Is your family considering splitting PG rental income between parents to save on taxes? It’s a common thought, but proceed with caution! While it might seem like a smart move to divide the income, experts warn that simply diverting rent without changing legal ownership can lead to trouble with the tax authorities.
Thank you for reading this post, don't forget to subscribe!Let’s break down why your current idea might not work and what legitimate strategies you can explore for tax-efficient rental income.
The Scenario:
You run a 10-room Paying Guest (PG) accommodation, generating around Rs 1.5 lakh per month. Currently, all the rent goes into your mother’s account. You’re thinking of splitting the rental agreements – 5 rooms under your mother and 5 under your father – to funnel rent into separate accounts and potentially reduce your overall tax burden.
The Expert View (by CA Niyati Shah, Vertical Head – Personal Tax at 1 Finance):
While your idea sounds appealing for tax savings, its legitimacy hinges on actual property ownership, not just who receives the rent or whose name is on a rental agreement.
- The Critical Point: If your mother is the sole legal owner of the property, then even if rent from some rooms is directed to your father’s account, the entire rental income will still be taxable in your mother’s hands. The tax department focuses on the legal owner, not just the recipient of the income.
- Risk of Scrutiny: Simply diverting income without a corresponding change in ownership can raise red flags with the Income Tax Department, potentially leading to scrutiny and reassessment.
For a Legitimate & Tax-Efficient Strategy, Ownership is Key:
To genuinely split the rental income for tax purposes, both parents must be co-owners of the property, with their ownership proportion reflected in the property’s title or purchase deed.
Smarter Ways to Optimize Rental Income Taxation:
Instead of artificial arrangements, consider these legitimate strategies:
- Joint Ownership:
- How: If feasible, formally transfer a part of the property’s ownership to your father. This must be done legally through a registered gift deed or a sale arrangement.
- Benefit: Once ownership is legitimately split, the rental income can be proportionately taxed in each parent’s hands.
- Standard Deduction (Section 24(a)):
- You can claim a flat 30% deduction on the net annual value of your rental income for repairs and maintenance, irrespective of your actual expenses. This is a significant tax-saving benefit.
- Home Loan Interest (Section 24(b)):
- If there’s a home loan on the property, the entire interest paid on this loan for a let-out property (like your PG) can be claimed as a deduction. There’s no upper limit for let-out properties.
- Senior Citizen Advantage:
- If either parent is a senior citizen (over 60), they benefit from a higher basic income exemption limit (Rs 3 lakh for those between 60-80, and Rs 5 lakh for those 80+). This can significantly reduce their overall tax liability.
- Beware of Clubbing Provisions (Section 64):
- Simply transferring income (without the underlying asset) between close relatives can trigger “clubbing provisions,” meaning the transferred income might still be added back to the transferor’s income for tax purposes. This further emphasizes why proper ownership change is crucial.
The Bottom Line:
Effective tax planning for rental income must align with real ownership and genuine intent. Avoid artificial arrangements lacking legal backing. For long-term tax efficiency and to avoid issues with tax laws, it’s always best to consult a tax advisor. They can help you structure ownership and income flow correctly, ensuring you maximize your tax benefits legitimately.
