Tax Breaks And Real Estate: Exploring The Benefits Of Real Estate Investments

Introduction

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.

What Is Real Estate?

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.

Taxability On Rental Income From Real Estate Investments

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.

Taxability On Capital Gains From Real Estate Investments

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.

Tax Breaks On Home Loans As Per The Income Tax Act

1. Section 24(b): It provides an exemption of interest paid on a home loan of up to INR 2,00,000 in the case of self-occupied homes. There is no limit to the exemption for the deduction of interest in the case of rental properties².
2. Section 80C: Principal repayment of up to INR 1,50,000 can be claimed as a deduction under Section 80C. Amounts paid for stamp duty, registration charges, and other expenses paid for the transfer of house property can also be claimed as a deduction, but the total amount cannot exceed INR 1,50,000³.
3. Section 80EE And 80EEA: A maximum deduction of INR 50,000 and INR 1,50,000 can be claimed under Section 80EE and Section 80EEA, respectively, on the interest portion of the home loan EMIs.This additional deduction is separate from the one claimed under Section 24(b) of the Income Tax Act for the interest amount. It's important to highlight that you can claim this deduction under either Section 80EE or Section 80EEA, depending on when your home loan was sanctioned⁴.

The table below summarises the tax benefits:

Tax Breaks On Capital Gains For Real Estate 

1. Section 54: Capital gains arising on the sale of a residential house are exempt under Section 54 if the gains are reinvested. The house may be let out or self-occupied. The new house must be acquired one to two years after the property transfer. In case of construction, it should be within three years from the date of transfer. If the assessee cannot purchase or construct the property before the due date of furnishing the return, he/she can invest all the unutilised capital gain proceeds from the sale of the old property in the capital gains deposit scheme. The property can be purchased later, helping the assessee save on any capital gains tax to which he would otherwise be subject⁵.
2. Section 54EC: It provides an exemption of LTCG on the sale of land or building or if the assessee has invested the capital gains in specified bonds within six months from the date of such transfer. The eligible bonds where the investment made is exempted are REC bonds (Rural Electrification Corporation Ltd), PFC bonds (Power Finance Corporation Ltd), and IRFC (Indian Railways Finance Corporation Limited). Investment in eligible bonds is limited to INR 50,00,000. Interest earned on these bonds is taxable under ‘Income from other sources’.
3. Section 54F: LTCG arising from the transfer of any long-term capital asset apart from the residential house shall be exempt if the assess invests the entire net sales consideration to purchase one residential house within one year before or two years after the date of transfer or construction of one residential house within three years after the date of such transfer.

Tax Planning Strategies For Real Estate Investors

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.

Conclusion

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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References:

1. Income Tax Department <https://incometaxindia.gov.in/Documents/Left%20Menu/Ind-income-from-house-property.htm> 
2. Income Tax Department <https://incometaxindia.gov.in/_layouts/15/dit/Pages/viewer.aspx?grp=Act&cname=CMSID&cval=102120000000081010&searchFilter=%5b%7b%22CrawledPropertyKey%22:1,%22Value%22:%22Act%22,%22SearchOperand%22:2%7d,%7b%22CrawledPropertyKey%22:0,%22Value%22:%22Income-tax%20Act,%201961%22,%22SearchOperand%22:2%7d,%7b%22CrawledPropertyKey%22:29,%22Value%22:%222023%22,%22SearchOperand%22:2%7d%5d&k=&IsDlg=0>
3. Income Tax Department <https://incometaxindia.gov.in/tutorials/16.%20exemption%20under%2054.pdf>
4. Income Tax Department <https://incometaxindia.gov.in/Acts/Income-tax%20Act,%201961/2014/102120000000036966.htm>
5. Income Tax Department <https://incometaxindia.gov.in/Acts/Finance%20Acts/1982/102120000000036022.htm>
6. Income Tax Department <https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx>

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