Selling a commercial property? Here are 5 key tax implications you must consider

Selling a commercial property Here are 5 key tax implications you must consider

Generally, commercial real estate has an advantage over residential property in terms of higher rental yield. Not only does one get lucrative rental income, but there is also the potential for capital appreciation that makes commercial real estate a good investment option.

Unlike equity investments that fluctuate with market trends, commercial real estate investments typically guarantee a predictable return, reducing investment risk. Further, the stability comes from long-term tenancy agreements in commercial real estate.

AryamanVir, CEO of Aurum WiseX, said, “Investing in A-Grade commercial real estate comes with a suite of benefits. High returns top the list, with investors looking at a healthy net internal rate of return (IRR) of 12-17%. This includes a steady 7-9% from monthly rental income and the possibility of capital appreciation. This return spectrum significantly outshines residential real estate’s 2-3% rental yield.”

Tax considerations: Investing in commercial real estate in India carries significant tax implications that every investor should know.

So, if you are thinking of selling commercial property after five years, AryamanVir says investors must consider these five critical tax consequences while dealing with commercial real estate investments.

• Capital assets and gains: Commercial properties are capital assets. Profits from their sale after 24 months are long-term capital gains (LTCG), taxed at 20%. If sold within 24 months, it’s short-term capital gains (STCG), taxed as per your tax slab.

 Tax relief through Section 54F: The Income Tax Act provides a tax relief option under Section 54F. If you reinvest the entire proceeds from the sale of your commercial property in a new residential property within a specified time – one year before the sale, two years after the sale, or within three years if you’re constructing a house – the capital gain on the sale is exempted from tax. This benefit is not available if you already own more than one residential property at the time of sale, purchase another residential property within one year, or construct one within three years after the sale.

• Section 54EC bonds: You can invest the capital gain from the property sale in certain bonds like NHAI or REC within six months to get tax exemption. The cap is Rs 50 lakh, and these bonds must be held for five years.

 Capital Gain account scheme: This scheme provides a solution for those who cannot invest in a new property before filing their income tax return. Under this scheme, you can deposit the unutilized sale proceeds in a separate bank account. This amount can be used later for purchasing or constructing a house within two or three years, respectively, to avail of the tax exemption as per provisions in Section 54. However, if the funds are not utilized within this timeframe, the amount is treated as capital gain from the previous year in which the period expires.

• 2023 Finance Bill Amendments: There’s a Rs 10 crore cap on deductions under Sections 54 and 54F, and the maximum deposit in the Capital Gain Account Scheme is also Rs 10 crore. Understanding these points can guide your commercial real estate investments and tax planning.

Source : Business Today

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