Income tax on residential property earnings, taxation guidelines explained

Real estate remains a popular choice for investment, especially in residential properties, offering two key advantages - regular rental income and appreciating property value over time. However, it's essential to understand that such earnings are not tax-free. Whether you receive rental income or sell the property later, tax liabilities arise.

When selling a property after holding it for more than two years, it falls under long-term capital gains and is taxed at 20% after considering the indexation benefit. Conversely, selling before 24 months results in short-term capital gains, which are taxed according to the individual's applicable income tax slab.

Fortunately, there are opportunities to save on taxes. Section 54 of the Income Tax Act provides relief from tax on income earned from selling an old property if the proceeds are used to buy a second residential property. However, this benefit is only applicable to long-term capital gains, assuming the seller's intent is to find a suitable home for themselves.

It's crucial to note that tax exemption under Section 54 applies exclusively to the purchase or construction of a residential property, not commercial property. For land, tax exemption can be claimed by investing the capital gains tax amount in buying a plot and constructing a house. However, purchasing land alone does not qualify for tax exemption. From the financial year 2023-24, tax exemption can be claimed on residential properties for capital gains up to Rs 10 crore, with long-term capital gains tax applicable to profits exceeding this limit.

To avail of the tax exemption, the new property must be purchased within two years from the date of transferring the old property, while construction should be completed within three years. Even if you buy a new property a year before selling the old one, you can still avail of the exemption.

On the other hand, if you earn rental income, you must include it in your income tax return under "Income from other sources." This income is added to your overall earnings, and you must pay taxes according to the relevant tax slab. To tackle tax evasion in rental income reporting, PAN card details are now mandatory for rentals that exceed a certain limit.

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