The real estate market in India is booming, with a myriad of growth prospects for the years to come. In the current year, the market stands at a whopping USD 265.18 billion and is anticipated to reach USD 828.75 billion by 2028, growing at a CAGR of 25.6%, according to a study by Mordor Intelligence. Despite this current growth after the pandemic, real estate has always been a safe haven for investors to earn a long-term profit. Similarly, for developers, it is a lucrative avenue as it provides several opportunities to not only showcase modern architecture but also earn a hefty ROI (return on investment).
However, profits earned also attract relevant property taxes that an individual or a limited liability company has to pay to the government. In the event of avoiding this payment, it further attracts a fine and, in some cases, strict legal action. Despite all these circumstances, one can always save tax if they have the right strategies at their disposal. This article discusses some of the smart tax strategies that could help investors and developers save money on taxes.
Smart tax-saving strategies
If you are a real estate investor or developer, then you might have to pay several taxes, including municipal corporation tax, goods and services tax (GST), stamp duty, registration charges, and more. With a myriad of taxes, it becomes daunting for an individual to devise a perfect strategy for any specific tax. However, with the amalgamation of different smart strategies, a collective positive result can be attained.
Also Read: 5 things you must do after buying a house
Saving on depreciation
While real estate can provide astonishing appreciations in value, it is still subject to depreciation. Therefore, investors as well as developers use this strategy to save taxes on their respective properties. Depreciation can be used to show the loss of value of a property, which can significantly reduce the taxable income for investors as well as developers. Actual utilisation of the depreciation deductions helps individuals not only save tax but also retain a large proportion of their earnings. According to the Income Tax Act, the annual depreciation rate for residential properties is 5%, and for non-residential developments, it is 10%.
Benefits of joint ownership
Another strategy that can be lucrative for investors as well as real estate developers is jointly owning a property. When a property is jointly owned by co-owners and is on a home loan, Section 80C of the Income Tax Act provides relief up to Rs. 1.5 lakh. Moreover, if the co-owners are earning a rental on the given property, they can divide the rental or the capital gains earned in such a manner that it would reduce their overall tax liability. This strategy can be more beneficial if the other owner falls under a low tax bracket.
Investing in agricultural land
Agricultural land in India is not only a lucrative tool for investment but can also be a good purchase strategy to reduce taxes for investors. This is due to the fact that there is no capital gains tax imposed on the sale of such property, as agricultural land is not classified under capital assets, according to Section 54 of the Income Tax Act. This is the reason that this particular type of land is lucrative in terms of both earnings and tax savings. Apart from these benefits, the owners can further utilise the land for additional benefits through either organic farming or fractional holdings, which can be a passive source of income.
Strategic investments
For investors and developers alike, it is critical to time their investment so as to avoid any additional taxes. For those who are short-term buyers and sellers, consideration of the tax deadline is crucial to avoid any late penalty. Moreover, the timing of the purchase of the building material or addressing any repairs early in the year is also essential for the developers, as these tasks attract immediate tax deductions. One good strategy is to invest in 54EC bonds, which can help investors get deductions up to Rs 50 lakh on capital gains from the sale of flats. However, one must only purchase the 54EC bonds, which are issued by the Rural Electrification Corporation (REC) and the National Highways Authority of India (NHAI), to avail of the benefits.
All things considered
Real estate has been providing stability to its investors for a long period of time, with rapid appreciation in value, rental prospects, and long-term reliability. However, with big capital gains come a number of taxes that can be daunting for property sellers. In a bid to significantly reduce these taxes, one can follow different strategies, including depreciation deduction, investing in agricultural land, jointly owning a property, and strategically timing their investment.
The real estate landscape is poised to grow in the near future. The ones who are ready to invest in the properties must not only know their taxes but also these strategies to maximise their income. In case of any issues with tax planning, it is advised to always get in touch with an expert or use an automated tax solution for simplifying their tax paying process.
(By Kapil Rana, Founder of Hostbooks. Views are personal)