How to Save Taxes When Investing in Real Estate

There are numerous tax-saving avenues for property purchase as per the IT Act. A loan for purchasing property can be a significant tax saving measure with regards to the Income Tax Act sections that cover tax gains under residential property: 80C, 24B and 80EE.

Section 80C covers the amount paid as repayment of the principal amount of a home loan. The maximum tax benefit allowed at present is Rs 1,50,000. The tax benefit is allowed only after the construction has been completed and the completion certificate has been received by the taxpayer. Stamp duty and registration charges can also be deducted under this section. 

Section 24B covers tax benefits on interest paid by an individual on their home loan. The maximum tax benefit allowed for a self-occupied property is Rs 2 lakh. If an under-construction property is not completed within five years from when the home loan was issued, the interest benefit will be reduced from Rs 2 lakh to Rs 30000.

Section 80EE covers income tax rebates on home loan interest for first-time homebuyers. It provides a deduction of Rs 50000 in addition to the tax deduction of Rs 2 lakh under section 24 and Rs 1.5 lakh under section 80C. The tax benefit will be available until the home loan is fully repaid.

The rationalization of property-related taxes is the most significant benefit that was offered in the 2019 Interim Budget. It will encourage people to invest in property for either their first home or additional investment.

Long Term Capital Gains

Changes have been made to the long-term capital gains (LTCG) tax structure for people selling a house to buy another house. The benefit of rollover of capital gains under section 54 of the Income Tax Act will be increased from investment in one residential house to two residential houses for a taxpayer having capital gains up to Rs 2 crore. This benefit can be availed once in a lifetime.

Declaration of 2 Houses as Self-Occupied 

The provision allowing taxpayers to declare two houses as self-occupied is a significant relief. Previously, taxpayers with two houses could declare any one house as self-occupied. Additionally, they had to pay tax on the rent the house could have fetched if it was let out, which is called notional rent. Now, they can declare both houses as self-occupied and do not need additional tax. This will encourage people to purchase second homes.

Tax Saving for Ready-To-Move-In Property

The tax saving options for a ready-to-move-in property is covered under Sections 80C, 24B and 80EE.  These benefits are allowed only after the completion certification has been received by the taxpayer.

Tax Saving for Under-Construction Property

When purchasing an under-construction property, your eligibility to claim interest on the home loan as a deduction begins only upon completion of construction. However, this does not mean that you cannot enjoy any tax benefits on the interest paid during the period between getting the loan and completion of construction. There is a provision, called the Prior Period, wherein you can claim a deduction on the pre-construction interest in five equal installments starting from the year in which the construction is completed. The maximum eligibility remains capped at Rs 2 lakh. 

Tax Saving for Plots

Unlike a housing loan, which is eligible for a tax deduction for payment of interest as well as the principal amount, plot loans do not offer any such benefit. You can avail of tax deductions only if you are constructing a house on the plot. If so, the deduction is applicable only for the loan amount taken against construction, and only after completion of the construction activity. Accordingly, income tax benefits are applicable only if you are constructing a house on the plot with additional funding.