Individuals planning to invest in any sector primarily focus on tax-saving instruments in order to reduce the tax burden. Several tax-saving tools like Public Provident Fund (PPF), Insurance, National Savings Certificate (NSC), etc., are some available options to choose from. However, investors will be happy to know that property investments can also help save taxes.
With an aim to increase property investments, the Government of India rolled out a number of property-related policies in its latest budget session. This will encourage individuals to invest more in real estate. So, individuals can start investing and calculate their due taxes seamlessly by using an income tax calculator.
What are the 4 best ways to save tax by investing in property?
Before investing in a property, one should follow certain tips that will help save maximum income taxes.
Consider investing in a second-hand property
From a tax exemption point of view, it is practical to invest in a second-hand property compared to a new property investment. Individuals can buy a commercial property on loan and use it for rental purposes. By doing so, one can obtain tax exemption on the interest of that loan without an upper limit. However, there is no exemption on repaying the principal amount of a loan for a second-hand property.
Note: Joint loan borrowers are also exempt from taxes based on the interest part of the loan.
In addition, individuals who pay the interest amount of a loan during the construction period of a second-hand property can get a tax exemption of up to 20% of the total interest paid.
Exemptions for long-term capital gains
Profits arising from selling a capital asset like real estate, stocks or bonds are capital gains. Therefore, individuals holding property for 3 years or less will need to pay Short-term Capital Gains Tax (STCGT) when sold at a profit. The profit from this investment is added to a person’s income and taxed as per the Income Tax bracket he or she falls under. However, taxation on STCG is not eligible for tax exemption.
On the other hand, properties held for more than 3 years attract a Long-term Capital Gains Tax (LTCGT). As these taxes are huge, several provisions are available to reduce the tax burden resulting from these transactions. So, property owners can enjoy tax exemption by reinvesting the capital gains in other capital assets within a certain period.
Home loan tax exemption
First-time home buyers can enjoy tax benefits on repaying both the principal and interest amount of a loan. On repaying the principal loan amount, one can claim a tax deduction up to Rs. 1,50,000 under Section 80C of the Income Tax Act. This benefit is available irrespective of the purpose of buying a home.
As per Section 24(b) of the Income Tax Act, a person investing in Self-Occupied Property (SOP) can enjoy tax reduction up to Rs. 1,50,000 – Rs. 2,00,000. However, individuals purchasing a property for rent can get tax benefits on the interest paid without any maximum limit.
Besides tax calculation, one should be aware of the EMI burden on obtaining a home loan. Therefore, borrowers can use an EMI calculator for home loans and get details regarding their monthly instalments. It will additionally help them reduce financial liability.
The Government plans to boost the real estate sector by emphasising Real Estate Investment Trusts (REIT). Investors on a lower budget can buy properties with the help of REITs. Such an investment can be an excellent way to save taxes on property investments.
So, individuals planning to invest in properties in recent years can consider going through this piece for tax-saving tips. This way, they can reduce their financial burden and have enough funds for future expenses.