Real Estate Depreciation: A Smart Strategy for Property Investors to Reduce Tax Bills
Meera Soni, a 35-year-old doctor, owns a two-storey building in Pune where she runs her clinic on the ground floor and lives on the upper floor. By claiming depreciation on the business portion, she can reduce her tax liability. This article explores how both residential and commercial properties can offer tax benefits through depreciation.
Real Estate DepreciationTax ReductionProperty InvestmentIncome Tax ActDepreciation RatesReal Estate PuneNov 01, 2025
Real estate depreciation functions as a tax shield by allowing investors to deduct the property's value loss from their taxable income. “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, an investment management firm.
Both residential and commercial properties qualify for depreciation if used for business or a profession. “If it is partly used for business and partly used for personal use, depreciation can only be claimed proportionate to the business use. Depreciation can only be claimed up to the useful life of the asset,” says Sherry Goyal, Associate Partner, DMD Advocates, a law firm.
For example, professionals such as lawyers, doctors, and chartered accountants can use residential property to run their practices and thus claim depreciation on such residential property. A property is classified as residential if at least two-thirds (66.66%) of its total built-up area is used for residential purposes. Hotels and boarding houses, however, are not counted as residential buildings. For Soni, because the property does not meet the 66.66% threshold for residential classification, the ground-floor clinic is treated as a commercial property for tax purposes, allowing her to claim 10% depreciation on the ₹40 lakh business portion.
“Any fittings and fixtures can get 10% depreciation, and certain other things, such as computer software, computers, and laptops, can get 40% depreciation,” says Himanshu Sinha, Partner- Tax Practice, Trilegal, a law firm. Furniture and fixtures are eligible for depreciation only if they are used for business purposes/professions.
From a taxation perspective, the value of a commercial property depreciates over time, and the depreciation claimed each year helps reduce taxable income. However, when the property is sold, this depreciation affects the calculation of capital gains. “Under Section 50 of the Income Tax Act, any gain arising from the sale of a depreciable asset, such as a commercial building, is treated as a short-term capital gain (STCG), regardless of the holding period. This is because the depreciation claimed over the years reduces the property’s written-down value (WDV), effectively increasing the gain on sale,” says Maheshwari.
“This would result in a higher tax rate applicable to the investor, i.e., 22% to 30% as against the long-term capital gains tax rate of 12.5% (plus surcharge and cess),” says Sinha.
Some of the common mistakes are not maintaining proper documentation for the purchase and usage and not claiming depreciation in the case of leased assets (as the Supreme Court in the case of Mysore Minerals considers actual use and beneficial ownership instead of formal title). “Not excluding cost of land while calculating the depreciation and not claiming depreciation in proportion to use for business purposes are also mistakes to avoid,” says Goyal.
Frequently Asked Questions
What is real estate depreciation?
Real estate depreciation is a tax deduction that allows property investors to account for the loss in value of a property over time. This deduction can reduce the investor's taxable income, thereby lowering their tax liability.
Can depreciation be claimed on both residential and commercial properties?
Yes, depreciation can be claimed on both residential and commercial properties, provided they are used for business or professional purposes. The rate of depreciation varies, with residential properties typically depreciating at 5% per year and commercial properties at 10% per year.
How does depreciation affect capital gains when a property is sold?
When a property is sold, the depreciation claimed over the years reduces the property’s written-down value (WDV). This can increase the capital gain on sale, leading to a higher tax rate on the gain.
What are some common mistakes to avoid when claiming depreciation?
Common mistakes include not maintaining proper documentation for the purchase and usage, not excluding the cost of land when calculating depreciation, and not claiming depreciation in proportion to the business use of the property.
Who can claim depreciation on residential properties?
Professionals such as lawyers, doctors, and chartered accountants can claim depreciation on residential properties used for their professional practices. The property must meet the criteria of having at least two-thirds of its total built-up area used for residential purposes.
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