As time passes by, the population keeps growing and so does the want and need of real estate. Real estate 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.
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 are 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 tax benefits, 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 is the age of the property, no. of additions from 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 is taxed at a concessional rate of 20%. Additionally if the gain from the sale of property is invested into infrastructure bonds or use the entire amount in purchase of another property you will end up paying no tax at all.
Real estate investment 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 centres 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 your 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.
Real estate 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 the home loans are readily and competitively available with as little as 20% down payment of 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.
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 the people who are looking to be a part of the growing Indian real estate world. For the first time this allows you with tax benefits on both ‘repayment of principal amount’ and ‘interest on payment’. On repayment of principal amount, you can avail to 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.
Loans are commonly used as investments and can be properly utilised 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 a 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 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 tem 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 guarantees enhanced realization for the investor.
Investments withhold immense potential for growth and greater profits. Being updated and informed about the various tax benefits will help the investors make more informed decisions about their investments. There are 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 an investment.