REAL ESTATE TAX STRUCTURE
Real estate assets in India attract three kinds of taxes:
1. Rental Income Tax
2. Capital Gains Tax
3. Property Tax
1. Rental Income Tax
All rent generating real estate assets are subject to rental income tax. A standard deduction of 30% on the total rental
revenue is allowed followed by a 30.9% tax on the taxable value.
Example:
Rent: Rs 100
Less: 30% standard deduction
Taxable Income: Rs 70
Tax: 30% of Rs 70 = Rs 21
Effective Tax Rate: (21/100) = 21%
The effective tax rate is 21% - In comparison with other investment instruments such as fixed deposits which are taxed at one third the gains, real estate investments offer a better tax rate.
2. Capital Gains Tax
If a property is held for less than 2 years, the capital gains are taxed at a flat 30% (asset classifies as a short-term capital
asset). However, if a property is held for more than 2 years, the capital gains are taxed at 20% after indexation (asset
classifies as a long-term capital asset).
Indexation is a process in which the government allows the value of real estate commercial properties to be increased at a rate
equal to the rate of inflation. The indexation for a particular year is announced during the annual budget after
considering average rate of inflation for the year.
Example of short-term capital gain tax:
Property A was bought on Jan 1st 2015 for Rs 100 and sold on Dec 31st 2017 for Rs 150 (50% growth in 2 years)
Purchase Price: Rs 100
Selling Price: Rs 150
Net Gain: Rs 50
Tax: 30% of Rs 50 = Rs 15
Effective Tax Rate: (15/50) = 30%
Example of long-term capital gains tax:
Property A was bought on Jan 1st 2015 for Rs 100 and sold on Jan 1st 2018 for Rs 150 (50% growth in 3 years)
Purchase Price: Rs 100
Indexed Purchase Price: Rs 100 * [1.07^3] = Rs 123 (Assuming an annual indexation of 7%)
Selling Price: Rs 150
Net Gain: Rs 150 – Rs 123 = Rs 27
Tax: 20% of Rs 27 = Rs 5.4
Effective Tax Rate: (5.4/50) = 10.8%
The effective tax rate is 10.8% - In comparison with other investment instruments such as fixed deposits which are
taxed at one third the gains, real estate investments offer a better tax rate even on capital gains.
Property Share takes advantage of the long-term capital gains tax structure to maximize investor returns.
If a co-owner opts to sell their shares to another investor before the sale of the total asset by the LLP, they will be
subject to short-term or long-term capital gains tax – depending on their holding period.
Thus, a co-owner can choose to cash-out his investments at any given time and still benefit from the capital gains tax
structure.
3. Property Tax
Depending on the location of the asset, an annual property tax is paid in accordance with the rate defined by the
regulatory authorities.