Tax Benefits

Another component of return is tax-sheltered benefits. These benefits are the paper losses you can deduct from the taxable income you receive from the property. Because you are the
owner of an investment property, the Indian Tax Authorities
allot you an annual allowance to deduct against your income if housing is purchased through a housing loan. For commercial properties depreciation is allowed. The premise is that this deduction will be saved up and used to replace the property at the end of its useful life.

For most businesses, this is a necessary deduction because equipment like
fax machines and computers wears out after time. But when it comes to real estate, most property owners don’t live long enough, or keep their buildings long enough, for them to wear out. Therefore,
the tax saving from the deduction is a profit that is added to your overall financial return.

There are a few different methods that you can use to determine your annual depreciation allowance. The most common
method relies on using the land- to- improvement ratios found on your property tax bill. Don’t be concerned if the actual rupee amount shown on the tax bill doesn’t mesh with what you’re paying
for the property; it is the ratio we are looking for.

The idea is to use the ratio numbers to get the percentage you need to determine the value of the improvements. To do this, use the following calculation:

Assessed improvement value ÷ Total assessed value
= % Value of improvements

Once you know the percentage value of the improvements,
you then multiply that by the sales price to get the amount of depreciable
improvements.

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