Income tax is the tax that an individual must pay on their earnings. They provide significant money for the government and are critical to the proper operation of government operations. They are also required if the country is to advance economically and thrive. The tax is also calculated based on your income level. Yes, you heard it right! You and I must pay taxes.
Every year, we get reminded by the taxman, the chartered accountant, or our employers that it is tax season. Most likely, your reaction will not be as if you received the latest iPhone. Let’s be honest about it: most of us detest paying taxes. Also, at some point in our lives, we’ve all fantasized about living in a tax-free country.
Aside from the fact that taxes get perceived as a financial burden, a lack of awareness about tax preparation may add to the stress. The bulk of taxpayers have difficulty putting the tax-saving component into their investing equation. Perhaps it is time to begin teaching taxes to children while they are still in school, to prepare them for the inevitable as adults – taxes.
Real estate has long gotten regarded as one of the most popular investment vehicles among investors. The reason for this is that real estate has provided huge returns in a short period, throughout the first decade of the twenty-first century. However, persons participating in the real estate market are somewhat unaware of the taxes, particularly the Long Term Capital Gain (LTCG) tax. They are also unaware of the exemptions that the government provides to real estate investors. According to tax and investing experts, investors unaware of this levy may find themselves in hot water. The income tax statute allows for deductions for different investments, savings, and expenditures made by the taxpayer within a fiscal year.
Everyone wants to invest in a real estate property that will provide a consistent stream of income. Every one of us wants to invest in real estate that earns income rather than costs.
Also read: 8 Legitimate methods to reduce tax on your passive income from real estate!
But the problem is tax.
So, how can we smartly invest in real estate to save tax?
But, firstly, we must understand the tax laws applicable to real estate investments.
So, what are the taxes applicable to real estate investments?
Real estate tax laws are a crucial element of every venture. Investors are constantly on the lookout for high-yielding investment opportunities that are also tax-efficient. It is reasonable for investors to believe this since, in the end, even if you receive fantastic returns and pay half of the earnings in taxes, the investment is worthless. As a result, each investor must have a good understanding of the Tax Laws for Real Estate.
Real estate is regarded as a ‘Capital Asset’ under Section 2(14) of the Income Tax Act, 1961. Hence, capital gains are liable to ‘Short Term Capital Gain Tax’ or ‘Long Term Capital Gain Tax,’ depending on the situation.
Also read: Tax Laws for NRI Investments in India: Income Tax and Tax Complications
- Long-term capital gains: Long-term capital gains are when a property gets kept for longer than three years. Long-term capital gains benefit more from low tax rates than short-term capital gains. Long-term capital gains get taxed at a rate of 20%. Long-term capital gains are also ineligible for tax deductions. However, capital gains from the sale of any long-term asset can be claimed under Section 54EC if invested in notified bonds within six months after the asset’s transfer. Only income over the exemption limit is taxed if your total income is less than the exemption limit. Long-term asset losses can only get offset by capital gain income.
- Short-term capital gains: Real estate is more profitable in the long run since it also has tax advantages. Short-term real estate investment is not only dangerous, but it also necessitates more taxation. The income generated by short-term gains gets taxed at a rate of 30%. However, unlike long-term profits, short-term losses can potentially be offset by long-term gains.
Also read: How to Save Capital Gain Tax on Commercial Property Sale.
What are the real estate investment options to save tax?
- REITs: REITs are similar to mutual funds. Several investors combine their money to invest in real estate. However, the assets get managed by a designated Manager in both situations. However, the underlying asset of a REIT is generally real estate holdings or loans secured by real estate. REITs are also eligible for a few significant tax breaks in India that other forms of Real Estate firms are not. Interest and dividend payments received by a REIT via a Special Purpose Vehicle (SPV) are tax-free. In this sense, an SPV is a domestic firm where the REIT owns at least a 50% share. A REIT may possess 50% or more of a number of SPVs that own specific real estate properties on its behalf. Any revenue derived from renting or leasing real estate assets directly owned by the REIT (rather than through an SPV) is likewise tax-free.
Also read: Indian Income Tax Rules Favour REIT Investors To Earn High Profits.
- Fractional ownership: If you invest through joint ownership, you must pay taxes on rental income and capital gains on the sale of the property. You must pay the same amount of tax as if you were the only owner of the property. However, if you own a rental property with your jobless spouse, you can save tax by making a change. When a property is co-owned, income is taxed exclusively based on the ownership ratio specified in the property’s title deed. All property owners can claim standard deductions separately, allowing you to lower your tax burden. To lessen your tax burden, you can also invest through joint or fractional ownership. If you are searching for a fractional ownership project to invest in, Assetmonk can be your investing partner. We provide commercial real estate properties with rental revenue under our Return Category offerings, with an estimated rental yield of 8%.
- Crowdfunding: According to TDS, a person who makes a payment to another gets entitled to a tax deduction. If you invest in rental real estate, you can claim a 1% tax reduction on TDS on the entire amount paid by you at the time of investment. You can claim a TDS deduction on the interest paid by the property management or developers if you invest through crowdfunding. This deduction is available on annual interest payments over Rs. 5000.
Also read: Tax Implications on Real Estate Crowdfunding in India Made Simple: What You Need to Know
- Home loan: Investing through leverage is one of the most prevalent strategies to claim a deduction on your rental properties. When you borrow money to purchase a home, you can deduct the interest you pay on the loan. However, this deduction is only available for the acquisition of residential property and not for the purchase of a commercial property. Section 24(b) allows you to claim a deduction for interest paid up to Rs.2 lakh. However, the section’s advantages cannot get claimed before the construction gets completed. If you pay EMI during the pre-construction period, you may claim a discount in 5 equal payments when the building gets completed.
Also, read: Wanna save tax on your rental investment? Here is everything you should know!
One of the most crucial topics to address if you are a tax-paying citizen is how to lower your tax costs. All of these methods can be employed to lessen the overall taxable amount for a given fiscal year. Other ways to earn a tax break also include purchasing a life insurance policy. It is vital to understand how to minimize taxes. It is also important to examine alternative possibilities to maximize your earnings in addition to the deductions. Real estate is one of the better possibilities since owning a home is a dream for many people. Real estate is also a long-term financial investment that grows in value over time.
