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Tax Benefits and Incentives for Commercial Real Estate
- India provides a wide range of opportunities for people looking to increase their wealth and ensure financial stability through commercial real estate investment. One strong way to generate income and capital appreciation is through the real estate market. Investing in real estate in India offers several tax advantages in addition to the possibility of financial gain.
- This guide covers the various tax benefits of investing in commercial real estate.
- “A penny saved is a penny earned,” as the saying goes. One way to minimize your tax liability is through tax planning. Find out more about the tax advantages of investing in CRE and boosting your income by reading on.
- While real estate investing is not new, it has become more and more popular in recent years. We understand the cause behind it. People are now looking deeply into this because of the transparency of the internet and their access to limitless knowledge, which have opened the doors to financial stability for many. Investing in real estate is always a win-win situation for you.
How to save tax on a commercial property?
- Due to the asset class’s strong capital appreciation potential and expanding demand, buyers are showing an increasing amount of interest in including commercial real estate in their portfolios. Read this article further if you’re one of them and are looking for ways to save money on taxes when buying the asset.
- Under Section 80C, residential properties provide tax benefits on principal repayment of a home loan up to Rs 1.5 lakh, and under Section 24, you can receive tax benefits on interest repayment of a home loan up to Rs 2 lakh. Additionally, those who purchase affordable housing units or first-time homes are eligible for additional tax deductions. They gain from reduced GST rates on the acquisition of reasonably priced homes as well.
- There are certain tax deductions available to you even though buying commercial real estate does not come with many tax advantages. Let’s examine these in more detail:
Tax treatment for Commercial Property Income/Rentals
Your revenue from commercial real estate will be subject to personal taxation under the “Income from House Property” category. The annual value, which is subject to taxation once certain expenses have been subtracted, is the rental amount you will receive or anticipate realising. The income from leasing a commercial property that you do not own will be subject to taxation under the heading “Income from Other Sources.”
It will fall under the heading of “Business Income” if you operate your own company out of the commercial property. Due to their desire to claim additional expenses on the latter, many people frequently make the mistake of reporting their rental income as business income.
Deductions available Commercial Real Estate Investors
Here are a few Tax Advantages of Investing in CRE:
Standard Deduction
It is applicable as a standard deduction at a flat rate of 30% for repairs and other improvements made to your rented commercial property. It applies regardless of the amount spent on purchasing the property and helps you save a respectable amount on taxes.
Deduction on the Loan Interest
Investors are eligible to deduct expenses from the total interest paid on a loan that they took out to purchase or develop commercial real estate, as well as to rebuild or develop it. Tax deductions are also available for this category’s processing fee or prepayment charge.
But this is only available starting the year after construction is finished and you actually take possession of the property. For any interest paid prior to the year you took possession of the commercial property, you may also be eligible to receive the entire amount in 5 equal installments. It will begin in the year that construction is finished.
Utilizing the Commercial Property for your Profession/Business
You are not eligible to deduct any notional rental income in this situation. Nevertheless, you are still able to deduct interest paid on your loan for the purchase of the property as well as depreciation. The actual cost of upkeep and repairs is deductible from your taxes.
However, the tax deductions for interest paid on your commercial property loan are limited under the new tax system. For let-out properties, it does not take into consideration any Section 24 deduction. Interest and the standard deduction are allowed, but only up to the net annual value, which is the amount left over after local taxes are subtracted from the gross rental amount.
Deductions on Interest Payments
Whether you opt for a traditional loan or a structured financial product like REITs (Real Estate Investment Trusts), interest payments incurred on financing your commercial property purchase are generally deductible from your taxable income. This translates to immediate tax savings and improves your cash flow.
Optimizing Your Tax Strategy
- Consult a Tax Advisor: Navigating the intricacies of Indian tax laws can be complex. Seeking guidance from a qualified tax advisor is crucial to maximize your tax benefits and ensure compliance.
- Stay Updated: Tax regulations are subject to change. Regularly consult with your advisor and stay informed about any updates or amendments that may impact your tax liabilities.
- Maintain Proper Records: Documenting all your expenses and income related to your commercial property investment is essential for claiming legitimate deductions and avoiding tax disputes.
Key Points to Remember
- The only year that deductions are available is the year that they accumulate.
- The amount of interest that can be deducted from loans taken out to purchase commercial real estate is unlimited. Nevertheless, during the construction phase, tax deductions are not permitted.
- For a commercial property purchase loan, there is no Section 80C deduction available for principal repayment.
- Rental income is taxed based upon the higher amount of either your rent in hand or the amount you expect to get.
Bottom Line
One benefit of making an investment in commercial real estate is the possibility of receiving tax benefits. Investors may be able to use Tax Benefits of Investing in Commercial Real Estate to lower or postpone the amount of income and capital gains tax that they must pay. These benefits, which range from tax advantages for an investor’s beneficiaries to depreciation and mortgage interest deductions, may boost returns. But in order to take advantage of these benefits, however, you need to know what they are and how they work.
Specifically, you can take advantage of post-purchase tax benefits on commercial properties. But take careful note of the requirements for the same. Purchasing commercial real estate is a value proposition when all factors are taken into account, including taxation.
Assetmonk is India’s fastest-growing real estate platform offering top-quality real estate opportunities with an IRR of 14-21%.
These investment options are chosen with care from the vibrant private markets in India, and a trustee registered with SEBI is in charge of them.
With a minimum investment of Rs. 10 lakhs, investors can participate in our structured debt offerings in the commercial real estate sector and enjoy an assured 17% IRR.
Despite the fact that the interest earned is taxable, a silver lining comes in the form of potential tax benefits where investors can claim tax benefits of up to Rs 50,000. Sounds great right? Reach out to us today!
FAQs
Q1. Can I save tax by investing in commercial real estate?
A. Yes, you can. You can save tax by investing in REITs, CRE crowdfunding, fractional real estate ownership, and Real Estate structured Debts.
Q2. How can we save capital gain tax on commercial property?
A. You can claim an exemption under Section 54EC by investing the proceeds in capital gain bonds issued by designated institutions or residential real estate.
Q3. Will my business fall under the business income category if I operate it out of the commercial property?
A. Yes, your business income will fall under this category if it is operated out of commercial real estate.
