How to Claim Deduction for Municipal Taxes Paid on Rented Property

Municipal taxes are levies imposed by local governing bodies, such as municipal corporations or municipalities, to fund local infrastructure and services. When you own or rent a property, these taxes are part of the financial obligations that must be considered duringtax filing. For individuals who own rented property, municipal taxes can be an important factor when calculating deductions under the Income Tax Act. Specifically, municipal tax deductions for rented properties allow taxpayers to reduce their taxable income by deducting the property taxes paid to local authorities. Let's discuss how to claim these deductions, provide a step-by-step guide, and highlight recent updates for FY 2025-26.

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Table of Contents

• Understanding Municipal Tax Deductions for Rented Property

• How to Claim Municipal Tax Deduction for Rented Property

• Calculation Example: Municipal Tax Deduction in Practice

• Key Requirements for Claiming Deduction

• Recent Updates for FY 2025-26

• Conclusion

• FAQs

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Understanding Municipal Tax Deductions for Rented Property

Municipal tax deductions refer to the property taxes paid to local authorities, such as municipal corporations or municipal councils, for the upkeep of the city or town. These taxes are levied on the value of the property and are used to fund services like road maintenance, water supply, waste disposal, and other civic amenities.

For individuals who own rental properties, the Income Tax Act provides an opportunity to claim municipal tax deductions under Section 24(b). This section allows taxpayers to reduce their income by the amount of municipal taxes paid on the rental property. These deductions are calculated as part of the overall property income, helping reduce the taxable rental income and, ultimately, the income tax liability.

How to Claim Municipal Tax Deduction for Rented Property

To claim a municipal tax deduction, you must follow these steps:

• Pay the Municipal Tax: The first step is to ensure that the municipal taxes on the rented property are paid in full. These taxes are typically paid annually or in installments, depending on the local regulations. Ensure that the payment receipts or challans are retained for documentation purposes.
  

• Calculate the Deduction: The municipal tax deduction can be claimed as part of the income from house property. The deduction amount is based on the municipal tax paid during the financial year, but only the taxes that are paid during that year can be claimed, not those outstanding or carried over from previous years.
  

• Include in the ITR: When filing the Income Tax Return (ITR), report the municipal tax deduction as part of the “income from house property” section. If you are filing manually, you will need to enter this information in the appropriate schedule of the ITR form, usually under “Deductions under Section 24(b).”
  

• Ensure Accurate Documentation: To substantiate the claim for municipal tax deduction, keep copies of the payment receipts and other relevant documentation, such as tax bills or municipal tax receipts. These may be requested by the Income Tax Department if there is any inquiry or audit regarding the deduction.

Calculation Example: Municipal Tax Deduction in Practice

Let’s say you own a rental property and paid a municipal tax of ₹20,000 in the financial year 2024-25. In the same year, your rental income from the property amounted to ₹1,00,000. You can claim a deduction for the municipal tax paid under Section 24(b) as part of your income from house property. Here’s how the calculation would work:

• Rental Income: ₹1,00,000

• Municipal Tax Paid: ₹20,000

• Net Income from House Property (after deduction): ₹1,00,000 - ₹20,000 = ₹80,000

The municipal tax deduction reduces your taxable rental income by ₹20,000, which lowers your overall tax liability. This is a straightforward example, but for properties with higher rental income or multiple properties, the calculation may become more complex, with other deductions like maintenance charges and interest on home loans also being factored in.

Key Requirements for Claiming Deduction

Claiming a municipal tax deduction is an important aspect of reducing taxable income for property owners. However, there are specific criteria that need to be met to ensure eligibility for this deduction. Below, we will break down these requirements in more detail to help you navigate the process and ensure compliance when filing your Income Tax Return (ITR).

1. Ownership of the Property

To claim a municipal tax deduction, you must be the legal owner of the property for which the deduction is being claimed. This means that you must have legal possession of the property, whether it is residential, commercial, or industrial. If the property is held under a lease, for example, you would not be eligible for the deduction unless the lease agreement grants you ownership rights in some capacity.

Furthermore, if you are renting out the property, the municipal tax deduction must be tied specifically to that rental property. For instance, if you own a property and are renting it out, you are eligible to claim the municipal taxes paid on that rental income property. However, if you live in the property or use it for personal purposes, the tax deduction will not apply.

In cases where the property is co-owned (e.g., jointly owned with family members), each owner may claim a portion of the deduction according to their share in the property. Therefore, it’s important to clearly establish ownership in order to qualify for the deduction.

2. Tax Payment

To be eligible for the municipal tax deduction, the tax must be paid during the financial year for which the deduction is being claimed. This means that for the current financial year, you need to ensure that all municipal taxes on the property have been cleared and paid on or before March 31st. Outstanding or unpaid taxes cannot be claimed for deduction in future years.

For example, if you paid your municipal taxes in the financial year 2024-25, you can claim them as a deduction in the ITR filed for the same year. However, if you have unpaid taxes from the previous year, those taxes cannot be used for a deduction in the current year's tax filing.

Municipal taxes often include property taxes levied by local municipal corporations or local authorities. These taxes are generally used for civic amenities such as water supply, garbage disposal, road maintenance, and other municipal services. Therefore, ensuring timely payment is essential for claiming the deduction.

3. Proper Documentation

When claiming a municipal tax deduction, you must retain proper documentation as proof of payment. This includes original municipal tax receipts, bills, or challans provided by the local municipal authority. These documents are vital for verifying the tax payment during the income tax filing process. They also serve as proof in case of a tax audit by the authorities, where they may request detailed records.

Without these documents, the claim for the deduction can be rejected, leading to potential delays and penalties. It is advisable to keep a safe and organised record of these receipts for each financial year, especially if the property is rented out or if you have multiple properties. These records can also be helpful if there are any discrepancies or questions raised by the Income Tax Department.

4. Property Used for Rent

Municipal tax deductions are available only for properties that are used to generate income, which typically means rental properties. If you are claiming the deduction for a property that you rent out, the municipal tax paid on that property can be deducted from your taxable income. However, if the property is self-occupied, you cannot claim this deduction, as the tax deduction on municipal taxes is applicable only to income-generating properties.

For example, if you own a house and rent it out for a portion of the year, the municipal taxes paid for that property during that period can be deducted. If the property remains vacant or is used exclusively for personal purposes, no deduction can be claimed.

Additionally, the rent income from the property must also be declared and taxed as part of your income. So, the rental income and the associated municipal tax deductions will balance out in the process of calculating your net taxable income.

If the property is a mix of self-occupation and rental use (e.g., part of the property is rented out while you live in the other part), only the portion related to the rental part can be considered for the municipal tax deduction.

Recent Updates for FY 2025-26

For the FY 2025-26, the Income Tax Department has provided updates regarding property deductions. While the basic provisions related to municipal tax deductions have remained unchanged, taxpayers should be aware of any revisions in the forms or reporting requirements. The government continues to focus on improving transparency and simplifying the tax filing process, so it is essential to stay updated with any new notifications or amendments in the law. It is advisable to check the latest ITR forms or consult with a tax professional for any changes to the documentation or filing procedures for municipal tax deductions.

Conclusion

Claiming municipal tax deductions for rented properties is an effective way to reduce taxable income and, in turn, lower your overall tax liability. By ensuring timely payment of municipal taxes and maintaining proper records, taxpayers can easily claim this deduction while filing their Income Tax Return. The recent updates for FY 2025-26 emphasise the importance of accurate documentation and timely filings. If you own or rent properties and are unsure about how to claim deductions, it may be helpful to consult a tax professional or use a platform likeTaxBuddy mobile app to streamline your filing process and ensure compliance.

FAQs

Q1: Can I claim municipal tax deductions on a self-occupied property?

No, municipal tax deductions are only applicable to properties that generate rental income. For self-occupied properties, no deduction is allowed under Section 24(b) of the Income Tax Act for municipal taxes. This is because the tax benefits for self-occupied properties are already covered under other sections like the home loan interest deduction and the property tax deductions under the same section.

Q2: What if I pay the municipal tax after the due date?

Municipal tax must be paid within the financial year for which the deduction is being claimed. If the tax is paid after the due date, it can still be deducted in the same year, but the interest on delayed payments cannot be claimed as part of the deduction. Ensure that you pay on time to avoid complications with deductions and interest claims.

Q3: Do I need to submit proof of municipal tax payment with my ITR?

While you don't need to submit proof of municipal tax payment with your ITR, it is recommended to keep all payment receipts or challans handy. The Income Tax Department may ask for them during an audit or assessment process. Having these documents ensures that your claim is valid and accurate.

Q4: Can I claim the municipal tax deduction if I don’t have rental income in a given year?

No, the municipal tax deduction is linked to rental income. If your property is not generating rental income, you cannot claim a deduction for municipal taxes under Section 24(b). The deduction applies only when you have a rental income that the municipal tax can offset.

Q5: Can I claim municipal tax deductions if I own multiple rental properties?

Yes, you can claim municipal tax deductions for each rental property you own, provided you have paid municipal taxes for each property in the given financial year. The municipal taxes paid on each rental property can be deducted against the rental income earned from that specific property.

Q6: Are there any limits to how much municipal tax I can deduct?

No, there is no specific limit or cap on the amount of municipal tax that can be deducted for rental properties. The full amount of municipal tax paid during the financial year on rental properties is eligible for deduction under the "income from house property" section. Ensure that the tax is paid within the financial year to claim the full deduction.

Q7: How do I report the municipal tax deduction in my ITR?

Municipal tax deductions are reported under the "Income from House Property" section of the ITR. You will need to mention the total amount of municipal tax paid on the rental property during the financial year as part of your expenses when declaring rental income. This will reduce your taxable income related to that property.

Q8: Do municipal tax payments affect other tax deductions?

Municipal tax payments do not directly affect other tax deductions. However, if you are claiming other property-related deductions, such as home loan interest, municipal tax deductions can be claimed alongside them. This means you can reduce your overall taxable income by claiming municipal tax deductions in addition to other eligible tax benefits for your property.

Q9: What if I missed paying municipal tax this year?

If you miss paying municipal tax in the current year, you will not be able to claim it as a deduction for that financial year. However, if you pay the municipal tax in the following year, you can claim it in the next year's tax return. It's essential to keep track of municipal tax payments to ensure you don't miss the deadline for claiming deductions.

Q10: Can I claim municipal taxes paid in advance for the next year?

No, you can only claim municipal tax deductions for taxes paid in the relevant financial year. Payments made in advance for the upcoming year are not eligible for deduction in the current year. The tax deduction applies to actual payments made within the year, not for amounts paid in advance for future periods.

Q11: How does the municipal tax deduction affect my overall tax liability?

The municipal tax deduction reduces your overall tax liability by lowering your taxable income. Since the deduction is applied against your rental income, it lowers the amount of income that is subject to taxation. This, in turn, can help reduce the amount of tax you owe, especially if you have multiple rental properties generating significant income.

Q12: Can I claim both municipal taxes and home loan interest deductions for the same property?

Yes, you can claim both municipal tax deductions and home loan interest deductions for the same property. Municipal tax deductions are claimed under the "Income from House Property" section, while home loan interest is claimed under Section 24(b). These two deductions are separate and can be claimed simultaneously, provided the property meets the eligibility criteria for both.