Beyond Returns: The Hidden Tax Advantages of Real Estate in India

The real estate sector in India has long been favoured as one of the most opportune investment avenues. Whether you are looking for long-term financial stability, a stable route for generating passive income, or capital appreciation, real estate is the ideal destination. However, another reason that often gets overlooked while investing in real estate is the numerous tax benefits associated with investing in real estate in India.

This is especially true when it comes to making real estate investments as the financial year comes to an end, as this is the time of year when investors are looking for investments that optimise their tax positions. Let us discuss a few of the top tax benefits of investing in real estate.

1.  Depreciation

A major benefit of investing in real estate is that one can claim depreciation on the property, which allows them to deduct a part of the property’s value over time. This is doubly ingenious because while an opportune investment’s property almost appreciates over time, the elements of the property, like its structural components, fixtures, etc., lose value. By engaging a surveyor who can comprehensively curate a depreciation schedule, investors can leverage this to potentially claim depreciation as a tax deduction. In addition to this, any amount spent on maintenance and repair can also be claimed along with depreciation, culminating in a powerful tax minimization strategy.

2. Negative Gearing

Another way in which investing in real estate can be beneficial in reducing tax liabilities is by utilising a strategy called negative gearing. As per this strategy, the investor intentionally allows the cost of owning a property to exceed the rental income generated from it. This cost can include interest on home loans, depreciation, maintenance, etc. This in turn creates a negative cash flow ecosystem that can be leveraged for tax deductions. For instance, when it comes to the interest paid on the loan on the purchase of a real estate asset, it can be deducted from the tax the investor is liable to pay.

3. Prepaid Expenses

Discerning investors can also benefit from investing in real estate by paying certain expenses related to it in advance. These expenses can include property insurance premiums, property management fees, certain service contracts, etc. By paying these expenses before the end of the financial year, investors can claim deductions on their taxable income. While an amateur investor might consider prepaying expenses to cause issues with optimum cash flow, it can actually be a very strategic way of managing and planning the needed funds. It is critical that these payments be made before the financial year concludes so that the deductions are applicable for the current reporting year.

4. Home Loan Tax Benefits

When you purchase a residential asset using a home loan, you are also liable for numerous tax benefits. Some of them are:

Interest on Home Loan
If a home loan is undertaken for the purchase or construction of a residential asset, then tax deductions can be claimed up to a maximum of Rs 2 lakh from the total income. However, if the property is being leased out, there is no upper limit on the amount of interest paid that can be deducted from the taxable income.

Principal Payment
The principal amount paid as an EMI for a home loan is also deductible up to Rs 1.5 lakh, but only if the property is not resold within 5 years of the initial sale date.

Stamp Duty and Registration Charge
Under Section 80C, an amount of up to Rs 1.5 lakhs can be deducted when incurred on stamp duty and registration charges, but only if it is claimed in the year the expenses are incurred.

Joint Home Loan
If a home loan is undertaken on a joint basis, Section 80C allows each party to claim up to Rs 1.5 lakhs of the principal amount. Further, Section 24B enables each party to claim up to Rs 2 lakh on a home loan’s interest.

In the realm of Indian real estate, the approaching end of the financial year becomes a strategic gateway for investors to unlock substantial tax benefits. From leveraging depreciation and intentional negative gearing to prepaying expenses and capitalising on home loan perks, real estate emerges not just as a wealth-building asset but as a tax-efficient powerhouse. This synergy of financial growth and astute tax planning underscores the integral role of real estate in driving comprehensive financial success for discerning investors in India.