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From Property to Profits: Unlocking Tax Savings on Residential Real Estate in India

Blox Social
Posted on
Nov 16, 2023

Holding residential real estate for an Indian is not only about security and a comfortable residence but also as a possible opportunity for saving on taxes. If property in a country is expensive to own, knowledge on how to save tax in the housing economy can open doors to numerous financial prospects.

In this comprehensive guide, we discuss customized approaches appropriate to the Indian setting and how your house can be more than your own home and help you save tax on residential property.

  • Taking advantage of an existing home loan tax benefit

The home loan tax benefit offered to homeowners in India is one of the opportunities to save tax on residential property available. You could also claim deduction under section 24 and section 80C of the Income Tax Act for the interest and principal repayment of your home loan respectively. This means that you can claim upto Rs.2 lakhs interest component of your home loan under section 24 whereas you can also claim upto Rs.1.5 lakh principal repayment under section 80 C. This means that you will be able to pay less by making use of these deductions.

  • Deductions and Tax Credits

Saving tax on residential property requires important deductions and credits. Besides home loan deduction, other expenses include property tax, home improvement costs, and home office expenses. Further, certain expenditure you may undertake on the premises such as an interest on loan which was used in repairing or refurbishing, falls within section 24 (b)

For those looking to make energy-efficient upgrades, the Residential Energy Efficient Property Credit is also available in India.

  • Affordable Housing Tax Benefits

The Indian government is actively promoting affordable housing. Under Section 80-IBA, developers constructing affordable housing projects can avail tax benefits. As a homeowner, this can indirectly benefit you as well. The government's focus on affordable housing may lead to more affordable and tax-advantageous housing options in the market.

  • Rental Income and House Property Tax Benefits

Rental income has the potential to be a significant source of income for Indian real estate investors. But it's crucial to comprehend the tax ramifications. While interest paid on loans obtained for the property may be written off under Section 24(a), rental income is still subject to taxation. In addition, you can lower your taxable rental income by deducting municipal taxes and a standard deduction of 30% of the property's net annual value.

  • Capital Gains Tax Considerations

When selling a residential property in India, it's crucial to understand Long-Term Capital Gains (LTCG) tax implications. According to Indian tax regulations, gains arising from the sale of a property held for more than two years are considered long-term capital gains.

To avoid paying capital gains tax, consider reinvesting the proceeds in another residential property. Section 54 allows you to seek an exemption from long-term capital gains tax if you invest in another residential property within two years. Furthermore, if you use the earnings to buy a new residential property within the time restriction specified, you can avoid paying capital gains tax under Section 54F.

  • Utilize Tax Professionals

India's tax laws can be complicated to navigate, therefore speaking with a tax expert is usually advised. You may maximize your deductions, find opportunities, and make sure you're following all tax regulations with the assistance of an experienced tax expert. They can also assist you take advantage of various tax advantages and structure your investments to minimize your tax liability.

  • Maintain Impeccable Records

In the context of Indian residential real estate, proper record-keeping is of utmost importance. Keeping organized and detailed financial records is essential for maximizing your deductions and credits while reducing the risk of an audit. It's important to maintain documents related to property transactions, rental income, and expenses, and home loan-related documentation.

In India, saving on taxes through residential real estate is not just a possibility but a financial strategy that can lead to substantial savings. By leveraging strategies like the Home Loan Tax Benefit, deductions and tax credits, understanding affordable housing tax benefits, rental income management, and capital gains tax considerations, you can unlock a world of opportunities to minimize your tax liability.

Furthermore, consulting with tax professionals and maintaining impeccable records will ensure you're well-prepared to navigate the complexities of tax savings on residential real estate in India. With every rupee saved on taxes, you can invest further in your property or secure your financial future. So, whether you're a homeowner or a real estate investor, embrace these tax-saving strategies and watch your property transform from a mere dwelling into a source of enduring profits and financial security.

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