How to save tax on a commercial property?
16 Jan, 2023

How to save tax on a commercial property?

Buyers are increasingly expressing their interest in adding commercial real estate to their portfolios as the asset class is witnessing growing demand and offers excellent capital appreciation potential. If you are one of them and trying to find avenues of tax savings on the purchase of the asset, this article is for you.

It will not be an overstatement to say that commercial real estate makes for a value proposition as there is a chance to receive the dual benefits of capital value appreciation and steady monthly income through rentals. However, when it comes to gaining tax benefits, there are few remarkable differences between residential and commercial properties.

Residential properties offer you tax benefits on principal repayment on your home loan up to Rs 1.5 lakh under Section 80C and on the interest repayment of the home loan up to Rs 2 lakh under Section 24. Also, there are extra tax deductions available for first-time homebuyers and affordable housing unit buyers. They also benefit from lower GST rates on purchases of affordable homes. While you do not receive a slew of tax benefits for buying commercial real estate, there are still some tax deductions that you can avail. Let us take a closer look at these:

Tax treatment for commercial property income/rentals
The income that you earn from your commercial real estate will fall under ‘Income from House Property’ category and will be taxable in your hands. The rental amount you receive or expect to realise will be the annual value, which will be taxable after specific types of expenditure are deducted from the same. If you do not own the commercial property and have sublet it, the income will be taxable under the category ‘Income from Other Sources’.

If you run your own business from the commercial property, it will come under the category ‘Business Income’. Many people make the common mistake of showing their income from rentals as their Business Income as they want to claim other expenses on the latter. However, it is advisable to refrain from doing so as such a step will only land you in trouble.

Deductions available to you

Standard deduction
It is applicable at a flat rate of 30 percent as a standard deduction for repairs and other renovations of your commercial property that you have let out. It helps you save a reasonable amount in taxes and applies irrespective of the amount spent on buying the property.

Deduction on loan interest
You can claim deductions on the total interest repayment on your loan availed for buying or building the commercial property as well as reconstructing or constructing the property. The prepayment charge or processing fee in this category is also eligible for tax deductions. However, this is only available from the year in which you take possession after the completion of construction. You can also claim the aggregate sum in five equal instalments for any interest paid before the year you took possession of the commercial property. It will start from the year of completion of construction.

Using the commercial property for your profession/business
In this case, you cannot claim any notional rental income-based deductions. However, you can still claim depreciation along with interest paid on your loan for buying the property. You can claim actual expenditure on maintenance and repairs as tax deductions.

Notably, the new taxation system restricts the tax deductions on interest paid on your commercial property loan. It does not account for any Section 24 deduction for let-out properties. You can claim interest and standard deduction, but only until the net annual value —the sum you realise after deducting municipal taxes from the gross rental amount.

Points to remember

  • Deductions are solely available in the year of their accrual.
  • Deductions on interest are applicable for the money that one borrows from relatives, friends, and others.
  • There are no limits on deductions of interest paid on loans availed of for buying commercial property. However, tax deductions are not allowed in the period of construction.
  • There are no deductions for interest paid before completion if you have taken the loan for reconstruction/repair/renewal purposes.
  • There is no Section 80C deduction available for principal repayment on a commercial property purchase loan.
  • Rental income is taxed based on the higher amount of either your rent in hand or the amount you expect to get​.
  • While you can claim the entire interest against rental income post standard deduction, there is a limitation of Rs 2 lakh for the loss you may set off against other incomes under the head ‘Income from House Property’. Any losses may be carried forward for eight years in this regard.

Distinctly, there are tax benefits available on commercial properties you can avail of post-purchase. However, note the conditions for the same carefully. If you consider the overall benefits, you will find that purchasing commercial property is a value proposition on all counts, including taxation.