4 Ways to save Tax by Investing in Property It is that time of the year when most people would have already planned their investments or would be looking at multiple options so as to save on their income tax. There are several instruments such as Public Provident Fund (PPF), Insurance, National Savings Certificate (NSC), among many others available that help you save on taxes. It may come as a surprise for many that investing in property too can help save on Income Tax. The Government of India, in its last budget session, brought in new property related policies in order to encourage the common man to invest more in the realty sector and save on taxes. Hence, here are few tips that can help you save on I-T by investing in property. Invest in a Second property Tax experts cite that investing in a second property besides a previously owned property is a viable option from the point of tax exemption. However, you should be aware that the second property must not be for self-occupation, but for rental purposes. You may also invest in a commercial property for the purpose of renting it out. The advantage you have in investing in a second property is the tax exemption you obtain for interest on the loan without an upper limit. In the case of a second home for which a loan is taken, there is no exemption for repayments on the principal amount. However, interest paid on the second home loan is exempt from taxable income and there is no upper limit to the amount that can be exempt. Additionally, if more than one borrowers are availing this loan, all the joint borrowers are eligible for exemption on the interest element individually. Further, the interest paid during the period of construction of the second home is also exempt from taxation up to 20 per cent of the total interest paid during this period. Exemption for long-term capital gains Before understanding the tax exemption, you should know what a capital gain is. Capital gains are profits obtained on disposing capital assets such as real estate, stocks or bonds. A property that is held for 3 years or less attracts Short-Term Capital Gain (STCG), when sold at a profit. The gain from its sale is added to the tax payer’s income and taxed as per the income tax bracket he falls under. For instance, if a tax payer falls under the tax slab of 30 percent, the STCG will also be taxed at the rate of 30 percent. The tax on STCG however, is not eligible for any type of exemption.
On the other hand, the income tax department allows an exemption for long term capital gains. The tax payer is liable to pay Long Term Capital Gain (LTCG) if he holds a property for more than 3 years before selling. Since the LTCGs are usually very large, there are several provisions available to reduce the tax burden arising from these transactions. Tax exemption may be obtained by reinvesting capital gains in other capital assets within a specific period. The previous budget increased this period from one year to three years. This means that you have three years to reinvest your capital gains into other assets without being taxed. Since the country’s real estate is booming, the best option is to reinvest the gains in an apartment, house or a piece of residential plot. Tax exemption on a home loan This comes as a boon for people who want to own a property in the fast growing Indian real estate sector. For the first home, both, ‘repayment of principal amount’ and ‘payment of interest’ are eligible for tax benefits. ‘Repayment of principal amount’ makes you eligible to claim a deduction up to a sum of Rs 1,50,000 under Section 80C; and that benefit is available with you immaterial of the fact whether you stay in the same property (Self Occupied Property – SOP), or have let it out on rent (Let Out Property – LOP). As far as the ‘payment of interest’ amount (for the loan amount availed) is concerned, it’s available for deduction under Section 24(b). In the budget announced in July 2014, the new Government increased the deduction limit on interest payment of a home loan on a selfoccupied property from Rs 1.5 lakh to Rs 2 lakh. However, if you have let out the property on rent (LOP), then the actual interest payable is eligible for deduction, thus not being subject to any maximum limit. This applies even in the case where you have two home loans for two different properties, where one is self-occupied and the other is let out on rent. Investing in REITs This option is not yet available in our country, hence it may not help you immediately! However, given the government’s interest to boost the country’s real estate sector and its emphasis on REITs (Real Estate Investment Trusts), this option may become a reality very soon! An investor with a budget as low as Rs 2 lakh can make property investments via REITs. Moreover, the regulators are currently working on creating a platform for investors to invest in REITs. As such, REITs have seen success on a global scale in channelizing huge savings into properties. Hence, REIT is expected to enjoy favourable tax regime and overall reduced taxes for tax payers. You can contact a financial advisor or an expert in tax laws to understand more options in detail about saving on income taxes by investing property. Source: CommonFloor.com For Latest Updates on Real Estate Updates, Property News and Cities Infrastructure Developments Visit: http://www.commonfloor.com/guide
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