Are you an Indian property investor or a professional using real estate for your practice? You might be leaving significant money on the table if you’re not utilizing one of the most powerful tax reduction tools available: real estate depreciation.
Far from being a complicated accounting trick, depreciation is a legally sanctioned method under the Income Tax Act (IT Act) to reduce your taxable income. Here is how you can use it to build wealth.
How Depreciation Becomes Your Tax Shield
In simple terms, depreciation allows you to deduct the gradual loss in the value of your building (not the land!) over time from your taxable income. This deduction is a “non-cash expense,” meaning you don’t actually spend any money; you simply get to subtract a theoretical amount from your profits.
This reduction directly lowers your total tax bill, functioning as an effective tax shield for both residential and commercial property owners who use their assets for business or professional purposes.
Key Depreciation Rates Under the IT Act (IT Act)
| Property Type | Depreciation Rate |
| Residential Property (Used for Business/Profession) | 5% |
| Commercial Property (Used for Business/Profession) | 10% |
| Temporary/Special-Purpose Buildings | ~40% |
| Fittings and Fixtures (Business Use) | 10% |
| Computers, Software, Laptops (Business Use) | 40% |
Expert Insight: “In India, the Income Tax Act allows for various rates, such as 5% for residential, 10% for commercial, and around 40% for temporary or special-purpose buildings. This reduces taxable profits, which lowers the investor’s tax burden,” says Niresh Maheshwari, Chartered Accountant and Director, Wealth Wisdom India.
Case Study: How a Doctor Saved ₹2 Lakh in Taxes
Consider the case of Meera Soni, a 35-year-old doctor who owns a two-story building valued at ₹80 lakh (excluding land). She uses the ground floor as her clinic and lives on the upper floor.
Since 50% of the property (₹40 lakh) is used for her professional practice, she can claim depreciation on that portion.
Here is how the calculation works for her:
- Business Value: ₹40,00,000
- Applicable Rate: Her clinic space is treated as commercial property for tax purposes (as it doesn’t meet the 66.66% residential threshold), qualifying for the 10% rate.
- Annual Deduction: $₹40,00,000 \times 10\% = ₹4,00,000$
- Tax Benefit: Dr. Soni can deduct the full ₹4 lakh from her professional income, significantly lowering her overall tax liability for the year.
The Rule of Proportionate Use
Depreciation can only be claimed on the portion of the property actually used for your business or profession.
- A lawyer, doctor, or chartered accountant using a portion of their home as an office can claim depreciation proportionate to that usage.
- “If it is partly used for business and partly used for personal use, depreciation can only be claimed proportionate to the business use,” clarifies Sherry Goyal, Associate Partner, DMD Advocates.
Also Read – Maharashtra Real Estate Defies Rate Hike, Hits Nearly Half of Annual Revenue Target!
The Capital Gains Trade-Off: What Every Investor Must Know
While annual depreciation is a massive win for reducing immediate tax liability, it creates an important trade-off when you eventually sell the property.
Depreciation systematically reduces the asset’s value on paper—this is known as the Written-Down Value (WDV). When you sell a depreciable asset, the gain is calculated based on this lower WDV, often resulting in a higher taxable gain.
Short-Term Capital Gains (STCG) Trap
Under Section 50 of the Income Tax Act, any profit from the sale of a depreciable asset (like a commercial building) is always treated as a Short-Term Capital Gain (STCG), regardless of how long you held it.
- Result: This pushes the gain into your regular income tax slab (which can be 22% to 30%), rather than qualifying for the lower Long-Term Capital Gains (LTCG) rate (around 12.5% plus surcharge and cess).
This means you get a lower tax bill now but face a higher capital gains tax later. The decision to claim depreciation, therefore, depends on your financial priority: immediate tax savings vs. future tax savings.
Common Mistakes to Avoid When Claiming Depreciation
To ensure you maximize your benefit and stay compliant with the tax laws, experts advise investors to avoid these common pitfalls:
- Not Excluding Land Value: Depreciation is only applicable to the building structure, fittings, and fixtures—never the land. Ensure you exclude the cost of land from your depreciation calculation.
- Ignoring Proportionate Use: Only claim depreciation on the exact percentage of the property used for business or professional purposes.
- Poor Documentation: Maintain meticulous records of the property’s purchase, usage, and any associated business expenses.
- Ignoring Beneficial Ownership: Even if the title is not formally in your name, you can still claim depreciation if you are the one using the asset for business and have beneficial ownership (as confirmed by the Supreme Court in the Mysore Minerals case).
By smartly applying the principles of real estate depreciation, Indian investors and professionals can significantly lower their annual tax burden, making property ownership an even more financially rewarding venture.
News Source – hindustantimes
