Understanding Real Estate Tax structure

Taxation structure is one of the most important aspects to understand before investing. In India real estate attracts 4 different kinds of taxes –

  • Rental Income Tax
  • Capital Gain Tax
  • Property Tax
  • Taxes during purchase

Rental Income Tax

Rent received from a residential property and a commercial property is taxable under this head. Lease from land, factory and warehouse are also grouped under this head. Municipal taxes on the property are treated as deductible and the tax is calculated on an annual basis. In comparison to other investments which are taxed at a third of the gains, real estate investments offer a better tax rate.

Capital Gains Tax

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit comes under the category ‘income’, and hence you will need to pay tax for that amount in the year in which the transfer of the capital asset takes place.

If a property is held for less than 2 years, the capital gains are taxed at a flat 30% (asset classifies as a short-term capital asset). However, if a property is held for more than 2 years, the capital gains are taxed at 20% after indexation (asset classifies as a long-term capital asset).Indexation is a process in which the government allows the value of real estate commercial properties to be increased at a rate equal to the rate of inflation.

In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. You can save tax by investing the sale amount in a new house or purchasing capital gain bonds.

Property Tax

Property tax is the annual amount paid by a land owner to the local government or the municipal corporation of his area. The property includes all tangible real estate property, his house, office building and the property he has rented to others. The tax amount is based on the area, construction, property size, building etc. The collected amount is mainly used for public services like repairing roads, construction schools, buildings, sanitation, etc.

Every one to five years, tax assessors will value the property and charge the owner-of-record the appropriate rate following the standards set by the taxing authority. Assessors calculate that value using either the mill levy or the assessed property value.

Taxes during purchase of property

For under-construction property, GST is applicable in India and differs for affordable housing and other properties. For a completed property which has obtained its occupation certificate, GST need not be paid.

These are the major taxes that real estate investors should be aware of in India. The rates do vary with budgets but overall, real estate investments and returns are taxed lesser than other investments.

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