Generating £20,50,000 tax-free rental income is a financial goal that many property owners are aiming for. The latest tax reforms introduced in Federal Budget 2025 allow us to minimize tax liabilities through strategic tax planning. This article discusses key provisions, including the use of deductions under Section 24 of the Income Tax Act of 1961, and rebates under Section 87A, to achieve tax liability for rental incomes above £20 lakh.
Understanding the reforms of the Union Budget 2025
Union Budget 2025 has brought several tax easing measures that benefit the middle class, particularly those. Important reforms are the increase in income tax exemption restrictions, where individuals with annual income are £12,00,000 exemption from taxes under the new tax system. The change is expected to increase disposable income, increase consumer spending and drive economic growth.
Utilize section 24 of the Income Tax Act 1961
Section 24 of the Income Tax Act provides important deductions that can significantly reduce taxable rental income. The two main deductions are:
#1 – Standard Deduction [Section 24(a)]
A flat 30% deduction is permitted for the Net Annual Value (NAV) of rental income. This will help you significantly reduce your taxable rental income.
#2 – Interest in mortgages [Section 24(b)]
If the property is rented and you have an active mortgage, taxpayers can claim a deduction of up to £2,00,000 on the interest paid on the loan. This deduction applies only if the property is removed. Self-occupied property is not entitled under the new tax system.
You can also explore How to minimize taxes through tax loss harvesting.
A step-by-step guide to minimizing tax on rental income
Careful application of these deductions and rebates allows property owners to reduce legally taxable rental income and even achieve tax-free status.
Step 1: Calculate the total rent you received
For example, let’s assume that Mr. X is earning rental income annually. £20,50,000 From his property.
Step 2: Apply the deduction based on section 24
a) Standard deduction (Section 24(a))
The standard deduction is 30% of net annual rent (gross rent is received from local taxes paid from local taxes paid).
- I received the total rent =£20,50,000
- Local tax paid =£50,000 (assumed)
- Standard deduction =30% of £20,50,000= £6,00,000
- Net rental income after standard deduction =£20,50,000 – £50,000 – £6,00,000 = £14,00,000
b) Mortgage interest (section 24(b))
If Mr X has a mortgage and pays interest on it, he can claim additional deductions based on this section.
- Interest in mortgages =£2,00,000
- Net rental income after section 24(b) =£14,00,000 – £2,00,000 = £12,00,000
Note: Deductions under section 24(b) are only permitted if the house is left out. If the House of Representatives is self-occupied and taxpayers choose a new tax system, this deduction cannot be charged.
Step 3: Apply tax rebates based on section 87a
According to Union Budget 2025, taxpayers with net taxable income £12,00,000 You can insist on rebating Up to 60,000 pounds Based on section 87a.
- Net taxable income = 12,00,000 pounds
- Rebates based on section 87a =£60,000
- Final taxes will be paid = £0
If you’re wondering You can check the amount of income tax you can save on a new income tax slab in just 2 minutes using chatgpt..
Cases that may not hurtIEVE tax-free rental income
The above steps work most of the time, but there are certain circumstances in which you need to pay taxes on your rental income.
No mortgage: If you do not have a continuing mortgage, you will not be able to claim a £2,00,000 deduction under Section 24(b) and will have a higher taxable income. Multiple rental properties: If you own multiple rental properties, your gross taxable wage income may even exceed £12,00,000 after deduction and will not qualify for a full tax rebate under Section 87A.
Old tax system: If you choose the old tax system, rebates under Section 87A will not apply and you will be able to increase your tax liability.
Other sources of income: If you have additional income from sources such as salary, business, or capital gains, your gross taxable income can exceed the exemption limit and lead to tax liability.
summary
By strategically using the deductions under sections 24(a) and 24(b), along with a rebate under section 87A, Mr X successfully reduced his taxable rental income to £12,00,000; I guarantee he has zero final tax liability.
Final Results: Mr. X earns £20,50,000 a year tax-free rental income.
If you are a property owner who earns rental income, employing these smart tax saving strategies will help you legally achieve your tax-free revenue. Happy investment!
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