Whether you buy, sell, or invest, real estate offers plenty of tax-saving options to the savvy investor. Real estate investors, especially those investing for the first time, can sometimes be a bit behind the curve on finding ways to save tax.
Let’s deep dive into how to save taxes on buying or selling any real estate asset in India.
Most houses in India are home loan purchases. If you take out a home loan on a self-occupied property, you can claim a tax deduction under section 80(C) corresponding to the principal amount you pay back on your loan.
A property is considered self-occupied if:
Section 80(C) also includes stamp duty and registration fees that you pay on your home.
Another benefit is section 24, which allows the interest on a home loan to be deducted from taxable income. For self-occupied property, this deduction can be up to ₹2 lakhs in a fiscal year.
A slightly lesser-known IT act provision that allows deductions up to ₹1.5 Lakh is Section 80EE, which applies to affordable homes (homes under the affordable housing scheme) purchased by first-time buyers.
Under sections 24 and 80EE combined, a maximum deduction of ₹3.5 lakhs can be claimed subject to:
The asset falling under affordable housing segment
The owner being a first-time home buyer
If you plan to co-own the house with someone, these benefits can be split up in proportion to the ownership share of each of the owners.
Selling a piece of land held for less than three years attracts short-term capital gains, whereas after three years it attracts long-term capital gains.
To offset capital gains, consider buying rural agricultural land. Agricultural land in a rural area does not classify as a capital asset, and does not attract capital gains tax. Urban agricultural land, however, is a capital asset upon which the extent of its holding period determines capital gains tax.
Long-term capital gains from an asset other than a house property can be exempted under section 54F subject to:
Proceeds from the sale being used to buy a residential flat or house less than two years from the date of sale.
The residential investment is made more than six months after the sale of land, with the amount deposited in a capital gains account with a bank.
Short-term capital gains are taxed as per applicable rates with no exemption under the IT Act.
You can claim indexation on long-term capital gains from the sale of your residential property. Indexation is the property price adjusted for inflation, effectively reducing your capital gains.
You can get capital gains reduced further by claiming expenses made on upkeep and renovation of the property. The condition is that
You (the owner) occupy the house for more than two years
You hold receipts to all the expenses you wish to claim.
Bonus tip: You can even mark any brokerage fees as a deduction at the time of sale.
The other mantra to have capital gains waived off on sale of property is: reinvest.
Invest proceeds from the sale of your property in another residential property to claim a deduction under section 54.
If you decide to buy a ready-to-move apartment or flat in India, it should be one year prior or two years after the sale. If you go for an apartment or flat for sale that is under construction, ensure the delivery falls within three years from the date of sale.
A caveat here is that there should be no more than one property registered under your name over and above the one newly purchased.
Let's say you make the sale but aren't keen on reinvesting in property.
What next? Do you lose out on advantages under section 54?
No!
You can still claim a rebate by investing in what are called 'Capital Gains Bonds.' This is a special bond category designated by the govt. whereby the investor can claim rebates under Section 54EC.
Keep in mind that section 54 EC mandates an investor to:
Invest within six months of the sale of any property
Conform to a lock-in of 5 years
Invest no more than Rs. 50 Lakhs in bonds
Capital Gain Account Scheme (CGAS) – Another option for saving capital gains tax is the CGAS. Public banks in India offer a unique CGAS scheme allowing investors to claim exemptions on capital gains up to a maximum of three years. CGAS is mostly deployed to park capital for a relatively short term before investing in other sections like 54/ 54F.
Real estate can be a complex terrain without knowing how to invest and maximise returns. If you plan to make the best of residential and commercial real estate in Noida, NCR, Pune, and other top Indian cities, with practical advice that helps you plan you ace the tax game, please feel free to get in touch.
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