Listing 8 Real Estate-Related Transaction That Are Tax-Free

Real estate is dearly admired by India for reasons conspicuous ─ any short-term downturns notwithstanding, your investment will bear fruit in the long run. Surely, you also have to pay taxes on profits arising out of your real estate investment. However, this is not true of all real estate investments. We list here some of the transactions that, according to the Indian income tax law, are tax-free.

Agricultural income

We are an economy with agriculture as the backbone. That sets the tone for owners of agricultural land enjoying certain benefits. According to Section 10(1) of the Income Tax (I-T) Act, agricultural income is exempt from tax. Do note here that agricultural income is any profit derived from land that is being used for agricultural purposes. If the land is being used for processing of agricultural produce, the income generated will remain exempt.  The law also says that any income earned through farmhouses is also considered agricultural income, subject to certain conditions specified in Section 2(1A).

Also read: Should Agricultural Land Be Converted For Non-Agricultural Purposes?

Capital gains in case of compulsory acquisition of urban agricultural land

The government acquired your agricultural land in an urban area to develop one of its projects? While you may not have a choice but to let go of your dearly held possession, the fact that you do not have to pay any taxes for the compensation you receive does act as some relief.  According to Section 10(37), one can claim exemption in respect of capital gain arising on transfer by way of compulsory acquisition of agricultural land situated in an urban area, provided compensation is received on or after April 1, 2004. However, to claim the benefit, you will have to prove that the land was being used for agricultural purpose for the two years, preceding the date of transfer.

Income arising out of family estate

According to Section 10(2) of the I-T Act, any family income or an income arising out of impartible estate by a member of a Hindu Undivided Family (HUF) is exempt from tax.  An HUF comprises members and extended members of a family.

Reverse mortgage

With property ownership comes the surety that you will be able to use this asset to fulfill your other needs. Many property owners actually mortgage their property to fulfill their other requirement. To do that, they approach banks to avail of loans against their property. This concept is known as reverse mortgage. The bank makes payment to the borrower against the mortgage of their property. The payment against mortgage is made either in instalments, in a lump sum amount, or both at a fixed rate of interest. Now, if you have availed of a loan under the reverse mortgage scheme, the amount you receive a loan is not chargeable to tax, according to Section 47(XVI) of the I-T Act.

Also read: Things You Need To Know About Reverse Mortgage Loans

Value of palaces

Not many of us are lucky owners of palaces, but those who do else enjoy certain perks of owning a large piece of property. Under Section 10(19A), the annual value of “one palace in the occupation of a former ruler” is exempt from tax. In case one owns multiple palaces, the annual value of the remaining palaces would be taxable.

Income of charitable trusts, religious institution

Income of charitable institutions, funds or institutions formed for religious purposes is exempt from tax under Section 10(23C)(IV) and Section 10(23C)(V). However, these institutions need the approved of authorities to be defined as such institutions. In 2014, the Central Board of Direct Taxes (CBDT) authorised I-T commissioners to grant approval to these institutions to avail of benefits under the two sections.

Income of real estate investment trusts

The profit a real estate investment trust (REIT) earns by renting or leasing property that it directly owns is exempt from paying taxes under Section 10(23FCA).

Income of a co-operative society formed for promoting the interests of SCs/STs

Under Section 10(26B), if a co-operative society is set up for promoting the interests of the members of Scheduled Castes or Scheduled Tribes or both, the profit it earns it exempt. However, the exemption is available only if “the membership of the co-operative society consists of only other co-operative societies formed for similar purposes, and the finances of the society are provided by the government and such other societies”.