Maximizing Tax Benefits for Capital Gains and Rental Income in Your ITR Filing
- Rajesh Kumar Kar
- Jun 11
- 9 min read
Updated: Jun 13
Filing your ITR smartly can significantly reduce your tax liability on both capital gains and rental income. For FY 2024-25 (AY 2025-26), key provisions under the Income Tax Act, 1961, have introduced new exemptions, raised deduction limits, and made it easier for taxpayers to optimize returns. Whether you’ve sold property or earned from letting it out, planning the right strategy before filing can help you legally reduce taxes. Understanding how these benefits work, especially with the regime changes, is essential for smarter ITR filing.
Table of Contents
How to Maximize Tax Benefits on Capital Gains and Rental Income in FY 2024-25
Effective utilization of tax benefits in FY 2024–25 can significantly reduce your liability from both capital gains and rental income. For capital gains, Sections 54 and 54F offer targeted exemptions when reinvesting proceeds into residential property. Similarly, rental income can be optimized using deductions like the 30% standard deduction, municipal tax payments, and full interest on home loans.
Under the new tax regime, taxpayers benefit from an enhanced threshold—rental income up to ₹12 lakh is effectively tax-free due to the increased basic exemption limit and standard deduction. With additional smart deductions and compliance planning, this threshold can stretch up to ₹20 lakh in tax-free rental income, especially for those with housing loan interest deductions or multiple properties.
Using a guided platform like TaxBuddy can help ensure:
Accurate exemption claims
Timely documentation
Strategy selection between old and new tax regimes
Auto-population of details using PAN and Form 26AS
Understanding Capital Gains Taxation in India
Capital gains are taxed differently based on the type of asset and the duration for which it was held. After the changes introduced in the Union Budget of July 2024, the tax structure has been revised significantly for both short-term and long-term capital gains.
Listed equities, mutual funds, REITs, InvITs: Taxed at 20% flat, if sold on or after July 23, 2024.(Earlier, the rate was 15% for such assets.)
Other assets like real estate or gold: Taxed at the applicable slab rate if held for less than 24 months (earlier 36 months for property/gold).
🔹 Long-Term Capital Gains (LTCG)
For all asset classes including equities, land, gold, and unlisted shares:
Taxed at 12.5% flat (without indexation benefit)
Applies to sales on or after July 23, 2024
For assets sold before July 23, 2024:
Old rates apply:
10% (exceeding ₹1 lakh) for listed equity shares/mutual funds
20% with indexation for real estate and other assets
Updated Holding Periods
Listed securities, mutual funds, REITs, InvITs: 12 months
Other assets (real estate, gold, unlisted shares, etc.): 24 months(Earlier, the threshold for real estate was 36 months.)
Claiming Exemptions on Capital Gains Under Section 54 and 54F
How Section 54 Works in the Old Tax Regime
If a residential property is sold and the gains are reinvested in another residential house within the specified window, the exemption under Section 54 applies. From AY 2024-25, the exemption is capped at ₹10 crore. Documentation, timely reinvestment, and filing compliance are crucial to claim this.
Is Section 54 Allowed in the New Tax Regime?
Exemptions under Sections 54 and 54F are permitted under the new regime as well. However, the utility of this depends on overall deductions and your tax slab. Proper evaluation is needed before choosing a regime.
Reporting Long-Term Capital Gains in Your ITR
Starting FY 2024–25 (AY 2025–26), if your long-term capital gains from equities are under ₹1.25 lakh, you can file using ITR-1. This is a notable simplification for small investors.
When reporting LTCG, you must disclose:
Sale price
Date of sale and acquisition
Cost of acquisition
Type of asset (listed/unlisted, equity/real estate)
Holding period
Supporting documents to retain:
Sale deed (for real estate)
Contract notes (for equity)
Purchase invoice
Demat account transaction reports
If your gains exceed ₹1.25 lakh or involve complex holdings, you must use ITR-2 or ITR-3.
Taxation of Rental Income in FY 2024-25
Rental income from residential or commercial properties is taxed under the heading “Income from House Property.” Whether you are under the old or new regime, certain deductions can drastically lower your taxable income.
Key Deductions:
Standard deduction (30%): Applied to Net Annual Value (NAV) of the property.
Municipal taxes: Fully deductible if paid by the owner.
Interest on housing loan:
Self-occupied property: Up to ₹2 lakh
Let-out property: No upper limit
How to Calculate Net Annual Value (NAV):
NAV = Gross Annual Value – Municipal Taxes. This forms the basis of your rental income calculation.
If the property is self-occupied, NAV is considered zero, and only interest on housing loan deduction (up to ₹2 lakh) is available. For let-out properties, GAV is typically the rent received.
Maximizing Deductions on Home Loan Interest and Municipal Taxes
Interest paid on home loans for let-out property can be fully deducted under Section 24b. Pre-construction interest is also deductible in 5 equal parts post-completion. Municipal taxes, if paid by the owner during the year, are fully deductible.
Comparison:
Category | Deduction Limit | Conditions |
Interest on Home Loan (Rented) | Unlimited | Must be for rented property |
Interest on Home Loan (Self-Occupied) | ₹2,00,000 | Capped |
Municipal Taxes | 100% | Paid by owner |
Recent Changes from Budget 2025 Impacting Property Owners
The Union Budget 2025 introduced several impactful changes aimed at reducing the tax burden on property owners and simplifying compliance for individuals with rental income or capital gains. Here's a breakdown of the key updates:
1. Rental Income Exemption: Tax-Free Up to ₹12 Lakh Under New Regime
For individuals opting for the new tax regime under Section 115BAC, rental income up to ₹12 lakh per annum is now fully tax-exempt. This move benefits salaried individuals and pensioners with secondary rental income, as it lowers the need for additional tax planning to shelter modest earnings from house property.
It is important to note that this ₹12 lakh exemption is a blanket benefit under the new regime, not dependent on claiming standard deductions or home loan interest. It is particularly advantageous for single-house landlords and retired individuals living on rental returns.
2. Effective Zero Tax on Rental Income Up to ₹20 Lakh with Deductions
Even if your annual rental income exceeds ₹12 lakh, strategic use of eligible deductions can bring your taxable income close to zero, even up to ₹20 lakh. Here’s how:
Standard Deduction: 30% of Net Annual Value (NAV) automatically allowed
Municipal Taxes: Fully deductible if paid by the owner
Interest on Home Loan (Section 24b): Fully deductible for let-out properties
Pre-construction Interest: Deductible over five years
For instance, if you earn ₹20 lakh in gross rent and have municipal taxes of ₹1 lakh and a home loan interest of ₹7 lakh, your NAV reduces significantly. Combined with the standard 30% deduction on NAV, your taxable rental income could drop to near zero, even under the new regime.
3. TDS on Rent: Threshold Raised to ₹50,000/Month Under Section 194I
Earlier, individuals paying rent above ₹2.4 lakh annually (i.e., ₹20,000/month) were required to deduct TDS under Section 194I. Budget 2025 has raised this threshold to ₹50,000/month, easing the burden for both landlords and tenants.
This change:
Reduces compliance for tenants (especially salaried individuals)
Helps small landlords receive full rent without delay
Streamlines cash flows, especially for families renting out inherited properties
This also means fewer cases of mismatched TDS credits in Form 26AS and fewer notices for landlords.
4. Easy LTCG Reporting: Simplified in ITR for Exempt Capital Gains
For Assessment Year 2025-26, updated ITR forms now include predefined sections for reporting exempt LTCG (like up to ₹1.25 lakh from listed equity shares under Section 112A). This improvement:
Reduces errors during self-filing
Makes filing faster for taxpayers with stock market gains
Allows better visibility and classification of exempt vs taxable gains
This is especially beneficial for salaried investors or retirees who regularly invest in equity mutual funds and don’t cross the exemption limit.
Encouraging Real Estate and Tax Compliance
These changes show a clear policy push toward:
Promoting investment in housing
Simplifying tax structures for individual property owners
Reducing unnecessary compliance hurdles
Increasing trust in self-reporting through tech-enabled ITR systems
For property owners and investors, this creates a more stable and compliant environment to earn rental income and realize capital gains—without losing sleep over tedious filings or hidden tax traps.
Mistakes to Avoid While Claiming Deductions
Even a small oversight during tax filing can result in penalties, missed deductions, or a scrutiny notice. Here are common pitfalls property owners and investors should actively avoid:
1. Failing to Retain Sale Deeds or Loan Statements
Sale deeds, loan sanction letters, EMI schedules, and completion certificates serve as critical proof when claiming deductions under Sections 24(b), 54, or 54F. Without them, exemption claims may be rejected during assessment. Keep digital and physical copies organized and accessible.
2. Missing the Reinvestment Deadline Under Section 54/54F
To claim exemption on long-term capital gains, you must reinvest the proceeds into a new residential property within the timeline—usually one year before or two years after the sale (three years if under construction). Missing this window nullifies the exemption, triggering full tax liability on the gain.
3. Not Reporting Exempt LTCG in ITR
Even if your LTCG (e.g., from listed shares) is exempt, it must still be reported in the ITR. Failure to disclose can raise red flags during processing or invite a mismatch notice from the tax department.
4. Choosing the Wrong Tax Regime Without Comparing Benefits
Selecting between the old and new regimes requires detailed calculation. For instance, exemptions like Section 24(b) and Section 54 are allowed under both, but deductions for set-offs and other expenses may not be. Filing under the wrong regime can cost you thousands in avoidable tax.
5. Ignoring TDS Compliance as a Landlord
If you're receiving monthly rent exceeding ₹50,000, the tenant is liable to deduct TDS at 5% under Section 194-IB. Ignoring this can lead to penalties, non-compliance notices, or disallowed income claims in your ITR.
Each of these errors can shrink your eligible deductions or trigger avoidable penalties. Filing through trusted platforms like TaxBuddy ensures your documentation is verified, deadlines are tracked, and all tax benefits are correctly claimed—leaving no room for costly mistakes.
Conclusion
Tax planning isn’t just about saving money—it’s about filing smartly with full clarity and precision. With new provisions, taxpayers can now unlock more value from rental income and capital gains while staying compliant. From reinvestment strategies to interest deductions, there’s a structured path to minimize tax outgo. For anyone looking for assistance in tax filing, it’s best to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQ
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers complete flexibility. Users can choose between self-filing using a guided platform or opt for expert-assisted filing where a qualified tax professional handles everything from documentation to final submission.
Q2. Which is the best site to file ITR?
The best platform depends on your comfort level with taxes. For those looking for a smooth, AI-driven filing experience with expert backup, TaxBuddy is a top-rated platform. It combines automation with professional support to ensure accurate and timely returns.
Q3. Where to file an income tax return?
ITRs can be filed on the official Income Tax Department portal. Alternatively, platforms like TaxBuddy offer a more intuitive interface, with features like document tracking, auto-calculations, and expert assistance that simplify the process.
Q4. What is the standard deduction allowed on rental income in FY 2024-25?
For FY 2024-25, a flat 30% deduction on Net Annual Value (NAV) is allowed for repairs and maintenance. This is applicable irrespective of actual expenses incurred on the property.
Q5. Can I claim home loan interest deduction on a property that is rented out?
Yes. Under Section 24(b), the entire interest paid on a home loan for a let-out property is fully deductible. There is no upper limit, unlike self-occupied property where the deduction is capped at ₹2 lakh annually.
Q6. How much capital gains exemption can I claim under Section 54?
From AY 2024-25 onwards, the exemption under Section 54 is capped at ₹10 crore. To claim it, the capital gains from the sale of a residential property must be reinvested in another residential property within the specified time limits.
Q7. Can I report long-term capital gains (LTCG) up to ₹1.25 lakh under exempt income in ITR?
Yes. For FY 2024-25, exempt LTCG up to ₹1.25 lakh from listed equity shares and mutual funds can be reported directly in ITR-1 under the ‘Exempt Income’ section.
Q8. Is rental income up to ₹20 lakh tax-free under the new regime?
The new regime allows tax-free rental income up to ₹12 lakh. However, by claiming standard deductions and interest on home loans, individuals can effectively bring their taxable income to zero even with rental income up to ₹20 lakh.
Q9. What documents are required to claim exemption under Section 54 or 54F?
To support your exemption claim, keep the following:
Original property’s sale deed
New property’s purchase deed
Construction completion certificate (if applicable)
Bank statements showing investment or purchase payment
Proof of reinvestment within timelines
Q10. Can I claim a set-off of house property loss under the new tax regime?
No. Under the new regime (Section 115BAC), set-off of losses from house property against other income heads is not allowed. This is a key consideration when choosing between regimes.
Q11. How does joint ownership help reduce tax liability on rental income?
When a property is jointly owned, rental income is divided in proportion to ownership share. Each co-owner can claim individual deductions and is taxed separately, potentially reducing the overall tax burden.
Q12. How can TaxBuddy help me file ITR for capital gains or rental income?
TaxBuddy simplifies the complex parts of filing—whether it's calculating indexed capital gains, choosing between Sections 54 and 54F, or maximizing deductions on rental income. The mobile app provides an easy way to upload documents, review filing options, and get expert guidance for error-free returns.
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