Many people turn to real estate for investment. Even in real estate there are many people who prefer residential property. This type of investment generally has two advantages. One is that it becomes a source of regular income in the form of rent, and second, the value of the property increases over time and thus yields handsome returns.
Income is not tax-free
However, like other earnings, it is not tax-free. If you are earning from home, your tax liability is being created. Whether you are earning from rent or selling the property after some time, tax liability arises in both cases. The mode of tax liability is different in both the cases. Today we are going to tell you about this in detail.
Tax on sales income
First of all, let’s talk about the income from sales after a while. There are two types of taxes on the profit from the sale of the house, i.e. capital gains. If the house is sold after holding it for 2 years or more then it will be treated as long term capital gain. 20% tax will be levied on capital gain amount after indexation gain. At the same time, the profit on sale of house before 24 months will be treated as short term capital gain. This profit will be added to the regular income of the person and tax will have to be paid as per the tax slab.
How you can save tax money
In some cases, tax can also be saved here. Section 54 of the Income Tax Act provides relief from tax on income received by selling an old house i.e. buying another house out of capital gain. This benefit is available only in case of long term capital gain. The Income Tax Act assumes that in such cases the intention of the seller is not to make money by selling the house, but to find a suitable house for himself.
Which type of property purchase will be tax exempt?
Section 54 of the Income Tax Act clearly states that the capital gain should be used only for purchase or construction of residential property. That is, there will be no tax exemption on buying commercial property. In case of land, an amount equivalent to capital gains tax can be claimed as exemption on purchase of plot of land and construction of house. Only the purchase of land will not get tax exemption. From the financial year 2023-24, only capital gains up to Rs 10 crore can be availed of tax exemption by investing in residential property. Long term capital gains tax will be levied on the excess profit.
How long will it take to buy a residential property?
Under Section 54, a new house has to be purchased within 2 years from the date of transfer of the old property to get tax exemption. Whereas, in case of construction, the building should be completed within three years. If you buy a new house even one year before selling the old property, you can avail the exemption.
Tax liability on rental income
On the other hand, if your income is in the form of rent, you have to show it in your income tax return. It can be shown in income from other sources. This income will be added to your other income and then you will have to pay tax as per the tax slab that will be created. Taxpayers don’t honestly declare this kind of income, that’s why PAN card has been made mandatory if the rent exceeds the limit.
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