There are numerous advantages to investing in the real estate market. Real estate ownership has many tax advantages besides building good profits and a significant, ongoing income flow for you. The Indian tax regime allows for tax avoidance but not evasion, and several taxation regulations enable you to save money by complying with specific best practices and claiming an exemption for your residential, industrial or commercial property. Let’s dive in further to learn more.
Exemption Of Interest Paid On Home Loan
Under section 24 of the Income Tax Act, 1961, the assessee (person subjected to tax) can take an exemption of the amount of interest paid by him/her on home load up to the value of Rs. 2 lakhs. This benefit can be availed by the owner of the property. However, to claim this exemption, this must be your residential property, i.e., the property is used for living and not rented. The Income Tax Act treats a home loan as your cost of acquisition of the asset, which is deductible from rental income.
Depreciation Deduction
The value of the asset is lost over time. Depreciation, as per the understanding of the Income Tax Act, is the incremental loss in the asset’s value caused by general wear and tear.
As a real estate investor with revenue-generating rental property, you may claim a tax deduction for the depreciation value of your property. The depreciation deduction reduces your overall taxable income, lowering your tax liability.
You can deduct depreciation for the complete expected life of your property, which is 27.5 years for residential property and 39 years for commercial property.
Short-Term and Long-Term Capital Gains tax exemptions
Let’s understand short-term and long-term capital gains tax exemptions in detail:
Short-Term
The profit or gain realized on the value of an asset is referred to as capital gains. You realise a short-term capital gain when you earn by selling an asset within the first year of purchasing it. Although you may be forced to sell, remember that doing so will increase your tax liability. This is because the gain is considered regular income.
Long-Term
Real estate investment is mainly undertaken for the long term. As a result, you are not subject to short-term capital gain tax liability.
To comprehend how long-term tax benefits of real estate investing, you must first understand the word indexation. It is a way of modifying the actual value of properties to account for the impacts of inflation. When you sell a property, you receive capital gains and must pay taxes on these gains.
But, if you retain the property for at least two years from purchasing such property, the capital gains tax will be reduced. This investment is currently taxable at 20% with indexation. Section 54 of the Income Tax Act is the charging provision. Typically, this is claimed on a residential property.
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Deduction of Stamp Duty and Registration Fees
Stamp Duty is a tax levied on any monetary exchange involving real estate acquisition. It fluctuates according to the percentage of the overall real estate investment purchase. The registration fee or charge is paid to register the property in the new owner’s name. This is in addition to or instead of stamp duty. It is typically 1% of the overall property cost.
These exemptions apply exclusively during the year of property acquisition and are only available to a particular group of individuals, namely individuals and Hindu undivided families.
Conclusion
The government allows these strategies and exemptions to strengthen the country’s real estate market and provide affordable commercial spaces for young entrepreneurs.
Managing these tasks are cumbersome. Therefore, we have real estate experts on board to assist you in your financial planning for real estate investment based on tax-related issues apart from other prominent discussions.
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