Real estate investments are considered one of the safest investment options amongst Indian investors. From our forefathers to now, investment in real estate remains the favourite investment and the loyalty of Indian investor for real estate has remained unchanged. For any investment, it is a natural tendency to look at the return on investment and also the tax implication on the same. The tax implication of investment in real estate is of equal importance and here are the various scenarios discussed:
AT THE TIME OF BUYING A PROPERTY
There are no taxes involved at the time of buying a property. But one has to pay registration charges and stamp duty at the time of buying a property. Also, in order to provide some relief to buyers, when an certain income-tax exemptions available to investors for the purchase of property, if the property is taken on loan.
Under Sec 80C an individual can claim tax relief of Rs 1, 50,000 towards the repayment of principal of the loan.
Under Sec 24(B) an additional tax exemption of Rs. 2, 00,000 is allowed for interest payment of loan.
FOR EXISTING PROPERTY OF AN INDIVIDUAL
For the existing property of an individual and any income derived from it, he is liable to pay tax on it. The income from such a property is calculated under the head of income from house property.
Income from house property can be categorized as under
- Income from self-occupied property
- income from let out property
For a self-occupied property, as the owner is residing in that property, he does not get any financial benefit from the same. Hence, his income from such a property is considered nil. Only one property per individual is allowed as self occupied property.
Income from let out property will be the income received as rental income. Such income received will be taxed under the head of income from house property.
The computation of tax for such an income from house property is as under:
Gross Annual Value of the property
(Less) Muncipal Taxes
=Net Asset Value (NAV)
(Less) 30% Standard Deduction of NAV
(Less) Loan Interest
For a self-occupied property, the gross annual value is zero and for a let out property it is the actual rent received.
AT THE TIME OF SELLING A PROPERTY
Capital gain tax is levied at the time of selling a property on the profits arising from such sales.
Capital gain tax is classified as into 2 types:
- Short-term capital gain tax
- Long-term capital gain tax
If you sell your property within 3 years of purchase ( changed to 2 years from April 1, 2017), then the profits arising from such the sale is known as short-term capital gain and you are liable to pay short-term capital gain tax which is added to your income slab and taxed as per it.
If you sell your property after 3 years( changed to 2 years from April 1, 2017), then the profits arising from such a sale is known as long-term capital gain and you are liable to pay long-term capital gain tax at a fixed rate of 20%( plus cess and surcharge) after indexation benefit.
The capital gains are calculated as under:
For short-term capital gain
Sale Value
(Less)Acquisition/purchase price
(Less)Cost of improvement
(Less)Expenses incurred on Transfer/sale
The short-term capital gains is added to the income of the assessee and taxed as per his income tax slab.
For Long- term capital gain tax cal
Sale Value
(Less) Cost of acquisition with Indexation benefit
(Less) Cost of improvement with Indexation benefit
(Less) Expenses incurred on transfer/sale
However, one can save on taxes on the entire earnings derived from long-term capital gain by:
- If an individual uses the entire proceeds to buy a house one year prior to the date of sale or within 2 years from the date of sale. For under construction property the time period is 3 years.
- Bonds specified by the government such as bonds of NABARD, NHAI, NHB, RECL. etc.
- Deposit the proceeds in Capital gains accounts scheme and use it for purchase or construction of new residential property within specified time limit.
In case of losses suffered by an individual at the time of selling his property, the same can be set-off against long or short term capital gains in the same year and if it cannot be set off in the same year, then it can be carried forward for 8 years.
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