1.Introduction- Income tax and real estate investment:-
Income-tax Act, 1961 began to exist on the date1-4-1962.The department's first introduction of revenue audit. Introduced a new method for evaluating Income-tax Officers' work.
Capital Gains Tax would be assessed at a flat rate of 20% if the property was held for more than three years. The indexation benefit would also be available to the property seller in the event of long-term capital gains.
2.Income Subject to tax-
Investors whose total income exceeds 10 lakhs are subject to a 30% tax. The profits are taxed at 20% after indexation after three years as long-term capital gains. Profits from selling property five years after its purchase are long-term capital gains.
Legally, the company must distribute dividends equal to at least 90% of its taxable income. The company can pass on the tax burden to shareholders rather than paying federal taxes because those dividends are the taxable portion of the REIT-owned property income.
3.Income tax Rates:
With indexation, long-term capital gains are taxed at a rate of 20.8%, which includes a 4% health and education cess. Indexation is adjusting the asset's cost per the inflation index. It will cost you more, reduce your gains, and raise your tax bill.
Under the heading "income from home property," rental income from a property is subject to taxation under Section 24 in the owners' hands. On the other hand, "income from other sources" includes the rent earned by leasing out unoccupied land. Only the land portion of a structure is subject to taxation for income from the home property. According to India's existing tax regulations, "Rental Income" refers to the sum received for a property when it is leased/ rented. It includes any security deposit-based advance payment.
The IPC claims that because the rental income is substantial, it should be subject to income tax law under Section 24. The government does not distinguish between business and residential real estate. Even the parking lot attached to your home or business is considered property and is subject to taxation if rented out. Any property that is shaped like a house can be taxed. In India, 30 % of your rental income is subject to taxation under the heading "income from dwelling property" as a standard deduction. However, in India, one must be the legal owner of a property for this standard deduction rate on rental income to apply.
4.Real Estate Investments as Tax Shelter for Active Income:
Real estate is a way for investors to make money. This is primarily because of its numerous tax advantages. Real estate provides tax sheltering through depreciation, operating expenses, long-term capital gains, and 1031 exchanges.
An active real estate investment involves directly purchasing a property by an individual or group of individuals. As a result, they are completely in charge of daily management decisions.
The fact that the investors get to keep all the income generated by the property is the primary advantage of an active approach. In addition, they are not required to split it with anyone else or pay a general partner a fee. s a result, their returns might be a little bit better. They also have complete control over all decisions regarding the identification, acquisition, and management of properties, which some people may find more advantageous than the alternative.
Although having complete control and receiving all of the profits may sound appealing, it also implies that investors bear all of the risks. They bear the entire cost if the transaction fails; there is no one else to share it with. They are also required to complete all the work, which means they must conduct their property due diligence and are in charge of collecting rent, dealing with maintenance requests, and ensuring the lawn is mowed. There's a reason it's called active investing: it takes a lot of work and can be a real pain.
5.Real Estate Investments as Tax Shelter for Capital Gain:
The profit you make when you sell a capital asset—like a piece of land, a house, a building, or any other kind of capital asset—for more money than you bought for it is known as a capital gain. Depending on an individual's tax bracket, the rates for Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) are 20 percent. Capital gains fall into two primary categories:
1) Long-term capital gains: Selling property that has been held for more than two years (24 months
2) Short-term capital gains: Selling property that has been held for up to two years.
When you sell a house, you frequently have to pay capital gains tax in the thousands of dollars. However, one of the following techniques can significantly reduce it:
1) When you purchase or construct a residential property, you are eligible for exemptions under Section 54F.
2) Purchase Capital Gains Bonds under Section 54EC.
3) Invest in a Capital Gains Accounts Scheme.
4) Invest for the long term.
5) Take advantage of tax-deferred retirement plans.
6) Use capital losses to offset gains.
7) Choose your cost basis.
The investor's Income Tax slab rate determines the STCG tax rate for real estate investments. In addition, these investments are subject to a 20% LTCG tax rate with indexation. However, additional tax regulations and conditions are associated with the purchase and sale of real estate.