Budget 2025 -Whether Rental Income up to Rs.20 lakh is tax-free?

One of my clients recently asked, after Budget 2025, whether Rental Income up to Rs.20 lakh is tax-free. The answer is YES but with a lot of IFs and BUTs.

If you’re a property owner and earn rental income, there’s good news for you! The new rules in the 2025 Union Budget allow you to legally reduce the tax you need to pay on rental income, helping you keep more of your earnings. In this blog post, we’ll break down how you can legally enjoy tax-free rental income of up to Rs.20,00,000.

What is Tax-Free Rental Income?

Tax-free rental income simply means that you don’t have to pay taxes on the income you make from renting out your property, up to a certain limit. This is possible by using certain deductions and exemptions available in the tax laws.

Whether Rental Income up to Rs.20 lakh is tax-free?

To make rental income tax-free, there are specific deductions you can take advantage of. By properly applying these deductions, you can significantly lower your taxable rental income, potentially to a point where no taxes are owed at all. Here’s how you can do that:

1. Understanding the Rs.12,00,000 Threshold

First, you need to understand the basic tax limits. Under the new budget rules, rental income of up to Rs.12,00,000 per year can be made tax-free with the right exemptions and deductions. If your total income, including rental income, stays below Rs.12,00,000, you won’t have to pay any taxes.

2. Key Deductions Available to You

There are two major deductions you can use to reduce your rental income, both of which are completely legal and recognized by the tax authorities:

a. 30% Standard Deduction on Rental Income

The government offers a flat 30% deduction on your rental income. This means that for any income you make from renting out your property, you are automatically allowed to deduct 30% of it. This deduction is for maintenance, repairs, and other expenses that come with renting out a property.

For example:

• If you earn Rs.10,00,000 in rental income, you can deduct Rs.3,00,000 (30% of Rs.10,00,000).
• This leaves you with Rs.7,00,000 as taxable income.

b. Home Loan Interest Deduction

If you have taken a loan to buy the property you’re renting out, you can deduct the interest paid on that home loan from your rental income. For properties that are let out, the maximum you can deduct is Rs.2,00,000 per year. This is applicable to the new regime.

For example:

• If you’ve paid Rs.3,00,000 as interest on your home loan for the rented property in a year, you can claim a deduction of up to Rs.2,00,000.
• This will further reduce your taxable rental income.

3. Putting It All Together

Let’s say you earn Rs.20,00,000 from renting out your property in a year. Here’s how you can apply these deductions:

• Start with Rs.20,00,000 in rental income.
• Apply the 30% standard deduction: Rs.20,00,000 – Rs.6,00,000 (30% of Rs.20,00,000) = Rs.14,00,000.
• Next, if you’ve paid Rs.2,00,000 as home loan interest, you can deduct that too: Rs.14,00,000 – Rs.2,00,000 = Rs.12,00,000.

Now, you’ve brought down your taxable rental income to Rs.12,00,000. Since you are within the Rs.12,00,000 limit, you don’t need to pay any tax on this rental income!

4. What Happens If Your Rental Income Exceeds Rs.12,00,000?

If your rental income exceeds Rs.12,00,000 after all deductions, then the excess amount will be taxed according to the income tax slab rates. For example, if you earn Rs.15,00,000 and after deductions, your taxable rental income is ?13,00,000, you’ll have to pay tax on Rs.13,00,000. However, you’ll still benefit from the deductions and exemptions.

Why Is This Important?

By understanding and applying these deductions, you can save a significant amount of money on taxes. Especially for people with multiple rental properties, these exemptions can add up quickly, ensuring that your rental income is not taxed at the full rate. The ability to reduce taxable income to Rs.12,00,000 means you could potentially make ?20,00,000 or more in rental income without having to pay taxes!

Final Thoughts

In conclusion, achieving a tax-free rental income of Rs.20,00,000 is possible if you take advantage of the deductions available to you. The 30% standard deduction and home loan interest deduction are two excellent ways to lower your taxable rental income and potentially keep all of it tax-free. Just remember, if your rental income goes above Rs.12,00,000, you’ll still have to pay taxes on the excess, you have to opt for a new tax regime and also you must have a home loan to make sure that your rental income of Rs.20 lakh is tax-free for you.

So, if you’re renting out property, make sure to explore these deductions and consult a tax professional to ensure you’re making the most out of your rental income!