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Taxes on Property Purchase - And How to Save On Them

Monday, January 07, 2019

Anuj Puri, Chairman, Anarock Property Consultants

If you are looking to buy a property or have already invested in one, you will know that there are tax implications involved. Let's first examine the tax on property purchase and then elaborate on how one can save on it via tax exemptions and deductions.

To begin with, the taxation on property purchase has become much simpler than it was before. With the roll-out of GST, all taxes previously applicable on real estate purchase (VAT, Service Tax etc.) have been subsumed under this single unified tax system.

The overall costs involved in buying a property are broadly divided into two components – the first being the one paid to the builder/seller and other - the statutory and legal costs – to the government. While the former roughly comprises 80-85% of the overall property cost, the remaining 15-20% goes as taxes to the government coffers.

So, are the taxes same for both under construction and ready-to-move-in properties? The answer is ‘No.’
 
Taxes for Under-Construction Properties
Statutory and legal costs for under-construction properties vary between 15-20%, depending on the State in question, and broadly include stamp duty, registration and GST.

Stamp Duty: Stamp duty is paid on the sale agreement to render a property transaction legal, and it varies from state to state.

Registration Charges: To register a sale agreement with a government-approved registration officer, buyers have to pay a registration fee of 1% on the total cost of the property at the district sub-registrar’s office.

GST:  Under the new tax-regime implemented in 2017, under-construction properties are currently taxed at 12% on the base cost of a property. Most recently, the GST council is mulling to reduce this rate with many anticipating it to be reduced to either 8% or 5%. Thus, check the prevailing rate at the time of purchase.

TDS (tax deducted at source):
TDS is charged at 1% for properties priced below Rs. 50 lakh. It is deducted by the buyer at the time of payment to the seller. Thereafter, the builder needs to pay this amount to the central government online or via any authorised bank within 7 days from the end of the month in which such TDS is deducted.

The Tax Benefits of Ready-to-move-in Properties
One of the major attractions of ready-to-move-in properties is that they are exempt from GST, provided that the project has been issued a completion certificate. Buyers of such properties need to pay only the stamp duty and registration charges as taxes, which comprise 7-8% of the total property cost.

The seller quotes a lump-sum amount and the buyer also pays the government’s statutory charges during registration. Thus, ready-to-move-in properties offer a good value proposition for homebuyers, who not only get to see the property they are buying but can also move in immediately and save on rentals.
 
Property Tax
Another tax that a buyer needs to pay after moving into his or her new home is the annual property tax. The tax amount varies not only from state to state but also according to micro markets in a city. In case there’s an income generated by a property, that too is liable to be taxed. However, if the property is self-occupied, then only the annual property tax applies.
 
Relief for Affordable Housing
In a major push to the affordable housing segment, the government has extended a GST benefit to its Credit Linked Subsidy Scheme (CLSS) for EWS, LIG, MIG-I and MIG-II homebuyers. Besides getting an interest subsidy, such buyers can also avail of a lower concessional GST rate of 8%.

In fact, to boost sales in this segment, the government has urged developers to refrain from charging any GST from homebuyers in this critical segment because the effective 8% GST rate in affordable housing can be adjusted against their input credit, should they opt for this.
 
How to Save More on Property Taxes
After understanding how taxation works in property purchase, we now move to tax deductions and exemptions which, if availed of appropriately can go a long way in easing a homebuyer’s overall financial burden.

Tax deductions on stamp duty & registration charges: While the Government charges 5-7% of the property cost as stamp duty and registration taxes, one can claim tax deductions on these under Section 80C of the Income Tax Act, 1961. Buyers can seek maximum Rs. 1.5 lakh as a tax deduction, provided they fulfil certain conditions.

For instance, the taxes paid must be in the same year as that of claim, only fully-constructed properties are considered for this exemption, and the property must be purchased for self-use and not as an investment.

Tax deductions on home loans: Buyers who avail of a home loan can claim tax deductions under Section 24, 80C and 80EE of the I.T. Act for repayment on both the principal and interest amount after fulfilling certain pre-conditions:

Tax deductions on interest repayment: Under Section 24, a buyer can avail deduction of a maximum of Rs. 2 lakh for the interest portion of the home loan for a self-occupied property. A property that is rented out has no upper limit for tax deduction claim.

Tax deductions on principal repayment: Under Section 80C, one can claim a deduction of Rs. 1.5 lakh on repayment of the principal portion of the EMI paid during the year. However, the owner must not sell the property for at least 5 years after taking possession, or else the deduction claimed earlier will be added back to owner's taxable income in the year of sale.

Additional benefit for first-time homebuyers: Under section 80EE, first-time home buyers can claim an additional Rs. 50,000 in deduction, provided the loan amount is Rs. 35 lakhs or less and the property value does not exceed Rs. 50 lakhs.

Tax deductions on joint home loans: In case of a joint loan, each loan holder can claim a deduction of Rs. 2 lakh for interest paid and up to Rs. 1.5 lakh for the principal amount under Section 80C, provided they are the co-owners of the property purchased via the loan.

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