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. For example, in Maharashtra, the stamp duty is 5% (now proposed to be 6%), while in Karnataka it is currently 5.6%. As such, stamp duty accounts for between 5-7% to the total property acquisition cost. Interestingly, most states offer a rebate of 1-2% to women if a property is registered in their name.
- Registration Charges: To register a sale agreement with a government-approved registration officer, buyers have to pay a registration fee of 1% of 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.
A Case Study – Buying a Home in Karnataka
Let’s take these charges as applicable in Karnataka to illustrate the calculations for under-construction properties with a super built-up area is 1,000 square feet (carpet area 780 square feet) and priced at Rs. 6,000 per square foot. We will divide the overall costs into the total cost paid to the builder and to State Government.
Total Cost Paid to Builder
- Basic cost = Rs. 60,00000/- (SBA* quoted rate i.e. 1,000*6,000)
- Cost of UDS/ Land Value (1/3 of basic cost as per notification) = Rs. 20,00000/-
Thus, the total taxable value (basic cost less cost of USD/land value) = Rs. 40,00,000/-
- BESCOM, BWSSB & legal charges (calculated on per sft rate) = Rs. 2,50,000/-
- GST on water, electricity & other services (18% on BESCOM, BWSSB & legal charges) = Rs. 45,000/-
- CGST (6% of taxable value) + SGST (6% of taxable value) = INR 4,80,000/- *
Thus, the total cost paid to the builder = Rs. 67,75,000/- (basic cost + BESCOM/BWSSB/legal + GST + CGST + SGST)
Total Cost Paid to State Government (during registration)
- Stamp Duty = INR 3,79,400 /- (5.6% of total cost to builder)
- Registration charges = INR 67,750 /- (1% of total cost to builder)
|Grand Total (Cost paid to Builder + Stamp Duty & Registration)||INR 72,22,150 /-|
(* If the GST rate is brought down to 8% in the next council meeting in Jan., the new GST cost paid to govt. will be INR 3,20,000/- – a reduction of INR 1,60,000/-)
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.
Understandably, recent trends as highlighted in ANAROCK’s recent consumer sentiment survey indicate that buyer preferences are significantly skewed towards RTM properties. More than 49% of today’s property seekers prefer to buy ready properties, not only to save on costs but also to avoid risks such as delayed project delays and assorted unscrupulous builder activities.
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 fulfill 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 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.
– An 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
Saving Tax on Rental Income
A property purchased for rental income is also subject to tax, but there are ways to save here as well:
- Maintenance charges: An easy way to save tax on rental income is to outright exclude maintenance charges from the rent received. One only needs to include the maintenance cost in the rental agreement.
- Municipal taxes: One can also claim municipality taxes like property tax, sewerage tax, etc. from the rental income, provided these charges are paid by the owner and not by the tenant.
- The additional tax benefit for jointly-owned property: In case of a jointly-owned property – usually husband and wife – one can save on taxes quite effectively. For instance, if the wife is not working, the rental income can be divided in the proportion of ownership of the property and thus save on taxes. This can also be beneficial in a scenario wherein both are working but are in different tax slabs.
- Basic deduction: One of the straightforward ways for owners to save more on a rented-out home is to deduct an outright 30% of the annual rental income for repair and maintenance of the property, irrespective of the actual expenditure incurred during the year
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