Tax Planning for Real Estate Investments

One of the most important rules for tax planning while buying a house property in India is that one should own only one house or a part thereof in the form of a flat or apartment particularly when it is meant to be used for self-occupation or dwelling by self or any member of his family.



If any one is the owner of two or more self-occupied houses or flats, only one self-occupied house would be exempt from income tax and the extra self-occupied house(s) would be liable to tax in respect of deemed rental income.


If a second house for self-occupation is desired, then the best course for him would be to acquire the second house in the name and through the funds of any other member of the family like, wife or major son or major daughter or brother or sister or father or mother or the Hindu Undivided Family.



House property for renting purposes



If one is interested in acquiring a house for the purpose of letting out, then a distinction is to be made between commercial property and residential property.



From the point of view of tax planning, there would not be any loss if he were to invest his funds in the acquisition of one or more commercial house property. Though he would be liable to income-tax in India on the net rental income from such house property, he would not suffer any disadvantage while selling the same particularly when he wishes to obtain 100 per cent tax exemption under the provisions of 54F of the Income-tax Act, 1961 as described later.



However, the better planning for the purpose of investment in commercial property in India is to split the purchase of more than one property in different names so that different members of the family own different property and incidence of income-tax is the lowest.



If an investor is interested in acquiring a residential house property for renting purposes, then he should see that there is only one residential property in his name. This is for enabling the said person to spread the tax incidence amongst the different members of the family.



However, in some cases, there may not be any great incidence of income tax, if an investor were to acquire one house property for self-occupation and other house property for letting out. In such a case, one property or flat or apartment used for self-occupation would be completely exempt from income tax whereas the other house would be liable to income tax in respect of net income from it.



If there is any interest payable in respect of funds borrowed by an investor for the acquisition of the property or for repairs to the property, then the said interest, whether paid or not, would also be deductible in computing the net income from house property.



Right to carry forward real estate loss



If there is any loss under the head ‘Income from house property’ and the said loss cannot be set off against any income of the same year under any other head, then the loss from house property not so set off would be allowed to be carried forward for the next eight assessment years to be set off against any income from house property.



Power of attorney purchase is possible



In India, normally an immovable property should be registered through the conveyance deed which is to be compulsorily registered. However, if the purchase of house property is done not through a regular conveyance deed but through an agreement to sell with a power of attorney duly executed by the seller, then it need not be registered with the registrar or Sub-Registrar in any State in India and no stamp duty on the purchase of the house property is to be paid.



Selling Residential House Property and getting 100 per cent Exemption



If an investor is interested in selling a residential house property, whether one or more, he would be eligible to get 100 per cent exemption in respect of long-term capital gains (i.e. where the house property is kept for more than three years since acquisition).



If the amount of long-term capital gains is invested in the purchase of another residential house property in advance within one year of the date of sale of the first house property or within two years after the date of said sale in another property.



In this manner, 100 per cent exemption from long-term capital gains can be secured particularly when he is interested in disposing of one residential house property and in acquiring another residential house property, subject to some procedural rules regarding keeping the unspent amount in a bank namely, ‘The Capital Gains Account Scheme’.



Selling any other asset and investing in residential house property to get 100 per cent tax exemption



If an investor is not the owner of more than one residential house property and has long-term capital gains on the sale of any other asset like shares, debentures, units, commercial house property, jewellery, open land etc., then he may also get 100 per cent tax exemption in respect of long-term capital gains made on the sale of such capital asset provided he invests the same in a residential house property.



Wealth-tax Exemption



There is an exemption not only for the commercial property used for one’s own business or profession but also for all commercial complexes and commercial buildings from the levy of wealth-tax. Besides, if any individual is the owner of only one house property or a plot of land upto 500 sq mts, he would be granted complete exemption in respect of the same from wealth-tax under the provisions of section 5 thereof. Besides, all residential properties let out for a minimum of 300 days in a year would be completely exempted from wealth-tax.



Likewise, the open land for development purposes would be exempt from tax for a period of ten years. Thus, in respect of real estate transactions, an investor can save a good deal of income tax and wealth-tax through proper tax planning.



By R L Lakhotia