Tax Benefits Of Real Estate Investment In India

As time passes by, the population keeps growing and so does the want and need for real estate. Real estate investment in India is the ideal place to make investments. It is one of those unique investments which will always keep on growing primarily from the fact that land is a premium commodity in India. We have seen people becoming millionaires overnight; a fact reinforced by the Gurugram and Noida real estate prices skyrocketing within a short time frame.

Key Takeaways

• Real estate has historically been regarded as one of the most secure ways to invest your money for long-term gain in India. Because land is such an asset, there will always be a demand for property, and therefore we can see sustainable increases in the price of property over time.

• The tax you pay on capital gains from real estate is equal to short-term capital gains (3 years or less ownership), which are taxed with slab rates based on your income, while long-term capital gains (3+ years) are taxed at a lower concession rate (20%).

• A way to avoid capital gains tax is to use the sales proceeds to purchase another property or invest in infrastructure bonds.

• You can claim up to ₹150,000 as a tax deduction for repayment of the principal amount when applying for Section 80C as a homeowner, regardless if the property is owner-occupied or rented out.

• If you have a loan secured against your second home that is rented out, interest payments on that loan can be claimed as expenses in full and will not be subject to any limit for tax purposes.

• In a co-owned property, each co-owner can deduct the interest from their taxable income separately.

• Debt finance gives investors access to larger amounts of money, which means they can buy multiple properties with the same total amount of equity; the interest on this has been deemed to be a business expense.

• Rental income also provides an ongoing cash flow, which can be applied against both repairs and loan repayments; however, rental income will be added to your total income and taxed using normal tiered rates.

 

There are various tax benefits that an investor can benefit from when it comes to investing in a property. One of the main tax benefits is deductions made on any residential, commercial property and the appliances and fixtures within. In order to understand the variety of ways in which one can enjoy the tax benefits of real estate investment, we break them down into the following:

Sale of Property

When an owner sells a property, he makes a profit that is taxed or can be re-invested in other assets. The most important element of a sale is time. The value on which capital gains are taxed is calculated by finding the differential amount between the price of the property and the initial price of the property. The factors that are included in computing value are the age of the property, no. of additions from the time of purchase, damages, etc.

If the property is sold within 3 years then it is considered to be a short-term capital asset (STCA) and is taxed according to the slab rates. Although, from a more profitable point of view it is advisable to own properties for more than 3 years which then become long-term capital assets (LTCA)  which will result in long-term capital gains (LTCG) which are taxed at a concessional rate of 20%. Additionally, if the gain from the sale of the property is invested into infrastructure bonds or use the entire amount in the purchase of another property you will end up paying no tax at all.

Rental Income

Real estate investment in India offers an avenue to generate steady flow income by offering the property on rent. This ensures you have a smooth cash flow throughout the entire life cycle of the property. Moreover, with the infrastructure development around your property like schools, hospitals, shopping centers, etc., the rental value of the property keeps on ascending.

Letting out a property on rent will also help you offset the cost of maintenance of the property in addition to paying off the loan amount that you may have taken to acquire the property. The rental income from property will however be added to your current income taxed according to your current income tax slab.

Safest Option

Real estate investment in India is quite obviously a tangible asset because you can touch and feel the asset while watching its value appreciate over time. It is also one of the easiest assets to procure since home loans are readily and competitively available with as little as a 20% down payment on the property value.

Unlike the stock market where prices are published on a regular basis, real estate prices are not openly discernible which prevents owners from panic selling like we regularly observe in the stock market. This ensures that the property value is protected and keeps on gaining in worth. Compared to the fluctuations in the stock market which might offer better returns but also can result in significant losses, property prices steadily increase and hence are the safer option over a longer period of time.

Tax Benefit

Many people want to invest in owning a house for either self-occupation or to let it out. Tax exemption comes as an advantage to people who are looking to be a part of the growing Indian real estate world. For the first time, this allows you tax benefits on both ‘repayment of principal amount’ and ‘interest on payment’. On repayment of the principal amount, you can avail of a tax deduction of up to Rs 1,50,000 under section 80C, which is available to you regardless of the fact whether you use it for self-occupation (SOP) or commercial purposes (LOP).

Owning a second property allows you the benefits of tax exemption on the interest portion of the loan without any upper limit. Although, one must bear in mind that the second property cannot be used for self-occupation but for rental purposes. If there are multiple parties who want to invest in a joint project then the parties are individually eligible for the exemption on the interest paid.

Leverage

Loans are commonly used as investments and can be properly utilized if informed how to. Many investors use debt leverage to buy real estate property. Instead of using one loan to get one property, you can spread across to invest in multiple properties. For example, if you have taken leverage of Rs 100,000, instead of buying one property worth Rs 100,000 you could buy four of Rs 25,000 each. This will generate more profits through diversification. Like every loan, this loan too has its interest rates. Although, the interest paid on the debt is deductible as business expenses. This gives more scope for growth for the business.

Financial Discipline and Pass it On Benefit

When you take a property on loan you are instilled with fiscal discipline wherein you have to ensure that you meet your EMI dates on time to avoid levying of huge penalties. Property investment acts as an instrument of compulsory saving thus ensuring adherence to a long-term financial goal. Given that real estate investment is almost always viewed from a long-tenure realization, this investment also allows you to pass on your investment to the next generation. This in conjunction with the external parameters like community growth in the surrounding areas helps guarantee enhanced realization for the investor.

Also Read: Real Estate Investment Tips For Beginners 

Conclusion

Opportunities for real estate investment in India withhold immense potential for growth and greater profits. Being updated and informed about the various tax benefits of real estate investment will help investors make more informed decisions about their investments. There is a multitude of parameters to consider while investing in property like demand-supply, location quality, etc. One must apprehend the type of property to invest in and to understand that, one must interpret the outcome of every kind of investment.

Also Read: Additional Costs To Consider When Buying A Luxury Home

 

FAQS

What are the main tax benefits of real estate investment in India?

The primary tax advantages of investing in real estate in India are the ability to deduct ₹150,000 or more from the principal amount of the home loan under Section 80C and the ability to receive unlimited tax exemptions for the payments made toward interest on the second (let out) property and zero capital gains tax if the proceeds from the sale of the property are reinvested into either an infrastructure bond or another property in which you would buy or sell.

What is the difference between short-term and long-term capital gains on property in India?

If you sell your property before the end of 3 years from the date of the purchase, then you will have made what is known as a short-term capital gain (STCG), and the proceeds that you receive for the sale of the property will be taxed based on your income tax slab rate. If you sell your property after the end of 3 years after its purchase, then you will have made what is called a long-term capital gain (LTCG), and the proceeds from the sale will be taxed at a flat rate of 20%. This will mean that holding property for an extended period of time will mean that your investment will be significantly tax efficient.

Can I save tax on a second home in India?

Yes, if you do want to rent out your second home in India and receive rental income, you need to use the property solely for rental purposes. As long as you adhere to this requirement, there is no limit on the amount of interest you can deduct from your taxable income.

How can real estate investors use leverage to grow wealth in India?

Real estate investors can utilize debt leverage by dividing a single loan amount for several lower-value properties rather than purchasing one high-value asset. This approach produces higher returns via diversification. Also, the interest on borrowed money is a deductible expense when talking about a business, which leads to a reduced overall tax liability and an improvement in net returns.

Is rental income from property taxable in India?

Yes, if you earn rental income from property in India, it will be taxable. It becomes part of your total yearly income, and the tax is calculated based on your income tax slab rate applicable to you. But rental income also gives a great way to partially cover property maintenance expenses and mortgage installment payments. Because of this, it is a smart way to generate a stream of cash across the life of your property.

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