What is Real Estate Investment?
Real estate investment is the process of buying or acquiring a property to generate more income. It includes any building, property, or land that is immovable but transferrable. Real estate investments can be classified into residential, commercial, and industrial. Even though the initial investment in real estate is more, it is one of the best ways for capital appreciation.
What are Real Estate Investment Strategies?
There are various beginner-friendly ways for real-estate investing in India. Following are the most common ones -
- Rental Property
Purchasing a rental property not only helps you build wealth over time with the appreciation of the asset but also secure a monthly income source for yourself. This investment could be in a single-family house, multi-family residence, warehouse or a commercial property. This can be used for renting out to others.
- REITs
REIT stands for Real Estate Investment Trust. These REITs run a number of real estate holdings warehouses, shopping complexes, residential building and hospitals. It is a type of business that manages and owns income-genrating real estate. It works in a manner similar to the share market. The investors can simply acquire REIT shares and earn profit from it without owning any physical real estate property.
What is Real Estate Tax in India?
Real estate tax refers to the tax levied on the gain from sale of a property, which is a capital asset. The gains from property sale are also known as capital gains.
Capital gains are the earnings derived from the sale of a capital asset - a residential house, business facility and a plot or land, when the sales price is more than the purchase price. These capital gains can be both short-term and long-term in nature depending on the time duration for which it was held. Long-term capital gains get taxed @20% depending on the tax bracket in which it falls.
The rental income earned from property is also taxed under the section 24 of the Income Tax Act in the hands of the owner. The rent received from leasing an unoccupied land is levied to tax under the head ‘income from other sources.’ The Indian income tax law allows a standard deduction of 30% on the rental income from the house property.
What are the Tax Benefits of Investing in Real Estate?
There are various advantages of investing in real estate. But it can be overwhelming to understand and discovering the potential solutions to your tax problems. Here is a list of the top tax benefits of investing in real estate -
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Home Loan Tax Benefits: If you invest in real estate by taking a loan, you can get multiple benefits on real estate taxes. Given below are some deductions you can claim on a home loan -
- Deduction on Interest Paid - If a home loan is taken for the purchase or construction of a house property then the assessee can claim a tax deduction. The interest on home loan EMI can be claimed as deduction from total income upto a maximum of Rs.2 lakhs. However, there is no upper limit for interest deduction on let out property.
- Deduction of Principal Repayment - The principal paid on the home loan EMI can be claimed as a deduction from the total income upto a maximum of Rs.1.5 lakhs. However, the house property should not be sold within 5 years from the sale date.
- Deduction for Stamp Duty - Apart from claiming a deduction for principal repayment, you can also claim stamp duty and registration charges under section 80C within the threshold limit of Rs.1.5 lakhs. However, these can be claimed only in the year of incurring the expense.
- Additional Deduction - The home buyers can also claim an additional deduction of Rs.50,000 under section 80E. However to claim this deduction, the loan amount should be less than Rs.35 lakhs and the property value should be less than Rs.50 lakhs and the individual should be a first-time home buyer.
- Additional Deduction u/s 80EEA - Section 80EEA allows homebuyers a deduction of a maximum upto Rs.1.5 lakhs. The stamp value of the property should not exceed Rs.45 lakhs, the individual should be a first-time homebuyer and should not be able to claim 80EE deduction to claim this deduction.
- Deduction for Joint Home Loan - If the home loan is taken jointly, then each co-owner can claim a deduction of upto Rs.1.5 lakhs under section 80C for principal repayment and upto Rs.2 lakhs under section 24B for interest on home loan.
- Standard Deduction: Standard deduction is a tax benefit provided on rental income in India. As soon as you buy a property, it is assumed that it will undergo repairs and maintenance. Even if there is no actual expense, you can still claim a deduction of 30% on the rental income.
- Depreciation: Depreciation can provide significant reduction in tax liabilities for homeowners. Real estate properties also suffer from wear and tear and require reinvestment in repairs and maintenance. The amount invested by the homeowner in repairs and modifications can be claimed as a deduction along with the depreciation.
In a country where property ownership is highly regarded, leveraging these tax incentives can prove to be a wise and strategic move for investors, ultimately making real estate one of the most attractive investment options in India. However, not everyone is aware of the benefits of investing in real estate. The best way to save taxes on real estate investment is to seek professional help.
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