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.'
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.
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.
Thus, the total taxable value (basic cost less cost of USD/land value) = Rs. 40,00,000/-
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)
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/-)
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.
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.
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 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.
- 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
A property purchased for rental income is also subject to tax, but there are ways to save here as well:
Anuj Puri, Chairman of ANAROCK Group is a highly respected industry authority and thought leader with 30 years' experience in leveraging Indian and global real estate opportunities. His company ANAROCK has a staff complement of over 1800 qualified and experienced professional, with offices in all major markets in the country, dedicated services in Dubai and a global footprint with over 80,000 preferred channel partners.