Introduction
Are you looking to optimize your finances and protect more of your hard-earned cash? One area where you may not have explored how to effectively save on taxes is the mortgage you pay or the rent you receive. It is common practice in India to pay tax on rental income, but did you know there is a trick to reduce this tax burden?
In this article, we will reveal five smart ways that allow you to reduce mortgage taxes. In addition, we will explore the wonderful National Pension Scheme (NPS) and how it can reduce your income tax by a whopping Rs. 86,000. Let’s dive deeper into the world of rental income tax optimization.
Strategy 1: Rent to Mom – Win-Win Strategy
One effective way to reduce your rental income tax liability is to give a portion of your income to your parents, specifically your mother. In India, rental income is taxed per applicable income tax slab rates and can be a significant financial burden. If you give rent to your mother, you can significantly reduce your tax bill.
This approach is financially beneficial and emotionally satisfying, as it helps support your mother while reducing her tax liability. But for this arrangement to work, ensure rental income is transferred legally and transparently through rental agreements and receipts. This way, you can be confident that you comply with tax laws while benefiting from a lower tax rate.
Here is a simple example: Your annual rental income is Rs. 3,00,000, and your mother is in a lower tax bracket. Passing on the rental income can significantly reduce your taxes while supporting it financially. This simple step can save you a lot of money and give you peace of mind.
Strategy 2: Invest in NPS To Save Maximum Income Tax
The National Pension Scheme (NPS) is a government-backed retirement savings scheme that offers a secure financial future and attractive tax benefits. By investing in NPS, you can save up to Rs. 86,000 per annum as income tax.
Under Section 80CCD(1B) of the Income Tax Act, a person can claim an additional deduction of Rs. 50,000 and Rs. 1.5 lakhs available under Section 80C. This discount is available only for contributions to NPS. So, if you are already contributing to NPS or considering starting one, this is a great way to reduce your taxable income.
In addition, NPS offers investment options, including equities, corporate bonds, and government securities, allowing you to customize your portfolio to suit your risk appetite. This flexibility does not only make NPS a tax-free investment not only tax but it’s also a smart choice for your retirement plan.
Strategy 3: HRA (House Rent Allowance) Deduction
If you are a salaried person living in rented accommodation, you can claim a deduction for Home Rent Allowance (HRA) under section 10(13a) of the Income Tax Act. To maximize this deduction, provide your employer with all necessary documents, such as mortgage vouchers and lease agreements.
An HRA deduction can significantly reduce your taxable income, especially if you live in a large city with high rent. By optimizing this tax deduction, you can reduce your overall tax liability and pocket more of your income.
Strategy 4: Home Loan Interest Rates are Reduced
If you have taken a home loan, you can claim a deduction for the interest paid under Section 24(b) of the Income Tax Act. This discount can be significant, especially in the early years of your home loan when most of your EMIs go towards interest payments.
Additionally, if you have rented the property under a home loan, you can claim the interest paid on the home loan as a deduction from rental income under section 24(b). It can help offset your rental income, reducing your taxable income.
Strategy 5: Keep an Accurate Record and Write Everything Down
Keeping accurate records is one of the simplest but often overlooked ways to reduce rental income taxes. Whether you are a landlord or tenant, keeping all rental agreements, receipts, and records in order is important. Not only does it ensure tax compliance, but it helps you claim all applicable deductions and exemptions.
Additionally, having the proper documentation for any audit or investigation by the tax authorities can save you unnecessary trouble. So, keep a dedicated folder for all rental-related documents and update them regularly.
Here’s a table outlining five smart strategies to reduce tax on rent in India using the NPS (National Pension System) to cut income tax by Rs. 86,000. This table will provide a clear overview of each strategy, its benefits, and potential tax savings:
| Strategy | Description | Benefits | Potential Tax Savings |
| 1. Invest in NPS | Contribute to NPS (Tier-I) to avail tax deductions under Section 80CCD(1B) over and above the Rs. 1.5 lakh limit of Section 80C. | Additional tax deduction of up to Rs. 50,000 per annum. | Up to Rs. 15,600 savings in income tax. |
| 2. Salary Restructuring | Request your employer to include NPS contributions in your CTC (Cost to Company) and claim deductions under Section 80CCD(2). | Reduce your taxable income, thus lowering the tax liability. Employer’s contribution (up to 10% of salary) is tax-free. | Varies based on salary structure and employer’s contribution. |
| 3. NPS for Self-Employed | Self-employed individuals can also invest in NPS and avail tax benefits under Section 80CCD(1B). | Claim tax deductions on contributions made to NPS. Benefit from the power of compounding over time. | Up to Rs. 15,600 savings in income tax. |
| 4. Withdrawal Planning | Plan your NPS withdrawal strategically, as partial withdrawals are tax-free, and annuity income is taxable as per your tax slab. | Tax-free partial withdrawals for specified purposes. Optimize annuity to minimize tax liability. | Varies based on withdrawal strategy. |
| 5. Maximizing Employer’s Contribution | Ensure your employer contributes the maximum allowed 10% of your salary to NPS and leverage this contribution for tax savings. | Employer’s contribution is deductible under Section 80CCD(2). Increase your overall NPS corpus for retirement. | Varies based on your salary and employer’s contribution. |
The rental income tax deduction is not just an economic move but a smart strategy that can lead to significant savings. By using these five smart strategies, including the “rent to mum” strategy, investing in NPS, claiming HRA deductions, taking home loan interest deductions, and carefully checking records types, you pay taxes while protecting your financial future -Can significantly reduce liability
Also, the potential of the National Pension System (NPS) cannot be overstated. Not only does it offer incredible tax savings, but it is also an excellent retirement planning tool. These steps allow you to optimize your finances, reduce taxes, and pave the way for a safe and prosperous financial journey. You can also learn more about income tax concepts with our blog.
FAQ
Is renting a property to one’s mother legal to reduce tax liability?
Yes, it is legal to rent a property to your mother or any family member. However, ensuring that the arrangement is transparent and complies with all legal requirements, including having a formal rental agreement and paying rent regularly, is crucial.
How much can I save in taxes by investing in NPS?
By investing in NPS, you can save up to Rs. 86,000 in income tax annually. This is achieved through an additional deduction of Rs. 50,000 under Section 80CCD(1B) of the Income Tax Act, over and above the limit of Rs. 1.5 lakh available under Section 80C
What are the key documents required to claim HRA deductions?
To claim House Rent Allowance (HRA) deductions, you will typically need rent receipts, a lease agreement or rent agreement, and proof of rent payment. These documents help support your claim and reduce your taxable income.
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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.