How Could a 50% Standard Deduction on Rental Income Boost the Buy-to-Let Market?

Overview: How Could a 50% Standard Deduction on Rental Income Boost the Buy-to-Let Market

Raising the standard deduction to 50 percent will improve the Buy-To-Let (BTL) market by substantially enhancing post-tax rental yields. Given that India continues to exist in a low yield environment, lowering the taxable component of rent will make real estate investment competitive with other asset classes. A move from the present 30% deduction to 50% rental income tax exemption under Sec 24(a) will have a revolutionary impact on buy-to-let investors in India.

What is the Current Landscape Of Tax on Rental Income?

In India, people are taxed on rental income under Income from House Property. This is calculated as the annual value of the property minus municipal taxes, standard 30% deduction, and the interest paid on housing loans.

For the financial year FY 2025-26 (AY 2026-27), under New Tax Regime, there is also a provision to claim up-to Rs 12- lakh total income tax-free using an enhanced Section 87A rebate of Rs 60,000 that would allow property owners to receive no tax on any sizeable rental income after the deductions. The tax slabs under the New Tax Regime are 0% up-to Rs 4 lakh, 5% between Rs 4 lakh to Rs 8 lakh, 10% for Rs 8 lakh to Rs 12 lakh, 15% for Rs 12 lakh to Rs 16 lakh, 20% for Rs 16 lakh to Rs 20 lakh, 25% for 20 lakh to 24 lakh and 30% for income over Rs 24-lakh. You remain eligible for the 30% standard deduction on rental income for all income levels. Source

Understanding the Existing 30% Tax Deduction

The 30% standard deduction found in Section 24(a) is based on the net annual value (NAV), which is the gross annual value (GAV) less municipal taxes, and is applicable to all expenditures on repairs, maintenance, etc., without requiring any proof.

Example: A NAV of Rs 340,000 allows for a deduction of Rs 102,000, meaning that approximately 70% of the NAV will be taxed until further adjustments. The standard deduction will continue under the new tax laws, making rental business operations more efficient following the revisions made by government agencies post-Budget 2025.

Currently How Much Rent Income is Tax Free in India?

Currently, no tax-free limit exists solely for rental income as taxation depends on total income, deductions and present regime. Under the new regime, Rs. 16 lakh gross rental yield can have zero tax if NAV deductions and rebate cover Rs. 12 lakh taxable income. So although there is no direct answer to the question how much rent income is tax free in India; the 30% deduction and other slab benefits can make Rs. 10-16 lakh gross rent tax-free for sole earners assuming standard municipal taxes and no other income.

Is EPF nudging people towards property investment?

The Employees' Provident Fund basically provides withdrawal flexibility for housing. This ensures that landlords and aspiring investors have a "PF Chance" to use retirement savings for budget property acquisition. Eligible candidates with at least five years of contributions can withdraw up to twenty four months' basic wages plus DA for land purchase or 36 months for house/flat construction/purchase. This directly funds rental portfolio expansion.

EPF interest rates, which is generally around 8.15-8.25%, lag behind real estate's historical appreciation and rental yields, this pushes savers towards property investment in India for better compounded growth. This inclination towards property for sale is further supported by tax advantages : EPF withdrawals for housing are tax-free if rules are met.

The 50% proposal: An innovative change for Buy-To-Let Segment

A move from the present 30% deduction to 50% rental income tax exemption under Sec 24(a) will have a revolutionary impact on buy-to-let investors in India. It is expected to lower the taxable NAV of an investment property to half while significantly increasing the amount of net yield available (after tax) from 2% – 3% to possibly 4% – 5%. Industry specialists are seeing this as a crucial step in being able to grow an institutional-quality rental portfolio, given the high costs of acquisition, along with regulatory challenges resulting from RERA.

Why is Industry Pushing for a 50% deduction?

Real Estate stakeholders such as NAREDCO have continuously lobbied to have the deduction increased from 30% to 50%. According to the various developer lobbies, the 30% deduction is inadequate. The existing 30% cutoff does not take into account actual repair costs as well as losses due to vacancies of approximately 5-10%, which negatively affect investor trust at a time when home loan rates are between 7% and 8%. The industry believes that a 50% slab would provide investors with the same operational standards like the UK and US models that historically have higher rental yields.

Comparison between 30% vs. 50% Standard Deduction

Impact on the Middle Class

• Increased Take-Home Rent: Under the current 30% rule, landlords pay tax on 70% of their rent. At 50%, they only pay tax on half. This enhanced rental income tax exemption directly increases their monthly cash flow.

• Insurance against inflation: Real-world middle-class apartments incur costs of over 30% for general maintenance (plumbing, society repairs, etc). The introduction of a 50% cap will create a realistic safety net from increased costs related to services.

• Retirement Security: Many middle-class Indians rely on rental income for pension. A higher deduction acts as a "tax-free" raise, helping retirees keep more of their earnings to cover medical and living expenses.

• Lower Compliance Burden: Middle-class landlords wouldn't need to keep meticulous records of every minor repair bill to prove expenses, as the "Standard" nature of the deduction covers it automatically.

How it Boosts the Buy-to-Let Market

• Higher Rental Yields: The rental yields from property for sale in India are typically quite low. However, a 50% standard deduction would have a significant impact on what is known as "Net Yield," by making rental properties much more competitive.

• Ensures Formal Agreements: This 50% standard deduction would provide an incentive to move away from the cash transaction model, and adopt a legally registered rental agreement model.

• Better management : Increased profits due to lower tax on rental income enable Landlords to highly invest in the management of their properties by hiring more professional property managers. This provides renters with better amenities which enhances the overall quality of the rental housing stock.

Budget 2026 Expectations: Should Landlords Prepare for a Rental Income Tax Exemption

Though the possibility of an entire rental income tax exemption for landlords is not expected anytime soon, landlords can expect to see targeted relief through the various industry-backed recommendations for increasing the standard deduction of 30% to 50%.There is also a possibility of instituting a complete tax exemption for affordable rental housing. In light of the Government of India's emphasis on promoting the New Tax Regime, landlords are encouraged to start preparing by formalising all rental agreements as well as becoming compliant with PAN regulations. By doing this, property owners will be able to take advantage of the new policies when they become enacted.

Partner with Moneytree Realty to capitalize on budget changes Now!

Do not let the changing tax landscape keep you confused about real estate investment in India. With the correct real estate investment tips from professionals, you can significantly improve your property ROI and get the maximum benefits from rental income tax exemption.

This is exactly what Moneytree Realty offers.With a team of skilled professionals with in-depth industry knowledge, Moneytree stands as one of the most prominent real estate advisors of the nation. Via our services you can gain access to some of the most high-end and exclusive buy-to-let properties that meet your budget needs.

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