Synopsis: Owning a property provides security and acts as a long-term investment. Selling a property at a high price feels great and brings profit to the owner. However, many are not aware that certain property tax saving tips can help provide tax benefits.
Real estate has been a major investment option for major Indian households but year after year, a large number of property owners overpay taxes because they are unaware of the deductions and exemptions available to them under Income tax act, 1961. From section 24 to 54, the law offers meaningful relief that goes beyond standard home loan interest deduction. Let’s look into the tax benefits Indian property investors use:
1. 30% Standard Deduction on Rental Income Under Section 24(a)
The rental income is taxable under the head “income from house property” when a property is rented out. However, a flat 30% standard deduction on the NAV of the rented property under Section 24(a) is applicable. If your property earns a NAV of INR 5 lakh, you can automatically deduct INR 1.5 lakh before computing taxable rental income. For self-occupied property, the NAV is considered zero, so this deduction does not apply.
2. Home Loan Interest Deduction
Under the old regime, a homeowner can reduce their taxable income by up to Rs. 3.5 lakh every year. A homeowner can deduct up to ₹2 lakh on home loan interest for a self-occupied property under Section 24(b) and up to ₹1.5 lakh on principal repayment under Section 80C. For let-out properties, the interest deduction is uncapped, but losses from house property are limited to ₹2 lakh for set-off against other income. Under the new regime, deductions for home loan interest on self-occupied property is generally not allowed. Interest can only be claimed if the property is let-out or rented, where the loss can be set off against other income up to ₹2 lakh.
3. LTCG Exemption Under Section 54 and Section 54F
Section 54 allows you to claim exemption on LTCG if you reinvest the gains in another residential property within two years of the sale and can claim an exemption up to Rs 10 crores. The new property should be constructed within 3 years of sale of old asset. Section 54F extends this benefit to assets other than residential property such as a long-term asset that is sold and invest the entire net sale into a residential house then the LTCG is exempt. Investors who are upgrading their assets can legally defer and eliminate capital gains tax by timing their reinvestment.
Also read: Top 7 Everyday Mistakes That Can Trigger an Income Tax Notice in India
4. Deduction on Pre-Construction Interest
Under the new income tax regime, pre-construction interest on home loans is deductible in five equal installments starting from the year construction is completed. This deduction, combined with current-year interest, is restricted to a total of ₹2 lakh for self-occupied properties.
5. Deduction on Principal Repayment
Under the old regime, section 80C allows a deduction of up to ₹1.5 lakh per year on the principal repayment of a home loan taken for a residential property. Many taxpayers do not realize that the stamp duty and registration charges paid at the time of purchase are also eligible for deduction under 80C (Under the old regime). This applies only to self-occupied or under-construction properties and not to let-out properties. Under the New Regime, deductions for home loan principal repayment under Section 80C are not allowed. The new regime mandates a lower tax rate in exchange for removing most deductions and exemptions.
In conclusion, India’s tax code is generous for most people but they do not realize it. The investors who plan to benefit from the above listed sections are those who plan their purchases, holding periods and reinvestments with tax outcomes. Understanding the provisions listed above can make a meaningful difference to the post-tax returns every year.
Written by Vijai Krishna
