One in all my purchasers lately requested, after Finances 2025, whether or not Rental Earnings as much as Rs.20 lakh is tax-free. The reply is NO. The reason being defined on this submit.
If you’re a property proprietor receiving rental earnings, it’s a widespread false impression that the mix of the usual deduction of 30% below Part 24(a) and the deduction for residence mortgage curiosity funds below Part 24(b) leads to a tax exemption for rental earnings as much as Rs. 20 lakh. Nonetheless, this isn’t the case.
What’s Tax-Free Rental Earnings?
Tax-free rental earnings merely implies that you don’t must pay taxes on the earnings you make from renting out your property, as much as a sure restrict. That is attainable by utilizing sure deductions and exemptions obtainable within the tax legal guidelines.
Whether or not Rental Earnings as much as Rs.20 lakh is tax-free?
To make rental earnings tax-free, there are particular deductions you possibly can make the most of. The one tax deduction obtainable below the brand new tax regime is Sec.24(b). Therefore, the reply is NO. Let me clarify it intimately.
1. Understanding the Rs.12,00,000 Threshold
First, you want to perceive the essential tax limits. Below the brand new finances guidelines, rental earnings of as much as Rs.12,00,000 per yr may be made tax-free with the best exemptions and deductions. In case your complete earnings, together with rental earnings, stays under Rs.12,00,000, you gained’t must pay any taxes.
2. Key Deductions Obtainable to You
There is just one main deduction that’s obtainable below the brand new tax regime i.e. Sec24(b). Earlier I too was of the impression that a typical deduction of 30% obtainable below Sec.24(a) on the let-out property is offered below the brand new tax regime. Nonetheless, one in all my weblog readers corrected this.
a. Dwelling Mortgage Curiosity Deduction
When you’ve got taken a mortgage to purchase the property you’re renting out, you possibly can deduct the curiosity paid on that residence mortgage out of your rental earnings. For properties which are set free, the utmost you possibly can deduct is Rs.2,00,000 per yr. That is relevant to the brand new regime.
For instance:
- In case you’ve paid Rs.3,00,000 as curiosity on your house mortgage for the rented property in a yr, you possibly can declare a deduction of as much as Rs.2,00,000.
- It will additional scale back your taxable rental earnings.
3. Placing It All Collectively
Let’s say you earn Rs.14,00,000 from renting out your property in a yr. Right here’s how one can apply these deductions:
- Begin with Rs.14,00,000 in rental earnings.
- Subsequent, when you’ve paid Rs.2,00,000 as residence mortgage curiosity, you possibly can deduct Rs.14,00,000 – Rs.2,00,000 = Rs.12,00,000.
Now, you’ve introduced down your taxable rental earnings to Rs.12,00,000. Since you might be inside the Rs.12,00,000 restrict, you don’t must pay any tax on this rental earnings!
4. What Occurs If Your Rental Earnings Exceeds Rs.12,00,000?
In case your rental earnings exceeds Rs.12,00,000 in any case deductions, then the surplus quantity shall be taxed in keeping with the earnings tax slab charges. For instance, when you earn Rs.15,00,000 and after deductions, your taxable rental earnings is Rs.13,00,000, you’ll must pay tax on Rs.13,00,000. Nonetheless, you’ll nonetheless profit from the deductions obtainable below Sec.24(b).
Why Is This Essential?
Do observe that in case your rental earnings is greater than Rs.14,00,000, then clearly there is no such thing as a such tax profit. Nonetheless, in case your rental earnings is inside Rs.14 lakh and having a house mortgage means the place you might be paying the curiosity of Rs.2 lakh a yr means your tax legal responsibility shall be zero.
Closing Ideas
In conclusion, attaining a tax-free rental earnings of Rs.20,00,000 isn’t attainable when you make the most of the deductions obtainable to you. The 30% normal deduction isn’t obtainable below the brand new tax regime and residential mortgage curiosity deduction is the one choice to decrease your taxable rental earnings. Simply keep in mind, in case your rental earnings goes above Rs.12,00,000 (submit Sec.24(b) deduction), you’ll nonetheless must pay taxes on the surplus, however this deduction can considerably scale back the tax burden.
Nonetheless, you seen that that is additionally attainable solely you probably have opted for a brand new tax regime and in case your complete taxable earnings from all sources (earnings from wage, earnings from home property, or earnings from different sources) collectively is properly under or equal to Rs.12,00,000. Additionally, the second vital level to contemplate is you probably have a house mortgage. In any other case, this isn’t relevant.