Taxation of Fractional Ownership in India

Taxation of Fractional Ownership

• Fractional ownership is the hottest trend in the Indian commercial real estate scene, which is allowing investors to participate in high-value commercial properties with smaller capital investments. But savvy investors like you, are focused on another important factor, which lies beyond the attraction of owning a portion of desirable assets
• Fractional ownership of commercial property is becoming a more popular way to generate wealth. Anything that makes it possible for you to accumulate wealth, though, has tax implications.
• Compared to other residential properties, commercial properties are subject to different tax regulations regarding fractional ownership. 

What is Fractional ownership Real estate?

• Fractional ownership in real estate is the ownership of a portion of expensive commercial Grade A properties that are jointly managed by a number of investors using their combined capital. 
• Otherwise, retail investors would not be able to invest in these sizable commercial properties. Retail inventors are extended an invitation by the real estate management company to invest a specific amount and reap the rewards of rate appreciation.
• Assetmonk is an alternative investment platform, for example, which offers a fractional ownership model where investments are secured and starts as low as 25 lakhs.

The Growth of Fractional Ownership in India

• The Indian CRE market has welcomed the concept of fractional ownership with open arms. It has reportedly grown from Rs 1,500 crore in 2019 to a staggering Rs 4,000 crore in 2023.
• This substantial growth can be attributed to the fact that fractional property ownership allows individuals the opportunity to invest in and benefit from Grade A commercial properties that would have traditionally been beyond their reach.

Understanding the Indian Taxation System

• The Indian taxation system is a network of direct and indirect taxes levied by both the central and state governments. Direct taxes involve levies such as Income Tax and Corporate Tax that are charged directly from the taxpayer. Indirect taxes, on the other hand, includes Goods and Services Tax (GST), customs duties, etc.
• The tax rates and slabs for individuals are set annually in the Union Budget and amended based on inflation and changes in the economic landscape.
• Another significant tax that the taxpayer must pay within the allotted time is the commercial property tax. “Real property” serves as the foundation for commercial property taxes in India.

Tax Implications for Fractional Ownership Real Estate

Understanding the tax implications of any investment is crucial and fractional ownership is no different. While there isn’t direct specific tax information on fractional ownership in India, it’s clear that any income generated from a fractionally owned property would fall under taxable income.

Taxation on Rental Income

The first form of taxation could likely be on rental income. The individual investor’s share of the property’s rental income is added to their total income and taxed according to the slab they fall into. 

Additionally, local Municipal taxes are also applicable on properties based on valuations determined by local governing bodies.

Capital Gain Tax

Secondly, the sale of a fractionally owned property could lead to capital gains tax. If the fractional share is sold after holding it for more than two years, it leads to a Long-Term Capital Gain (LTCG) and is subject to a 20% tax rate after indexation.

 However, if the share is sold within two years of acquiring it, it leads to a Short-Term Capital Gain (STCG) and the gain is added to the total income and taxed according to the tax slab rate.

Each fractional owner is liable for their share of the taxes, contributing to the overall expense of maintaining the property.

This is a summarized view of the likely tax implications of fractional ownership. It’s recommended to consult with a seasoned tax or legal advisor to fully understand the details peculiar to each case.

Role of Regulatory Bodies (SEBI) in Fractional Ownership

Securities and Exchange Board of India (SEBI)  oversees the online platforms offering Fractional Ownership in Real Estate. Investors’ interests are protected and transparency in these kinds of investments is supported by the regulatory framework that SEBI has prescribed.  

To guarantee efficient compliance and risk reduction, investors should be aware of these regulations. 

Click Here to know more about SEBI To Regularize Fractional Ownership India.

Is Fractional Ownership Real Estate a Suitable Investment for You? 

• Investing in CRE properties was once a privilege only available to HNIs/UHNIs, but with  the introduction of concepts like Fractional Ownership it has enabled investors to buy premium CRE properties in an affordable financial segment, one of the most profitable asset classes once only accessible to the 1% previously.
• But, Is Fractional Ownership Real Estate a Suitable Investment for You?  Real estate fractional ownership is an excellent way to diversify your portfolio and increase passive income, especially for investors on a tight budget.
• ​ However, like any investment, it also carries potential risks. 
• Ultimately, whether fractional ownership of real estate suits you or not depends on your financial situation, risk tolerance, investment goals, and the specific commercial real estate project under consideration.

Bottom Line

Though fractional ownership can be seen as a beneficial approach to investing in commercial real estate, understanding the potential tax implications is important for any investor to make well informed decisions. 

As the fractional ownership concept continues to establish its presence in India’s real estate market, it’s hopeful that further clarity on taxation matters will come to the fore.

Tax liabilities — ranging from rental income, capital gains to municipal taxes — must be attentively handled with proactive planning. In light of these intricacies, it is strongly encouraged that investors consult with a tax or legal expert.

Though promising, prospective investors should always perform their own due diligence before opting for fractional ownership investment in the real estate sector, especially keeping in mind these potential tax liabilities.

Would you like to make the most of your money? Invest now in the developing Indian commercial real estate market. Take advantage of the favourable returns on capital appreciation and rental income. So where should I invest my money in order to enjoy these rewards? 

Assetmonk brings high-quality tax-efficient investment options for investors looking for maximizing returns. A platform with a strong track record of offering exceptional investment opportunities to potential real estate investors is Assetmonk with an IRR of 14-21%. Reach out to us today. Happy Investing!

FAQ’s:

Q1. How is rental income from fractional ownership taxed in India?

A. The share of rental income that an individual investor earns from a fractionally owned property is considered ‘Income from House Property’. This income is added to the investor’s total income and then taxed based on the applicable slab rate.

Q2. How does SEBI play a role in fractional ownership?

A. The Securities and Exchange Board of India (SEBI) outlines regulatory frameworks for fractional ownership to safeguard investor interests and promote transparency in these investments. It’s important for investors to understand these regulations to ensure compliance and manage potential risks.

Q3. Should I consult with a tax or legal expert before investing in fractional ownership real estate?

A. Yes, due to the various tax implications and regulations involved in fractional ownership investment, it’s recommended to get advice from tax or legal experts. They can provide comprehensive guidance and help make informed investment decisions.