Proceeding towards the second half of the financial year when most of us tend to plan our investments, looking out for multiple options to save on their income tax. There are several such instruments as the Public Provident Fund (PPF), Insurance, National Savings Certificate (NSC), etc that help us save on taxes. But very few know today to be that investing in property too can help in saving up on the Income Tax.
During the last budget session, The Government of India had brought in some new property-related policies in order to encourage the commoners to invest more in the realty sector and save on taxes.
Let's discuss a few tips that can help us save on income tax by investing in real estate:
4 WAYS TO SAVE TAX BY INVESTING IN REAL ESTATE
- Invest in a Second property:
Experts suggest that investing in a second property beside a previously owned property is always a viable option for tax exemption. However, one should also be aware of the second property being not only used for self-occupation but rental purposes as well. You may also invest in a commercial property for renting the same. The advantage of investing in a second property is that the tax exemption you obtain for interest is on the loan without an upper limit. There is no exemption for repayments on the principal amount when a home loan is taken for a second home. Yet, the interest paid on the second home loan is exempted from the taxable income and there is no such upper limit to the amount that can be exempted.
If more than one borrower avails the loan, all the joint borrowers are eligible for exemption on the interesting part individually. Further, the interest paid during the period of construction of the second home is also exempted from tax up to 20 per cent of the total interest paid during this period.
- Exemption for long-term capital gains
Before understanding tax exemption, one should be well aware of capital gain. Capital gains are profits that are obtained by disposing of capital assets such as real estate, stocks or bonds.
A property that is held for 3 years or less attracts the Short-Term Capital Gain (STCG) when sold at a certain profit. The gain from its sale is added to the taxpayer’s income and is taxed as per the income tax bracket one falls under.
However, the income tax department does allow an exemption for long term capital gains. The taxpayer is liable to pay Long Term Capital Gain (LTCG) if he/she holds property for more than 3 years before selling it. Since the LTCGs are very large, there are several provisions available to reduce the tax burden arising from these transactions. Tax exemption may also be obtained by reinvesting the capital gains in other capital assets within a specific time period. The previous budget had increased this time period from one year to three years, which means that we have three years to reinvest our capital gains into other assets without being taxed. Hence, the best option will be to reinvest the gains in an apartment, house or a piece of the residential plot.
- Tax exemption on a home loan
Tax exemption on home loans comes as a boon for those people who want to own a property in today's times. For the first home, both the ‘repayment of principal amount’ and ‘payment of interest’ are easily eligible for tax benefits. ‘Repayment of principal amount’ makes one eligible to claim a deduction up to the sum amount of Rs 1,50,000 under Section 80C; and further benefit us, immaterial of the fact whether we stay in the same property ie, Self Occupied Property – SOP or have let it out on rent, ie, Let Out Property – LOP.
- Investing in REITs
This option is not yet available in our country, hence it may not help us immediately. But, given the government’s effort to boost the country’s real estate sector with its emphasis on REITs (Real Estate Investment Trusts), this option may soon become a reality. An investor with a budget as low as Rs 2 lakh can make property investments easily via REITs. Studies suggest that regulators are currently working on creating a platform for investors to invest in REITs. REITs have recorded a huge success rate globally by channelising most of the savings into properties. Hence, REIT is expected to enjoy a favourable tax regime and an overall slab of reduced taxes for taxpayers.
One can contact a financial advisor or an expert in tax laws to understand more about saving on income taxes by investing in properties. 