ITR Filing: There are tax differences between capital gains from real estate investments, dividends, and rental income. an examination of the various investment categories as seen under the tax rules.
The consistent income that real estate investments provide in the form of monthly rents is one of their main draws.
Historically, investing in real estate has been one of the most well-liked options. A variety of investment opportunities are available in this asset class, including rental properties, commercial spaces, residential properties, real estate investment trusts (REITs), and more. differing sorts of income that are subject to differing tax treatment may be obtained from various real estate investment types.
It is important to know how revenue from real estate investments is taxed if you own real estate or want to invest. For example, rental income is usually taxed at your marginal tax rate and is included in your regular income. In the meanwhile, capital gains—profits from the sale of real estate—are liable to capital gains tax, the amount of which varies depending on how long the asset was owned.
In addition, a number of exemptions and deductions, including standard deductions, indexation, home loan interest, and property maintenance expenditures, may be taken advantage of in order to lower the taxable income from real estate. Investors may maximize their gains and guarantee compliance with tax laws by being aware of these tax ramifications. As such, it is essential that you familiarize yourself with the tax treatment of various real estate revenue streams prior to making any real estate investments.
Rental Revenue
The consistent income that real estate investments provide in the form of monthly rents is one of their main draws. While commercial buildings may generate larger returns, ranging from 6 to 9 percent annually, residential properties normally give a rental yield of two to three percent annually.
But according to practicing chartered accountant Suresh Surana, "income earned from renting out property is subject to tax under the head "money from House Property"." Though there are certain deductions you may make, the rental income as a whole is not taxed. "Standard deductions, such as thirty percent of the net annual value and interest on house loans, may be claimed as deductions. The net yearly value of the property is defined as gross rent less municipal taxes. According to Surana, the residual income is included in the taxpayer's total income and subject to taxation at the relevant slab rates.
For example, if your annual rental income is Rs 5 lakh, you may deduct Rs 1.5 lakh, or 30% of Rs 5 lakh, as a standard deduction. This amount may also be subtracted if you have a house loan for that property and have paid interest of Rs 1 lakh over the course of the year. The total of your normal deduction of Rs 1.5 lakh and your house loan interest of Rs 1 lakh would equal Rs 2.5 lakh, which is your taxable rental income (Rs 5 lakh minus Rs 2.5 lakh). The remaining Rs 2.5 lakh will then need you to pay tax.
But if you own the home as a business asset, the way the rental revenue is treated by the IRS may be different. For instance, rental income from a property that you own and operate as a hostel will be subject to taxation under the Profits and Gains of Business or Profession (PGBP) heading. Yeeshu Sehgal, Head of Tax Market at AKM Global, a tax and consulting firm, explained that income from property is subject to taxation under the PGBP when the assessee is involved in the business of renting out property or occupies the property for the purpose of any business or profession that he carries out on him.
You are not eligible for the standard deduction if you possess real estate as a business asset. Alternatively, you may deduct a number of other relevant company costs, such upkeep, personnel costs, power bills, and maintenance. There are no set restrictions on deductions under the PGBP heading. To determine the taxable income, all costs paid solely and exclusively for the operation of the company or profession may be subtracted. Furthermore, Sehgal said that depreciation expenses are also deductable under PGBP.
separated from REITs
Another way to invest in real estate is via Real Estate Investment Trusts, or REITs. Compared to tangible real estate, REITs have a lower investment barrier, which attracts a lot of investors. In REITs, you may invest as little as Rs 10,000.
Securities associated with real estate, or REITs, are listed on stock exchanges and may be traded there. They have sponsors, trustees, fund managers, and unit holders in a structure similar to mutual funds. On the other hand, REITs invest in actual real estate that generates income and is held by special purpose vehicles (SPVs), with the revenue being divided among the unit holders. Investors get money from REITs in the form of dividends.
However, according to Surana, "the taxing system chosen by the SPV would determine the taxability of the dividends in the hands of REIT unit holders."
According to Section 10(23FD) of the IT Act, "the dividend received would be exempt from tax in the hands of investor or unitholders in case the SPV has opted to pay taxes as per the normal provisions applicable," said Surana.
However, Surana said, "The dividends generated by the unitholder from the REIT (which was received by the SPV) would be payable in the hands of the unitholders as per your personal income tax slab rate, appropriate to each unitholder, if the SPV opts for repayment of taxes u/s 115BAA of the IT Act."
Foreign investments in real estate
Indians invest in real estate not only domestically but also outside, with many of them purchasing homes overseas. Actually, Indians make up a significant portion of the investors in international locations like Dubai and London. For a variety of reasons, including the possibility of higher profits, people decide to invest in these cities. But the taxation of earnings from foreign real estate investments is contingent upon the domestic tax legislation of the nation in which the immovable property is located. In general, the nation where such immovable property is located has the authority to tax property income, according to Sehgal.
The nation in which you invest may have different tax rates, and any income from such assets may be subject to local taxes initially. If there is a Double Taxation Avoidance Agreement (DTAA) between India and the nation of investment, you may deduct the tax you paid in the host country from your tax burden in India. If not, you may still need to submit a tax return in India.
Sehgal explains with an example. Suppose Mr. A owns a Dubai apartment and receives some rental revenue from it. Since there is now no personal tax or withholding in the United Arab Emirates, this income is not subject to taxation. If a tax is subsequently imposed on the rental income from the UAE apartment, it will be taxed in the UAE first. Mr. A, an Indian resident, is eligible to claim any applicable foreign tax credits for taxes paid in the United Arab Emirates. Furthermore, in order to avoid paying income taxes twice, India has ratified a number of DTAAs with over 90–95 nations.
Take these tax laws into account before making a regular income real estate investment. We will discuss how capital gains from real estate assets are taxed upon exiting your interests in the next installment of this series.
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