiny.

8) Hindu Undivided Family (HUF) Structure

If you have a registered HUF, consider buying property in its name. This helps split income between your individual file and the HUF’s file. Since both are separate tax entities, it allows you to use individual tax exemptions more efficiently.

Tax-Saving Tips for NRIs with Rental Income in India

If you’re an NRIs earning rental income from Indian properties, here’s how to save tax on your rental income in India:

Make use of Strategic Family Transfers

Some NRIs prefer transferring property to family members who reside in India and fall under lower tax slabs. This is a long-term planning move and should be done legally via gift deeds.

DTAA benefits to avoid double taxation

India has signed Double Taxation Avoidance Agreements (DTAA) with over 80 countries. As an NRI, you are eligible to claim credit in your home country for taxes you have paid in India. Understanding and applying DTAA benefits helps avoid paying taxes twice on the same income.

Using Rental Income for Strategic Investments

The tax planning process doesn’t stop at deductions; intelligent utilization of rental income can optimize long-term wealth generation.

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If Old Tax Regime is more beneficial to you then – Channeling rental income into ELSS, PPF, NPS for 80C benefits

If you opt for the old tax regime, you can reduce taxable income by investing your rental proceeds in eligible instruments like:

• ELSS (Equity Linked Saving Schemes)
• Public Provident Fund (PPF)
• National Pension System (NPS)

 These investments offer tax benefits under Section 80C or 80CCD.

Cash flow + Compounding Synergy

Rental income is an excellent source of regular cash flow. If reinvested properly, it can grow infinitely by the compounding effect. For instance, investing Rs. 20,000 per month in an ELSS fund for 10 years can generate considerable long-term capital gains, as well as yearly tax savings.

Common Mistakes to Avoid While Filing Rental Income

1. Ignoring notional rent on vacant second properties: If you own more than two houses, even a vacant one is considered “deemed to be let out” and taxed on its expected rental value.
2. Incorrect reporting of municipal taxes: Claim deductions only for municipal taxes you have actually paid. Unpaid or tenant-paid taxes don’t qualify.
3. Forgetting TDS deduction by tenants (above ₹50,000 rent/month): If the monthly rent exceeds Rs. 50,000, tenants must deduct 5% TDS under Section 194-IB and deposit it with the government. As a landlord, failing to declare this can result in penalties.

Final Thoughts – Effective Ways to Save Tax on Rental Properties

Rental income can be a great source of passive income and long-term financial stability. However, it often comes with tax obligations that many investors overlook or mismanage. Knowing how to save tax on rental income helps you stay compliant and reduce your overall tax burden.

As a fee-only advisor, I always recommend that clients keep documentation clear, make use of legal deductions, and plan holistically, thereby considering both current tax relief and future financial goals.

Remember, successful tax planning requires consistent implementation and proper documentation throughout the year, not just during tax filing season.

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Ready to Unlock More Saving Secrets?

Although rental income provides fantastic tax optimization opportunities, there are innumerable other strategies that can revolutionize your overall financial landscape.

Download my FREE e-book – “3 Secret Hacks to Maximize Your Savings“

Whether you’re just starting your investment journey or looking to optimize your existing portfolio, these proven techniques will complement your rental income strategy and accelerate your path to financial freedom.

FAQs: Income Tax on Rental Income