If you are looking at investing in a new home or planning to sell your existing one, then you know just how mind boggling the taxes involved in the buying and selling of properties in India can be. In this article we will try to break down the various taxes and costs involved so that you can further use this knowledge to save on property taxation by availing of the various exemptions and deductions available.

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Earlier, there were a plethora of taxes involved in the purchase of a property. These have since been consolidated with the introduction of GST. Costs at the time of purchase are basically of two types – Money to be paid directly to the builder / owner and statutory and legal charges to be paid to the Government. Taxation varies based on whether a property is under construction or complete. If you are deciding between whether to go for Ready to Move property or an Under Construction property, then here are some points to consider:

Under Construction properties maybe easier on the pocket and the price difference between a UC property and a RTM property may vary from 10 – 30%. These properties have an extended window between the start of construction and completion that may allow you to enjoy considerable capital appreciation. UC properties are RERA registered and have to comply with RERA guidelines and rules that protect your interests as a consumer.

RTM properties have a negligible wait period and you can simply complete the formalities and move in, which helps you save on time and possible rental expenditure. These properties are free from GST implications and you will be saving a full 12% by investing in an RTM property.

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Regardless of the status of the property, there are some charges that have to be paid like Stamp Duty, Registration and Tax Deducted at Source (TDS).

Stamp duty is paid on the sale agreement in order to render a transaction legal. It ranges from 5-7% and varies from state to state. Registration charges are needed to register the sale with a government approved registration officer and these are 1% of the total cost.

TDS @1% should be deducted by the purchaser of the property at the time of paying the sale consideration in case of properties where the value is equal to or more than 50 lakhs.

Another distinction to be made, is between Property Tax and Income Tax on income from property. Property Tax is levied by the local body like Panchayat/Municipality/Municipal Corporation while Capital Gains Tax is levied by the Central Government. The method of computation of amount of tax payable in both cases is very different. Property tax is charged by the local authorities for upkeep and maintenance of basic amenities and infrastructure in the area. Vacant plots of land are not liable to be taxed under property tax.

There are 3 main ways in which property tax can be calculated:

  • Annual Rental Value (ARV): This is a system in which the gross annual rent of the property is determined by the concerned local body and taxes are levied based on this value.
  • Capital Value System (CVS): In this system the market value of the property is used to determine the taxes to be paid.
  • Unit Area System (UAS): Taxes are levied based on the per unit price of the carpet area of the property.
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Income tax laws provide for taxation of a person who receives income from the rent of both commercial and residential property. The property is taxable on the basis of annual value. That is if the rent received by you is a nominal amount then you will be taxed at the market rent rate for the property, and if the actual rent received by you is higher than the market rate then you will be taxed at the rate of the actual rate received by you. Besides deductions for municipal taxes and rent not accrued, you are also allowed to claim a standard deduction of 30% annually for repairs and maintenance of the property. If you have borrowed money for the purpose of renovation, repairs etc. then you are also allowed to claim a deduction on the interest for the amount borrowed.

Another tax related to the sale and purchase of properties is Capital Gains Tax.When you sell a property at a rate higher than its purchase price then you will be liable to pay Capital Gains Tax.

Short term capital gains is gain from the sale of a property that you have owned for less than 2 years. Taxation on this gain is calculated based on your current tax slab. You are allowed to deduct any brokerage or commission that you have paid from the sale amount. You are also allowed to deduct expenditure on construction and improvement. The liability you will incur under STCG is significantly high if you belong to a higher tax slab. In this case it is better if you hold the property for a period of 2 years before sale.

Long Term capital Gains arise from sale of property that has been held for a period of more than 2 years. It is the difference between the value of the sales consideration and the indexed cost of the property. The benefit of indexation is allowed in this case to offset the impact of inflation. You are allowed the same deductions as STCG as well as indexation benefits. You can also gain exemptions by investing the gains in residential property or buying capital gains bonds issued by REC or NHAI.

This article is based on information from various sources and cannot be taken as professional advice.