Tax laws for Real Estate Investments – A deeper look
Taxation is an important aspect of any investment. Investors are always on a search for well rewarding investment options, and also that don’t hurt too much with taxes. It is fair enough for investors to think so because ultimately, even if you earn good returns and pay half the profit as taxes, the investment is of no good. Hence any investor must have a fair amount of knowledge concerning the taxes involved.
When it comes to Real estate, a traditional investment vehicle in India, over the years, has been considered one of the safest and reliable investment options. Along with capital appreciation, it also generates regular income in the form of rentals, which makes it even more lucrative. Like any other investment option, Real Estate investment is also taxed, and there are laws for its taxation. Buying, selling, or even flipping of the real estate property attracts taxes according to the government's predefined laws.
The tax laws pertaining to the real estate investments are discussed below.
Tax on Rental Income
Rental income is taxed under the head income from house property. Rent received from both the residential property and commercial property is taxed under this head. The property is taxed based on the annual value of the property that is determined from the rent received or that is expected to be received from a property, whichever is higher. However, you are allowed to deduct the municipal taxes payable for the property, and also claim a deduction for the rent which you have not yet realized, on fulfillment of certain conditions. You obtain the annual value of the property from which you are allowed a standard deduction of 30% to cover the expense for repairs, etc.
Long Term Capital Gains
When the property is held for more than three years, the income generated is regarded as Long-term capital gains. Long term capital gains are benefitted by low tax rates than short term gains. Long term gains are taxed at a rate of 20%. Also, you cannot claim tax deductions on long-term capital gains. But, capital gain from the sale of any long-term asset can be claimed under Section 54EC by investing in notified bonds within six months of its transfer. If your total income is below the tax exemption limit, only income above the exemption limit is taxed. Losses from long-term assets can be set off only with capital gain income.
Short Term Capital Gains
When considered for the long term, real estate is more beneficial as it also enjoys tax benefits. When you invest in real estate for short, not only is it risky, but also you will have to pay more taxes. The income received from short term gains is taxed at a rate of 30%. But unlike long term gains, the short term losses can also be set off using long term gains.
TDS on Sale of Property
Investors need to consider specific rules when buying, selling, or renting out a real estate property. They need to deduct TDS at the rate of 1% of the property value if the property’s value is above INR 50 Lakh. The buyers have to withhold TDS from the price payable to the seller. On the sale of the asset, the buyer will deduct TDS from the amount payable to the seller.
Considering these tax rules before investing in the Real estate will help the investor make the right investment decision. Proper knowledge about all the rules and regulations, along with the taxation rules, is essential for an investor to avoid any unexpected loss. Though you make not be able to avoid taxes, you will be able to make better choices of investment. Investing with awareness about tax laws will allow the investor to make smart moves regarding their investment.
Yes, rental income is taxable. However, if your annual income including the rental income is within the income bracket which exempt from tax payment then you don’t have to.
The capital gains tax in India on property sale is calculated at a rate of 20.8% which is considerably less than the short term returns in real estate.
No, the payment of the capital gains tax can be done before the due date of that particular quarter.
Yes, short term capital gains are added to the total income earned by an individual and then taxed.
The buyer of the property must pay the TDS of a certain percentage on the total amount paid as a consideration on the sale property.
TDS of 1% on the amount of sale consideration to be paid by the buyer is calculated as the TDS applicable.