Investing in Indian Real Estate is not only a great way to diversify your assets and increase wealth but also a way to save on taxes. The Government of India has made a lot of tax incentives available to encourage real estate investments especially for first time home buyers or investors of rental properties.
Maximizing tax benefits via property investment not only means reducing taxable income but also lower financial burden and creates long term financial goals. So let us explore how one can do that.
Tax Deductions on Home Loan Interest (section 24)
The most important tax benefit while investing in property is tax deduction on the home loan interest taken to buy a home or construct a home for self occupation. The benefit can be claimed up to ₹2 lakh per financial year.
However if the property is to be rented out, then there is no upper limit on interest deduction but overall loss from a residential property that can be set off against income is capped at ₹2 lakh per financial year. The remaining can be carried forward for up to 8 years against future income.
How to maximize tax benefit?
- Ensure construction of the property is completed within 5 years from the end of the financial year in which the home loan is taken or else the benefit limit reduces to ₹30,000.
- Joint home loans can be very beneficial as you and your spouse can both claim a deduction up to ₹2 lakh per financial year, effectively doubling the benefit.
Deduction on Principal Repayment (section 80C)
The principal amount paid towards your home loan is also eligible to be claimed for tax deduction under section 80C of the Income Tax Act. However, this section includes the deduction for life insurance premiums, Employee Provident Fund EPF and Public Provident Fund PPF and the combined deduction is capped at ₹1.5 lakh.
How to maximize benefit?
- Start early. Since section 80C includes multiple tax saving instruments, you can combine all and fully utilize the 1.5lakh limit.
- If you invest in a second home and obtain a home loan for the same, the principal amount paid for it is also eligible for tax savings under the combined benefit of 80C.
Deduction for First Time Homebuyers (section 80EE & 80EEA)
The Government allows a deduction capped at ₹50,000 under section 80EE for first time home buyers on the interest paid on the home loan as an initiative to encourage home ownership. However, certain conditions must be met:
- The value of the home should not exceed ₹50 lakh.
- The loan amount must not exceed ₹35 lakh.
- The loan should have been sanctioned between the period of April 1, 2016 and March 31, 2017.
Additionally, section 80EEA offers a deduction of up to ₹1.5 lakh for first time home buyers buying property worth a maximum ₹45 lakh. In this case the loan has to have been sanctioned between April 1, 2019 and March 31, 2024.
How to maximize the benefit?
- If you are a first time home buyer carefully evaluate the home value and loan amount to fit above criterias.
- Combine deductions under section 24 and 80EE/EEA to maximize tax savings.
Tax Benefits from Renting Your Property
Apart from the benefits mentioned under section 24, there is one more deduction that can be claimed if you are renting out your property. A standard flat deduction of 30% of the annual rental income is allowed to cover the expenses such as maintenance, repairs and other property related costs.
How to maximize the benefits?
- Ensure you calculate and report the annual rental income accurately.
- If the home loan interest exceeds the rental income, the loss can be set off against other incomes like salary to a maximum of ₹2 lakh per financial year. The remaining can be carried forward for up to 8 years.
Capital Gains Tax Exemption (section 54 and 54EC)
The profit earned on selling a property is taxable and is considered capital gains. This however offers certain exemptions:
- Section 54: If you sell a residential property and reinvest the proceeds in another residential property within a span of two years or construct one within 3 years, then you can claim the exemption. This applies only to long term capital gains where a property is held for at least 2 years.
- Section 54EC: Alternate to the above is reinvesting the capital gains in Government specified bonds such as REC and NHAI within six months of the sale with a maximum investment limit of ₹50 lakh.
Tax Deductions on Stamp Duty & Registration Fees (section 80C)
In addition to above mentioned deductions included under section 80C, it also allows tax deductions for stamp duty and registration charges paid for buying the property. These two are significant expenses, so make sure you include these in your calculations for tax benefits.
However, this will also come under the combined limit of ₹1.5 lakh as stated above.
Hence apart from property value appreciation, investing in real estate carries a wide array of tax benefits. One has to understand and utilize the various sections of income tax well and significantly reduce the tax burden. It is advisable to consult a tax professional or financial advisor to fully explore options to maximize your tax benefits via property investment.
