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Do you intend to buy your first ever real estate property this coming month? Well, congratulations! But did you also know that you could generate rental income from that property of yours? Buying your first real estate property is a significant step for any investor. It’s also one of the most valuable properties you can purchase, and with time and work, it can be a terrific method to produce rental income. Sounds fantastic? But, before you become a real estate tycoon and begin constructing an empire, you need first to learn the fundamentals. And one of the most critical fundamentals in real estate investment is T-A-X! Oh yes, TAX! And so is rental income taxed!

Real estate is one of the most popular investment vehicles among investors. The reason is that in the first decade of the twenty-first century, real estate provided large profits in a short period. For example, Assetmonk is a wealth technology platform that only lists approved and credible real estate assets. In regions like Hyderabad, Bengaluru, and Chennai, the assets provide project returns with IRRs of up to 21%. However, it has always been the case that persons participating in the real estate market are somewhat unaware of the taxes involved. And particularly the Long Term Capital Gain (LTCG) tax and the exemptions that the government provides to real estate investors. According to tax and financial experts, being unaware of this tax may find the investor in hot water.

But firstly, what is real estate investment?

Real estate investment is acquiring property to generate income. In layman’s words, it is any land, building, infrastructure, or other physical property that is immovable yet transferrable. Real estate investing is classified into several categories. The most prevalent types of real estate investing are residential, commercial, and industrial. Real estate investing may appear to be pricey at first, but it is one of the most proven strategies to grow wealth through rental income and capital appreciation.

What are the real estate investment strategies for beginners?

For individuals unfamiliar with the sector, real estate investment can be scary. It may take many months (or properties) for investors to ease with real estate. As a result, beginner-friendly investing techniques are a wonderful place to start. While they are appropriate for inexperienced investors, they may nevertheless be tremendously rewarding especially for rental income when handled correctly.

There isn’t just one method to invest in real estate, so don’t be concerned—you don’t have to buy a whole apartment complex right now! Here are four of the most common real estate investment approaches for novices.

  • Rental Property: Purchasing a rental property is a terrific method to establish a monthly income stream, especially if you’re ready to become a landlord. You can employ property management instead if you do not want to be a landlord. You may purchase a single-family home to a multi-family residence, commercial property, or a warehouse. You may then rent it out to renters. And what do you get? Rental income! Rental properties with appealing rental revenue can also help you achieve a high real rate of return over time. Rental income also provides the benefit of a consistent income that rises year after year to keep up with inflation. So, if you want to invest in real estate in order to make a significant rental income, rental properties can help you.
  • REITs: REITs are unquestionably the simplest type of real estate investing, making them an appealing alternative for new investors. REIT is an abbreviation for “real estate investment trust.” These typically own and occasionally run a range of real estate holdings such as hospitals, warehouses, shopping complexes, residential buildings, and others. A real estate investment trust (REIT) is a business that owns and manages income-producing real estate. Investors can then acquire REIT shares and profit from real estate without owning physical assets.
  • House Flipping: The concept of flipping houses provides a whole different perspective on property ownership. It is not intended to be a long-term project of managing renters and adding properties to your portfolio. Flippers acquire houses or properties needful of repairs, spend time fixing them up to increase their worth, and then resell them at a higher price. Because the goal is to rapidly sell and move on to the next property to flip, the ideal circumstance is short-term.

Rental Income & Capital Gains Taxes for Your First Real Estate Investment

But, what is the real estate tax in India?

Capital gains are earnings gained when you sell a capital asset — a plot of land, a residential house, a business facility, or any other capital asset – for a price that is more than the price you paid for it. Furthermore, under the Income Tax Act, these capital gains are taxed. Capital gains tax can be Long term Capital Gains Tax (LTCG) or Short term Capital Gains Tax (STCG), depending on the duration of the property’s holding.

Long-Term Capital Gains (LTCG) get taxed at 20%, depending on an individual’s tax bracket.

Property owners in India must pay capital gains tax on the sale of residential property. The rationale for the capital gains tax on residential property transactions is that the sale of property frequently results in profits for the owner. Whether you’re buying or selling a house in Pune or elsewhere, paying capital gains tax is one way to save money.

And, what about tax on rental income from real estate in India?

Rental income from a property is taxed under Section 24 in the owners’ hand under the heading ‘income from home property.’ The rent received by leasing out unoccupied land, on the other hand, is taxed under ‘income from other sources.’ Income from the home property only gets taxed on the land part of a structure.

According to India’s current tax laws, if a property is leased or rented, the sum received in exchange for the property is referred to as “Rental Income.” It includes any advance payment made as a security deposit. The rental income is substantial, according to the IPC, and should get taxed under Section 24 of the Income Tax Law. The government makes no distinction between residential and commercial property. Even the parking lot attached to your business or home is considered a house property and is taxed if rented out. House property is any structure-shaped property that may be taxed. As a standard deduction, 30 percent of your rental income gets taxed in India under the head income from dwelling property. However, for this standard deduction rate on income tax on rental income in India to apply, one must be the legal owner of a property.

So, what are the real estate tax benefits?

Real estate investing may give tax benefits like rental income tax benefits. But the difficulty – and sometimes the most difficult challenge – is discovering available solutions and knowing how and when to apply them.

These chances are not always clear or straightforward, and they frequently need extensive investigation. The end outcome can be well worth the effort. Taking full advantage of these tax breaks can help you develop considerable long-term wealth by reducing – or eliminating – tax and rental income tax payments.

The following sections of the Income Tax Act of India provide the tax and rental income tax benefits for real estate investments.

  • Section 80C: Under Section 80C of the ITA, you can deduct up to Rs. 1.5 lakhs from your total taxable income if you have made investments. Because purchasing a home is an investment, you can deduct the amount from your income and apply it to your home loan. This tax break is based solely on the total amount spent in that year on principal payments. There is no minimum claim amount. However, the maximum claim amount is Rs.1.5 lakh.
  • Section 24: Of course, loans are more than simply the principal amount; there is also a significant interest component. It is when Section 24 comes in handy. This clause allows for interest on borrowed capital exemptions. Under the current tax structure, deductions for home loan interest can be up to Rs.2 lakhs provided the buyer or their family stays on the property. Section 24B allows you to deduct home loan interest on the rental income if you rent the house.
  • Capital Gains: The profit realized by selling a property or investment gets referred to as capital gains. The profit realized if the property is sold within three years after the acquisition is a short-term capital gain. Short-term capital gains are treated as income and are taxed appropriately. A 30 percent tax is payable on investors whose total income exceeds 10 lakhs. After three years, the profits are considered long-term capital gains and get taxed at 20% after indexation. Long-term capital gains are profits gained from property sold five years after purchase. In this situation, the tax benefits under Section 80C will get negated, but you can still take advantage of the Section 24 benefits (b). Any sum advanced towards principal will be taxed, but loan interest can get deducted.
  • Depreciation: The tax savings from depreciation are by far the most substantial tax reduction for buyers, considerably improving their cash flow towards house loan repayment. Real estate properties suffer from wear and tear over time. To keep the house in good condition, the owner must reinvest in it by making repairs and modifications. Tax deductions can get claimed for the renovation expenditures and the depreciated purchase price. This depreciation begins as soon as the residence gets inhabited by the owner or a renter.
  • Standard Deduction: The standard deduction is one tax benefit on tax on rental income in India. When you buy a property to rent it out, it gets assumed that you would spend money on repairs and maintenance. By definition, it is subjective. As a result, regardless of actual repair and maintenance costs, you can claim a Standard Deduction of 30% of Net-Annual Value on rental income.

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