Tax trap or smart move? Splitting PG rental income between parents explained

We operate a small PG of 10 rooms, with rent (~Rs 1.5L/month) currently going into my mother’s account. We’re thinking of splitting the rental agreements, putting 5 rooms under my mother’s name and 5 under my father’s, so rent flows into separate accounts and possibly reduces tax liability. Is this a legitimate strategy, or is there a better way to manage tax on rental income?

Advice by CA Niyati Shah, Vertical Head – Personal Tax at 1 Finance

At first glance, splitting rental agreements between parents to divide the rental income might seem like the best option to reduce overall tax liability. However, from a tax perspective, the legitimacy of such a strategy depends not just on where the rent is credited but on who actually owns or co-owns the property.

If the property is legally owned only by the mother, then even if rental agreements are split and some rent is routed to the father’s account, the entire rental income remains taxable in the mother’s hands. This is because taxability is determined by ownership and not the name mentioned on rent agreements or the bank account receiving rent.

For this strategy to hold water legally and help optimise taxes, ownership needs to be genuine and documented:

● If both parents are co-owners in equal proportion (and this is reflected in the property title or purchase deed), then rental income can be proportionately taxed in their respective hands.

● Mere diversion of income without corresponding ownership may invite scrutiny and possible reassessment from the Income Tax Department.

Better Ways to Optimize Rental Income Taxation:

1. Joint Ownership: If feasible, formally transfer part ownership to the father through a registered gift deed or sale arrangement. Post that, rental income can be legally split.

2. Standard Deduction: Under Section 24(a), every property owner can claim a flat 30% deduction on rental income for repairs and maintenance, regardless of actual expenses.

3. Home Loan Interest: If a loan exists on the property, interest paid can be claimed under Section 24(b), up to Rs 2 lakh (for self-occupied) or fully (for let-out property).

4. Senior Citizen Advantage: If either parent is over 60, their income slab offers a higher basic exemption limit (Rs 3 lakh or Rs 5 lakh for 80+), which can help reduce tax outgo.

5. Clubbing Provisions Warning: Transferring income (not the asset) between close relatives can trigger clubbing provisions under Section 64.

Conclusion: Tax planning must align with real ownership and intent. It’s advisable to avoid artificial arrangements that lack legal backing. Consulting a tax advisor to structure ownership and income flow correctly can ensure long-term tax efficiency, without running afoul of tax laws