Irrespective of class or income, Indians are fond of buying gold and real estate. Purchasing and selling the metal is a straightforward game but a property, through its lifecycle (buying, owning and selling), can be taxing. If played right, you can reduce the tax outgo.
A house is the biggest purchase most people make in their lifetime and the government realises this. To give buyers relief, the government has allowed income tax (I-T) deductions if the property is bought on a loan. Under Section 80C, the borrower can claim deduction of up to Rs 1.5 lakh. For a self-occupied property, a Rs 2 lakh benefit is available under Section 24 (b) of theIncome Tax Act for interest on the home loan. If the property is not self-occupied, the entire interest paid to the lender can be deducted from income. “This applies even if a person borrows money from a friend, his family or a private lender provided appropriate loan document between the borrower and private lender is done and there is either a letter or a confirmation of interest charged by lender,” said Hemal Mehta, senior director, Deloitte in India.
Problem area: Under the current market conditions, project delays are a common thing. This can cause financial trouble to the borrower. A person can’t claim deduction for the interest if his or her house is still under construction. A buyer can, however, get benefit for the principal amount. On possession, the borrower can claim deduction for the interest paid during the pre-construction period. This needs to be done in five equal instalments, starting the financial year you are handed the property.
Tip: To take advantage of current laws, a couple should take a joint loan in equal proportion. This will allow each to claim full tax deductions available for the principal and interest. This also applies to a child and a parent.
While you own it
If it’s the borrower’s only house and self-occupied, there’s no taxation. For those who have two or more houses and these are neither let out nor occupied, the taxation can get tricky.
According to I-T laws, in such cases the owner should take a notional rent value and pay tax on it. There’s a prescribed method to calculate the notional value, which takes into consideration the municipal value of the property and the rent control legislation (either of the two) or the prevailing rent in the area for a similar house. “In a case of a notional rent, there is no rule to submit a certificate from a third party. However, it’s better that a person submits a letter from a broker stating the prevalent rent in the area,” said Mayur Shah, executive director – tax & regulatory services, EY India.
Problem area: If you are claiming housing loan deductions and housing rent allowance (HRA) at the same time, it can cause trouble. Many people claim HRA by showing rent paid to parents or wife (if there’s a house in their names). A taxpayer is allowed HRA and loan deductions both under certain conditions. For example if your house is in a different city than that of residence. The department also allows you to claim HRA if you have a house in the same city as your residence, but you need to have a genuine reason. For example, many people in metros such as Delhi and Mumbai own house in far-off suburbs and can find it difficult to commute, owing to the distance. In such case, the person can claim both.
Tip: While calculating the notional value of a second home, you are allowed to claim few deductions such as municipal taxes. Also, an owner can claim deduction of a sum equal to 30 per cent of the value of the house property towards repair and maintenance charges.
When a person sells a property, he or she needs to pay tax on the profits made. If sold within three years of acquisition, the seller needs to pay short-term capital gains tax (STCG). In this case, the profits are combined with the income and taxed on the I-T slab rate.
If the property is held for more than three years, it attracts long-term capital gains tax (LTCG). The tax is levied at 20 per cent (plus surcharge and cess) after adjusting the gains for inflation using the cost inflation index the government issues.
A seller can save entire tax outgo if he or she uses proceeds equivalent to long-term capital gains for buying a new house located within India within one year prior to the sale date or two years from the sale date. If the property is under construction the time period permitted is three years.
The amount used for buying a new property is exempted from tax and if there’s any balance, it will be taxed at a flat 20 per cent (plus cess and surcharge). If you are not immediately buying a house, this money needs to be kept in the Capital Gains Account Scheme (CGAS), and withdrawn within the stipulated timeframe.
If you don’t want to go for a residential property, you can still save LTCG tax by investing in specified bonds issued by the National Highways Authority of India or Rural Electrification Corp (under section 54/54EC) within six months from the date of sale. These bonds have a lock-in period of three years. Also, the seller can only invest a maximum of Rs 50 lakh in these bonds, while you have to pay tax on the remaining amount.
Problem area: If the seller had inherited the property or it was gifted to him, the capital gain will be computed on the basis of the cost to the previous owner. If the house was purchased before April 1, 1981, the I-T department will consider the acquisition cost by the original owner or the fair market value of the property as on April 1, 1981, whichever is higher.
If a person sells an under-construction property after holding it for over three years, the taxation rules completely change. This is because the I-T department considers the person as a property owner only when he or she has received possession.
Tip: While calculating STCG and LTCG tax on sale of property, one can deduct the money spent on improvement and also cost for acquiring the asset such as stamp duty, legal fees, and payment of brokerage.
Tax deducted at source (Withholding tax) while buying property
- For property purchases over Rs 50 lakh, buyers need to deduct withholding tax on behalf of the seller
- This is 1% of the agreement value
- This amount needs to be deposited with the income tax department
- Buyer needs to furnish information online in Form 26QB
- He/she also needs to download TDS certificate (Form 16B) and issue it to the seller
- Failure to comply results in interest and penalty on the buyer