Tax Benefits of Buying a Commercial Property

Every person dreams of owning a house as it allows them to live comfortably. Having a piece of real estate allows one to realise their ambitions. Real estate without taxes is a fantastic investment as it can turn out to be a wise business move allowing one to get substantial tax benefits. There are plenty of tax benefits of buying a commercial property.

Under Section 80C, residential properties provide tax benefits on principal repayment of a house loan up to Rs 1.5 lakh, and under section 24 of income tax act commercial property, you can receive tax benefits on interest repayment of a home loan up to Rs 2 lakh. Additionally, those who purchase affordable housing units or first-time homes are eligible for additional tax benefits and this will help the investor with tax benefits on commercial property loan india. They gain from reduced GST rates on the acquisition of reasonably priced properties as well. There are certain tax deductions available to you even if buying commercial real estate does not come with many tax benefits of buying a commercial property.

We’ll get to know more about the specific tax benefits of buying a commercial property in this article. Additionally, it will provide an outline of the commercial shop financing options for real estate purchases:

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Tax Relief on Commercial Property

Let’s understand the tax exemption on commercial property loan in detail:

Standard Deductions

It is applied as a standard deduction at a flat rate of 30 per cent for repairs and other improvements made to your commercial property. It applies regardless of the amount spent on purchasing the property and helps you save a respectable amount on taxes. 

Deduction on loan Interest

You are eligible to deduct expenses from the total interest paid on a loan that you took out to purchase or develop commercial real estate and rebuild or develop it. Tax deductions are also available for this category’s processing fee or prepayment charge. But this is only possible starting the year after construction is finished and you take ownership of the property. For any interest paid before the year you gained control of the commercial property, you may also be eligible to receive the whole amount in five equal instalments. It will begin in the year when construction is finished and the amount will get the deduction on the loan interest. 

Using the Commercial Property for your Profession/Business

You are not eligible to deduct any notional rental revenue in this situation. Nevertheless, you are still able to deduct interest paid on your loan for the purchase of the commercial property as well as depreciation. Actual maintenance and repair costs are deductible from your tax benefits of buying a commercial property. 

Interestingly, the tax relief on commercial property for interest paid on your business property loan is limited under the new tax structure. For let-out properties, it does not take into consideration any Section 24 deduction. Interest and the standard deduction are allowed, but only up to the net yearly value, which is the amount left over after local taxes are subtracted from the gross rental amount.

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Tax Treatment for Commercial Property Income/Rentals 

Your revenue from commercial real estate will be subject to personal taxation under the “Income from House Property” category. The yearly value, which is subject to taxation once certain expenses have been subtracted, is the rental amount you will get or anticipate realising. The income from subletting a business property that you do not own will be subject to taxation under the heading “Income from Other Sources.” 

It will fall under the heading of “Business Income” if you operate your own company out of the commercial property. Due to their desire to claim more costs on the latter, many people frequently make the error of reporting their rental income as business revenue. 

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Conditions

Available for payment only. This indicates that a deduction can be made in the year that the expense is incurred, regardless of the year that it is paid.

The interest deduction is applicable to funds obtained from friends and family as well as other sources.​

Whether commercial property is rented out or utilised for one’s own business or profession, there is no cap on the interest amount that can be deducted from the loan.

During the building phase, no tax deduction is permitted: 

(i) Interest paid in advance of loan completion is not deducted if the loan is taken out for repair, renewal, or reconstruction.

(ii) In the event that the loan is for both purchase and construction, the total interest paid throughout the project may be deducted over the course of five consecutive fiscal years, beginning with the year that construction is finished.

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How can I Reduce my Sales Tax on Commercial Property?

According to the Income Tax Act, 1961 (henceforth referred to as the Act), capital gains on the sale of a business property can be preserved in the following ways and through this one can get several tax benefits of buying a commercial property.

Section 54F

The investor is completely excluded from paying any tax on any capital advantage if the general promoting proceeds—as opposed to simply the capital gain—from the sale of industrial property are put into a contemporary residential home.

The time limit for making the funding is:

1 year preceding the date of sale, or

2 years after the date of sale, or

3 years after the date of sale in case of production of residence assets.

Section 54EC

The assessee is exempt from paying tax on long-term capital gains if all or part of the proceeds from the sale of business belongings are invested in certain bonds, which include National Highways Authority of India (NHAI) or REC bonds, within six months of the date the monetary property changed into offered and before the income tax return for the applicable length changed into file. This applies first-rate to the capital income, not the sale proceeds. Nevertheless, the exemption supplied by using the usage of Section 54EC is restrained to a funding of no greater than Rs. 50 lakhs.

These bonds need to be held for a full five years. The exemption that becomes used might be eliminated and a problem to taxation in the three hundred and sixty-five days that its miles are withdrawn if the cash is taken out in advance than five years.

In order to take advantage of the exemption and avoid paying capital advantage tax, an assessee may additionally invest a part of the income from the sale of commercial belongings in residential actual assets and the remaining amount in bonds as laid out in Section 54EC.

Capital Gain Account Scheme

If the assessee is not able to shop for or collect residential assets earlier than filing a profits tax pass back, the very last fee variety must be invested or deposited in a separate financial institution account referred to as the Capital Gain Account Scheme. The budget also can then be used again to buy or construct a belonging inside the subsequent or 3 years, respectively, to qualify for the exemption.

The exemption may be revoked and the less utilised quantity could be taken into consideration as a capital benefit within one year before the above mentioned duration finishing if the aforementioned quantity is not used for the purchase of residential property in the allocated time body.

Amendment: It is usually advocated to restrict investments to Rs. 10 crores through the Finance Bill, 2023, in regards to deposits made into the Capital Gains Account Scheme.

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Things to Keep in Mind for Tax Benefits of Buying a Commercial Property

• The only year that deductions are available is the year that they accrue.
• Interest deductions are available for money borrowed from friends, family, and other sources.
• The amount of interest that can be deducted from loans taken out to purchase commercial real estate is unlimited. Nevertheless, during the building phase, tax deductions are not permitted.
• If you have taken out the loan for reasons of reconstruction, repair, or renewal, there are no deductions for interest paid before completion.
• For a commercial property acquisition loan, there is no Section 80C deduction available for principal payments.
• The higher your actual rent or the amount you anticipate receiving the amount that is taxed on rental revenue. There is a cap of Rs 2 lakh on the loss you may write off against other revenues under the heading “Income from House Property,” even though you can claim the full interest against rental income after standard deduction. In this sense, losses may be carried forward for eight years. 

Specifically, you can take advantage of the post-purchase tax benefits of buying a commercial property. But take careful notice of the prerequisites for the same. Purchasing commercial real estate is a value proposition when all factors are taken into account, including taxation.

Conclusion

Many income tax regulations apply to real estate, beginning with the acquisition and continuing through the sale of the asset. In order to do the required tax planning and so save taxes, an assessee must comprehend the taxation of real estate transactions. If utilised properly, Section 54F is one of the programmes that might greatly help an assessee. To receive the advantages, one must abide by all laws and restrictions specified in the aforementioned part; otherwise, they will put them in danger. Therefore, it is imperative that you comprehend every facet of Section 54F of the Act before making a decision.

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