Real Estate Crowdfunding is currently one of the trending investment forms in India. People are curious to learn about real estate crowdfunding and its ability to generate consistent passive income for a long tenure. However, the tax implications on investments through real estate crowdfunding are still not known to many people in India. Monetary return or equity-based crowdfunding is still illegal in India but constructive steps have been taken by the Securities and Exchange Board of India which has put up a consultation paper reviewing the possibilities and regulations to organize the crowdfunding industry. As of now, the Government of India has legalized only Peer-to-peer Crowdfunding for raising finances and earning a percentage return on the same.
Also Read: Real Estate Crowdfunding in India – The Essential Guide for You
Peer-to-peer crowdfunding involves an online crowdfunding platform that connects and raises funds from peers to finance a real estate project. The taxation aspects of peer-to-peer crowdfunding setups have been simple but not much aid is given to investors in terms of tax reliefs. In this article, we aim at diving deeper into learning about the taxation aspects of Peer-to-peer real estate crowdfunding.
Also Read: Real Estate Crowdfunding: The most affordable real estate investment solution
Peer-to-peer Real Estate Crowdfunding
The legalized way of conducting real estate crowdfunding in India is through Peer-to-peer crowdfunding. This method has been prevalent for a long time through an informal framework. However, in November 2017, the Reserve Bank of India issued a landmark framework that gave all the P2P lending firms a status of a Non-Banking Financial Institution which will be regulated under the ambit of RBI. Thus, a more strict and regulatory framework has insisted on transparency in the process and thus demands investors to account for the flow of funds and returns under the Income Tax Act.
Taxation for Investors or Lenders in Real Estate Crowdfunding
Income Tax filing is compulsory to be done for any member holding a Permanent Account Number and deriving income above the Basic exemption limit in a Previous Year. Therefore, for an investor or a lender who contributes towards funding a real estate project through crowdfunding is required for accountability of his returns under the Income Tax Act.
For Peer-to-peer crowdfunding, the money invested or lent acts like any other normal investment. Thus, the interest charged on such loans given is defined as interest income and is taxable. Following is a detailed reference of taxability aspects of Real estate crowdfunding in India.
Taxability on Interest Earned
Interest earned on the crowdfunding investment is treated under the last head of the Income Tax Act that is Income from Other Sources. All the incomes that don’t classify amongst the first four heads, form part of Income from Other Sources as per Sec 56 (2) of Income Tax Act. For such income, there is no specific rate of taxation. Income from Other Sources except the Gift income is added to the Total Income of the person and is taxable as per slab rates.
Taxability on Principal Repayment
Principal Repayment done by the developer of the real estate project to the investors does not include any additional income for the investor. Thus, the principal repayment received is not taxable under the Income Tax Act. However, if the developer fails to repay the principal amount, then such amount cannot be claimed as Capital Gain Loss and thus cannot be set off against any other income.
TDS deduction on Interest
For interest payments done by the developer to the investor, the developer is liable to deduct TDS (Tax Deductible at Source) on the interest payment exceeding ₹5000 in a financial year. This liability falls on the developer as per section 194A of the Income Tax Act if his annual turnover or gross receipts exceeds the 5 crore limit set for a tax audit. The TDS deduction is applicable when a developer pays an individual lender a sum exceeding ₹5000 as interest payment.
GST implications on Peer-to-peer crowdfunding
For investing in peer-to-peer real estate crowdfunding, there are no GST implications on receiving interest on money invested. However, for investing in any real estate project, the crowdfunding platform charges a certain fee for facilitating the transactions between the investor and the developer. Such a fee paid by the investor is subject to GST and is paid by the Crowdfunding platform through Input Tax Credit from the investor. Moreover, the registration fee applicable to the investor for subscribing to the Crowdfunding platform is also paid by the Crowdfunding company by the way of Input Tax Credit from the investor.
Since the equity-based crowdfunding model is not legal in India, there cannot be any deductions claimed for the losses incurred in such real estate crowdfunding in India as of now. With more regulations from the likes of SEBI and Income Tax Act in the future, a detailed approach can be adopted by the Indian Government following the footsteps of other nations who have legalized all forms of crowdfunding.
Read Also: What Is Commercial Real Estate Crowdfunding In India?
Tax Advantages on Real estate crowdfunding
Crowdfunded investments come with a number of tax benefits. Crowdfunded investments, for example:
- Are taxed as though they were a non-productive activity (no self-employment taxes due),
- Allow you to balance passive earnings and losses.
- Are entitled to depreciation allowances,
- An IRA can be used to fund it, and
- Are subject to capital gains tax.
Tips to reduce Tax with crowdfunded real estate investment
As you can see, figuring out the tax consequences of crowdfunded investments isn’t simple. If you’re an accredited investor, you’ll want to talk to your accountant about the implications before proceeding.
If you’re an unaccredited investor, be sure to disclose your 1099-INT income and subtract any penalties for early withdrawals from your net income.
If you’re an authorized investor, you can avoid a hefty tax payment by following these guidelines:
- Understand the sort of investment you’re making; equity and debt investments have distinct tax effects.
- To counterbalance passive losses, actively seek for investments with passive income, such as rentals.
- Consider investing in debt agreements using money from an IRA to take advantage of investment income tax deferral.
- Hold investments for at least a year to be able to report the income as capital gains, which are taxed at a lower rate than normal income.
- Use a crowdfunding site that allows you to do a 1031 exchange.
- To avoid paying fines or costs, make sure you file Form 1065 together with your personal tax returns on time.
- For new investors, crowdfunded investments might be a terrific way to get their feet wet. Seasoned investors may diversify their portfolios by investing in crowdfunded real estate ventures and benefit from a variety of tax benefits that can help your investment business and bottom line.
Talking about the Indian scenario for investors, only interest income is majorly taxable in the case of peer-to-peer real estate crowdfunding. Therefore, it doesn’t seem to be overly taxing for the investors falling under the lower income tax slab rates. But for investors with high total income, the tax payable will be higher on interest earned. Thus, depending on the goals of the investor and his/her annual income, one can invest in real estate crowdfunding projects optimizing their taxability. The above points are expressed keeping the general investors in mind. For more detailed taxability requirements, one can consult a tax professional for personalized requirements. Real Estate Crowdfunding is surely one of the high return-yielding real estate investments. Thus, understanding a holistic view of such investments is important on the part of investors along with considering aspects like taxability, returns, safety, and so on.
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Tax Implications on Real Estate Crowdfunding in India FAQ’s:
Do you have to pay taxes on Crowdfunding?
Yes, one has to pay taxes on interest earned through crowdfunding a real estate project.
Is Crowdfunding a Safe investment?
Yes, crowdfunding is a safe investment when proper due diligence is conducted by the investor regarding the developer’s credit history, legal compliance of the project and so on.
How are real estate syndications taxed?
Real estate syndications are usually taxed as a partnership firm. The profits of a partnership firm are taxed as per slab rates.