Real estate is one of the favourite avenues for wealth creation, as it provides rental income and has the potential for capital appreciation. Besides the financial benefits, real estate offers tax advantages that help investors optimise their profits and reduce tax liabilities.
In this blog, we will delve into the tax breaks available to real estate investors in India and explore how understanding and utilising these advantages can be a game-changer for your investment strategy.
Real estate is a tangible asset that is immobile yet transferable. It is a secure investment option as property values tend to appreciate over time. It offers a unique combination of attractive risk-adjusted returns, income generation, capital appreciation, diversification, and inflation protection.
The demand for real estate is high due to a growing population, increased economic activity, and urbanisation.
Rental properties are assets drawing regular monthly income and hence attract taxes on the same. Income from rent received is shown under the head ‘Income from house property’ in the Income Tax return. As per Section 24(a) of The Income Tax Act, the Government allows a standard deduction of 30% of the net annual value to account for various expenses1.
This deduction is available irrespective of the actual expenditure incurred on repairs, maintenance, etc. There is also a deduction for municipal taxes and interest on loans taken to acquire/construct the property. The balance is taxable at the applicable tax rate of the investor.
For example, If you earn INR 6,00,000 as annual rent from a property and pay a municipal tax of INR 10,000, you can claim INR 10,000 plus 30% of 5,90,000 (6,00,000 Rent - 10,000 Municipal Tax) = INR 1,77,000 as deductions.
Capital gains arise when an investor sells a property for a profit. Income arising from property sales is shown under the capital gains section of the Income Tax Return.
Capital Gains can be short-term (STCG) or long-term (LTCG), depending on the holding period. STCG (where the holding period is up to 24 months for immovable property) are taxed at the applicable slab rate, while LTCG (where the holding period is more than 24 months) are taxed at 20% with indexation benefits. Indexation helps the investor adjust the acquisition cost for inflation, giving him the benefit of tax savings on gains.
The table below summarises the tax benefits:
Section Number | Deduction Amount |
Section 24(b) | INR 2,00,000 p.a. |
Section 80C | INR 1,50,000 p.a. |
Section 80EE/80EEA | INR 50,000 p.a./INR 1,50,000 p.a. |
Tax planning is crucial for real estate investors to maximise available tax benefits. Some strategies include timing property purchases and sales to minimise capital gains tax, structuring property ownership to take advantage of lower tax slabs for family members, and availing of deductions and exemptions under different sections of the Income Tax Act 19616.
Real estate investments offer a promising avenue for wealth accumulation and attractive tax advantages for investors. Understanding the tax deductions, capital gains benefits, and incentives available can significantly impact the overall profitability of the investment. As with any financial decision, it is essential to consult a tax advisor or financial expert to tailor the tax planning strategy to individual circumstances. By leveraging the tax benefits available, investors can embark on a successful real estate journey while achieving their financial goals.
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