Commercial real estate offers an edge over residential property concerning its ability to generate higher rental yield. It not only provides attractive rental income but also holds the potential for capital appreciation, making it a favorable investment choice.
In contrast to equity investments, which are subject to market fluctuations, commercial real estate investments generally ensure a reliable and predictable return, thus lowering the overall investment risk. This stability is reinforced by the presence of long-term tenancy agreements in the commercial real estate sector.
According to AryamanVir, the CEO of Aurum WiseX, investing in A-Grade commercial real estate offers a range of advantages. The primary benefit is the potential for high returns, with investors expecting a robust net internal rate of return (IRR) of 12-17%. This includes a stable 7-9% generated from monthly rental income, along with the possibility of capital appreciation. In comparison, residential real estate's rental yield of 2-3% pales in comparison to this return spectrum.
Tax implications associated with investing in commercial real estate in India are essential for every investor to be aware of, as highlighted by AryamanVir. When considering selling commercial property after a five-year period, five critical tax consequences should be taken into account:
Capital assets and gains:
Commercial properties are classified as capital assets. Profits from selling them after 24 months qualify as long-term capital gains (LTCG) and are taxed at 20%. If the property is sold within 24 months, it falls under short-term capital gains (STCG) and is taxed based on the individual's tax slab.
Tax relief under Section 54F:
The Income Tax Act offers a tax relief option through Section 54F. If the entire proceeds from the sale of a commercial property are reinvested in a new residential property within a specified time (one year before the sale, two years after the sale, or within three years if constructing a house), the capital gain from the sale becomes exempt from tax.
However, this benefit is not available if the investor already owns more than one residential property at the time of sale, purchases another residential property within one year, or constructs one within three years after the sale.
Section 54EC bonds:
Investors can opt to invest the capital gain from the property sale in specific bonds like NHAI or REC within six months to receive tax exemption. The maximum amount eligible for tax exemption is Rs 50 lakh, and the bonds must be held for a minimum of five years.
Capital Gain account scheme:
For investors unable to invest in a new property before filing their income tax return, the Capital Gain account scheme provides a solution. By depositing the unutilized sale proceeds in a separate bank account, the amount can be used later for purchasing or constructing a house within two or three years, respectively, to avail of tax exemption under 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:
Recent amendments have introduced a cap of Rs 10 crore on deductions under Sections 54 and 54F. Additionally, the maximum deposit allowed in the Capital Gain Account Scheme is also Rs 10 crore. Understanding these points can be valuable in guiding commercial real estate investments and tax planning strategies.
