A joint loan while buying is beneficial; make full use of
deductions available while selling
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.
While buying
A house is the biggest purchase most people make in their
lifetime and the government realizes 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 the Income
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.
While selling
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.
TDS WHILE BUYING A 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
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