Property investment vs other tax-saving options: Which is right?

When it comes to investments, buying a property is one of the most traditional and favoured options among Indians, both residents and non-residents.

But what makes property investments favourable?

The reasons are many –

1. Capital appreciation as the value of real estate increases over time
2. Rental income if you let out the property
3. Creating an asset for your future
4. Creating an asset for your loved ones when planning your legacy

Plus, there’s another benefit—like the icing on the cake—the tax angle. Real estate investing attracts tax benefits, which make it favourable for house investors. Let’s understand what these tax benefits include.

Tax benefits of property investment
 

If you avail yourself of a home loan for property investment, you can claim tax benefits on the principal as well as the interest component of the loan. Let’s understand how –

1. Tax benefit under Section 80C
 

Section 80C of the Income Tax Act of 1961 offers tax benefits on the principal repayment of a home loan. Under this section, stamp duty and registration charges paid towards property purchases are also allowed as deductions.

The maximum deduction limit is ₹1.5 lakhs, which helps you save taxes up to ₹45,000 if you are in the 30% tax bracket. However, this benefit is available if you choose the old tax regime for filing your returns. If you choose the new regime, this deduction will not be available.

Did you know?

To claim the deduction under Section 80C, you should not sell the property in the next 5 years. If you do, the tax benefit allowed in the previous financial years will be reversed.

Good to know!

If you apply for a home loan on a joint basis, i.e., with a co-applicant, both you and the co-applicant can enjoy tax benefits under Section 80C. This is specifically helpful if you and your spouse are earning. You can apply as co-applicants and enjoy the tax benefits on independent incomes to reduce your total tax liability.

2. Tax benefit under Section 24(b)
 

Section 24(b) of the Act provides tax exemption on the interest paid towards the home loan. Under this section, you can claim a deduction of up to ₹2 lakhs on the home loan interest payment.

Did you know?

If you purchase an under-construction property, you can still claim a tax exemption on the interest paid for the home loan post-completion of construction within five equal instalments from the year the construction is completed. However, the construction should be completed within the next 5 years of availing the loan to be eligible for the exemption.

Good to know!

If you have co-applicants, the exemption under Section 24(b) can also be claimed by the co-applicant. This doubles the exemption limit to ₹4 lakhs.

3. Other tax benefits
 

Other benefits that you can claim on your property investment are as follows –

1. If you let out the property and earn a rental income, you pay tax on the income at your income tax slab rates. However, you can claim a standard deduction of 30% on the rental income to bring down your tax liability

2. Currently, if you own two properties and one is vacant, the vacant property is considered ‘deemed to be let out’, and the deemed rental income is taxed at your slab rates. However, this taxation has been removed with the latest proposal in the Union Budget 2025. This means you can own two properties without paying any real estate tax in India on the vacant one

3. For commercial property investments, depreciation can be claimed as a tax-free expense to lower your tax outgo

Property investment vs. other tax-saving investments
 

Besides real estate investing, there are other tax-saving avenues too. Three of the most popular ones are as follows –

1. Public Provident Fund (PPF)
 

PPF is a government-backed, fixed-income investment avenue that offers tax benefits on the amount invested, returns earned, and maturity proceeds. It is a long-term investment that lasts 15 years and requires regular deposits.

2. Equity Linked Savings Scheme (ELSS)
 

ELSS is an equity-oriented mutual fund scheme that offers tax deductions on the amount invested under Section 80C. Moreover, on redemption, returns up to ₹1.25 lakhs are tax-free and excess returns are taxed at 12.50%.

3. National Pension System (NPS)
 

The NPS scheme is a retirement-oriented, market-linked saving scheme backed by the government. It offers tax deductions on the invested amount under Section 80CCD (1). The limit is ₹1.5 lakhs, which includes the limit of Section 80C.

Furthermore, you can claim an additional deduction of ₹50,000 under Section 80CCD (1B), which is over and above the 80C limit of ₹1.5 lakhs.

Property investment vs. mutual funds vs. PPF vs. NPS
 

Let’s compare the features, benefits, and tax implications of property investments vis-a-vis other avenues –

Which one to choose?
 

The choice of the right tax-saving option depends on a lot of factors like –

1. Your preference
2. Financial goals
3. Investment amount
4. Investment horizon
5. Risk appetite, etc.

While all options offer tax benefits, their choice depends on your financial needs. You can even choose all of the options for a diversified portfolio. For instance –

1. You can invest regularly in PPF to create a debt component in your portfolio for guaranteed returns
2. You can invest in NPS to plan your retirement
3. You can have a property investment for self-accommodation or to create a source of rental income
4. ELSS mutual funds are a good choice for their return potential and for planning for other financial goals

Making the right choice
 

Whether it is real estate investments vs. mutual funds or other options, assess your needs and make the right choice for efficient tax planning. If property investment is your goal, save up for the down payment and take a home loan to enjoy the tax benefits.

To save up, choose IDFC FIRST Bank Savings Account and enjoy attractive interest with monthly credits to grow your savings faster. Once you have saved enough, you can get an IDFC FIRST Bank Home Loan to finance your property at affordable interest rates.

You can also invest in other avenues, and IDFC FIRST Bank offers a seamless digital platform for managing your portfolio. So, take charge of your taxes and lower your tax outgo to save more!