Tax Saving Tips that will maximize your Real Estate Investment Returns

S Raheja Reality Blog

When you are investing in real estate, you should know what you are gaining from your investment.


Buying a new home is an exciting affair and ensuring that you get the best returns on your real estate investments sweetens the deal further. With the financial year end just around the corner, here are a few tips to help you maximize your tax benefits on your real estate investments.


What are the areas you can claim tax benefits by investing in a real estate property?


Below are the 4 areas where you can claim tax benefits:


1. You can claim tax exemption under Section 80C on principal repayment up to a maximum limit of Rs.150,000 per annum.

2. You can claim tax exemption under Section 24 on interest payment up to a maximum limit of Rs.200,000 per annum.

3. Section 24 is claimed on an accrual basis while Section 80C benefit can only be claimed on an actual payment basis.

4. If you are going for a home under Rs.50 lakh value in this year, you can get an additional exemption of Rs.50,000 u/s 80EE for interest paid, provided you are a first time home buyer.


Let us start with an illustration to guide you through the process of claiming benefits.


Suppose you recently purchased a 2 BHK property worth Rs 55 lakh in Kolkata which had been financed by one of the prominent banks to the extent of 85 percent of the value of the property. You aware that buying a house on loan is a tax efficient proposition but you are not aware of the nuances of how best you can leverage your home loan for tax benefits. You will read through the relevant sections pertaining to Section 80C and Section 24, but but you still wont be clear how it will work out in totality for him you. You, therefore will now approach to a tax advisor who will educate you more about how you can use your property for tax benefits.


Did You Know there is more than earning benefit on principal repayment under Section 80C.


Monthly EMI of Rs. 42000 is entailed, when you took a home loan to finance your apartment. Now in each month this EMI of Rs. 42,000 gets split into 2 components

  • The Interest Component
  • The Principal Component


Initially the interest component is higher while in the later years of the loan, the principal component is higher. In the first year, the interest component will work out to approx. Rs. 30,000 per month while the principal component will work out to Rs. 12,000 per month, as per the bank loan statement. That works out to a total principal repayment of Rs.1,44,000 per year which can be claimed as a deduction under Section 80C. 


Additionally, the registration charges and stamp duty paid for the property are also eligible for deduction under Section 80C. Now to claim full deduction of registration and stamp duty subject to a maximum limit of Section 80C limit, you should time your purchase in the Jan-Mar quarter. Then you can claim the full principal from next year. In fact, if you are planning to invest in PPF, you can postpone that by 2-3 years since Section 80C will be fully covered by the principal component of home loan itself. There is one more thing to remember here. The treatment of principal on home loan remains the same irrespective of whether the property is self-occupied or rented out. There is one important point to remember here. If the property is sold before a period of five years then the Section 80C benefits claimed over the last five years will be treated as taxable income in the hands of the assesse in the year in which the property is sold.


Do you know how to treat interest on home loans, if it is a self occupied property ?


Every capital gain can show one property as self-occupied for tax purposes. You can show income on house property as zero and show the entire interest up to Rs. 200,000 per annum as a loss and adjust that against your taxable income, when filing your IT returns. Here you will pay Rs. 360,000 as interest component on your home loan and against that you can get Rs.200,000 as exemption under Section 24 of the Income Tax Act. Considering that you are in the peak tax bracket, your rebate is over 30% on the interest paid. An interesting point to remember here is that the rebate under Section 24 is available on an accrual basis and not on an actual payment basis.


And what if it is a let out property ?


You will need to treat your home loans slightly different here as it is a let out property. In this case, you do not have any limit for exemption under Section 24 and the limit of Rs. 200,000 will not hold any longer. Of course, you will have to show the higher of the fair rental value or the actual rent received as income on the house property. But there is no limit on the amount of interest on loan that you can claim as an exemption. In the above example, the entire interest component of Rs. 360,000 can be claimed as deduction in the case of let out property. In fact, the idea here is that if you are planning to let out your property then you can opt for a shorter tenure loan of 10 years instead of 20 or 25 years so that you can get higher exemption as anyways there are no limits on exemption on interest paid on home loan.


Now coming to buying a property on a single versus joint names.


You can either go for a home loan in your name or in the join names of yourself and your spouse. You can apply for loan in joint name which will entitle you for a higher loan amount, if your spouse is an earning member then. Additionally, this limit of Rs.200,000 can be claimed individually by you and your spouse when you file your tax returns making it doubly tax efficient.


Miscellaneous facts about investing in Real Estate/Home Loan…


There are some additional points to remember. You are eligible for an additional deduction of Rs. 50,000 under Section 80EE subject to the loan being sanctioned during the financial year 2016-17, if you are a first time home buyer, then. While there is no income eligibility for Section 80EE, it is subject to the maximum cost of the house being Rs.50 lakh and the maximum loan being Rs.35 lakh. Additionally, Section 24 benefit is available only if the construction of the house is completed within five years of the end of the FY in which the loan was availed. Pre-construction interest is available separately as a deduction in equated installments over a period of five years.


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*DISCLAIMER – All the information shared in this article are from external resources and SRaheja in no way advocates the expertise shared herein. All information shared herewith are subject to change in lieu of government stipulated regulations under income tax acts of Indian law 2016 – 2017