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Effective Tax Strategies for Real Estate Investors

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Created on
July 12, 2023


What’s Inside

Historically, investing in real estate has always been a safe investment. Especially in India, young investors often get the advice that they should invest a part of their income in an asset-backed investment such as real estate. And although the advice might seem outdated, it is still a good idea to invest your money in real estate if you are looking for a less volatile investment.

Now if you are a new investor in the real estate market, it is fair to ask the question “What are real estate taxes?”. Let's take a look at real estate taxes, strategies to invest and other related investment options.

What are some smart tax strategies?

Like in most countries, there is a real estate tax applicable in India. You can follow some simple strategies to save money on this tax:

Consider your Rental Income

If you earn rental income from your real estate properties, it is considered income from the said property and is taxable under the head "Income from House Property." Deductions like payment of municipal taxes, standard deduction of 30% of the net annual value, and interest on home loans can be claimed to reduce the taxable rental income.

Capital Gains Tax

When you sell a real estate property, you may be subject to capital gains tax. Long-term capital gains (holding period of more than two years) on the sale of a property can be reduced by applying for indexation benefits. Additionally, you can invest the capital gains in specified bonds (such as NHAI and REC bonds) or utilize them to purchase another property to claim exemptions under Section 54 and Section 54F of the Income Tax Act, respectively.

Advantage of Joint Ownership

In the case of joint ownership of a property with your spouse or family members, you can divide the rental income or capital gains in a manner that reduces the overall tax liability. The division should be done based on the actual ownership percentage. 

For example, if you own 50% of said property, you can declare 50% of the rental income or capital gains. This strategy can be beneficial if one of the co-owners falls into a lower tax bracket, resulting in lower overall tax liability.

Make the Most of Deductions

If you have taken a home loan to finance your real estate property, you can claim deductions on the interest paid on the loan under Section 24(b) of the Income Tax Act. The max amount of deduction allowed is Rs. 2 lakh per year for a self-occupied property. For a let-out property, there is no upper limit on the deduction.

Set Off and Carry Forward of Losses

If you incur a loss from one property (under the head "Income from House Property"), you can set it off against the income from another property you own. This means you can deduct the loss amount from the positive rental income of another property, reducing the overall tax liability. 

If there is any unabsorbed loss remaining, you can carry it forward max till 8 assessment years and set it off against future profits from the house property.

Real estate investment isn’t the only way to go!

For a lot of new investors, investing in real estate feels like a safe route. And although real estate investments generally have stable returns and are less volatile than the stock market, they aren’t the only stable investment option. Mutual funds offer a very effective alternative.

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Frequently Asked Questions

1. What are some effective tax strategies for real estate investors? 

There are many strategies to reduce your real estate tax. Rental income can be reduced by deductions. Capital gains from property sales can be reduced through indexation or exemptions by reinvesting in specified bonds or purchasing another property. Joint ownership allows income splitting for lower tax liability. Home loan interest can be deducted. Losses from one property can be set off against income from another property.

2. How can depreciation benefit real estate investors? 

Depreciation benefits real estate investors in India by reducing taxable income. Buildings and structures can be depreciated at specific rates. Investors can deduct depreciation from rental income, lowering tax liability. Excess depreciation can be set off against other income. Depreciation affects capital gains when selling the property.

3. Are there any specific tax deductions or credits available for real estate investors? 

In India, specific tax deductions and credits are available for real estate investors. These include deductions on home loan interest and principal repayment, additional deductions for affordable housing, and a tax holiday for developers of affordable housing projects. Professional advice is recommended to understand eligibility and maximize benefits.

4. What are the tax implications of rental income from investment properties? 

Rental income from your real estate properties is taxable under the head "Income from House Property." Deductions like payment of municipal taxes, standard deduction of 30% of the net annual value, and interest on home loans can be claimed to reduce the taxable rental income.

5. How can a 1031 exchange help defer taxes for real estate investors?

In India, there is no provision for a 1031 exchange. However, real estate investors can defer taxes on capital gains by utilizing exemptions under Section 54 and Section 54F of the Income Tax Act, which allow the reinvestment of proceeds into another property to defer tax liability.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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