Unless you are careful, the tax repercussions could be on you long after the property has changed hands


They say experience prevents you from committing the same mistakes twice. But so far as income tax is concerned, experience seems to teach us how to commit the same mistakes again and again, albeit differently each time.


Take the tax provisions related to housing loans. Over time, there have been so many alterations and revisions to the laws thereof that even now, immense confusion prevails.


Take the case of Kapoor, a friend's father, which I recount here because it applies to many of us.


In 2005, the friend in question was abroad but had indicated his intention of returning permanently to India. He would need a place to stay and therefore asked his father to purchase a suitable house —- he would take care of the cost and expenditure involved once he came back and settled down. Ergo, Kapoor purchased a flat by availing a loan from a bank in April 2005. The loan was disbursed in installments during the construction work as and when the builder requisitioned for it. The last installment was disbursed in November 2008. The house was ready for occupation by December 2008.


In the meantime, the whimsical junior cancelled his plans to return to India as he got a break elsewhere. Kapoor figured he would be better off selling off the new property as he didn't need another house. Consequently, the flat was sold on December 16, 2010.


Under the circumstances, Kapoor acted as any other prudent person would —- using the sale proceeds, he paid off the entire loan along with the interest. Anything wrong? Let's see.


First of all, Kapoor had sold the house within three years of having taken possession of it. He had got the possession in December 2008 and had sold it in December 2010. Consequence? Short-term capital gains. Consequence? A higher rate of tax. The fact that Kapoor had started paying the EMIs way back in 2005 has absolutely no bearing in ascertaining either the cost of acquisition or the short-term or long-term nature of the asset.


Now let's look at the tax breaks. Payments towards the cost of construction of a residential house property qualify for a deduction under Sec 80C. However, there are two conditions imposed. The benefit of the deduction cannot be claimed until the house is ready. Secondly, the house is required to be held for a minimum period of five years from the end of the financial year in which its possession was taken. If the house is sold earlier, the aggregate amount of the deductions of income tax claimed on repayment of housing loan so far are to be added back to the tax liability for the year during which the house is sold.


Consequently, capital repayments made by Kapoor prior to FY 2008-09 (the year in which the house gets ready) are wasted in as much as they don't qualify for tax deduction. Principal repaid in FY10 however does qualify for deduction. However, immediately in the next year (FY 2010-11), Kapoor would have to add back this claimed deduction since the house is sold before the specified holding period of five years is over.


Next on the agenda was the interest paid so far. If the interest payable is for a period prior to the year in which the property was acquired or constructed, it is to be deducted in five equal annual installments commencing from the year in which the house is purchased or constructed.


This means the interest before the house was ready will have to be spread over five years from December 2008. The interest after the house is ready can be claimed straight away. However, the aggregate of the past interest (which has to be spread over) and that for the current year has a ceiling of Rs 1.50 lakh. Kapoor found that the interest component of the initial EMIs was so high that his annual interest payment itself was higher than Rs 1.50 lakh. So for the financial years 2008-09 and 2009-10, he couldn't utilise the deduction available on interest paid before getting possession of the house.


The only solace was the remaining interest (that was already paid before getting possession) was still deductible over the next three years in spite of having sold the property. Consequently, Kapoor would need to show the interest as a negative income (loss) under the head 'Income from House Property' and set it off against other earned income. A hitherto self-prepared tax return would all of a sudden be requiring the services of a chartered accountant.


Notice how a seemingly innocuous action set off a domino effect. Kapoor is indeed very bitter about all this, while Junior thanks his stars he has nothing to do with India and its tax laws.


And the finance minister complains that less than 2% of our population pays taxes. With laws like these, even this number seems impressive.
-DNA
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  • I dont think all these calculations come into play if you invest the money in a new project within 6 months of selling the earlier property. But then does this new property need to have a registry or can it be an under construction property? If you are aware of this aspect, can you throw some light on it ?
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  • Sale of property entails tax liability. You may have to pay tax in case you decide to dispose off a property. The Income Tax Act contains specific provisions regarding tax of capital gains arising out of transfer of a house. Capital gain tax is leviable on sale or transfer of a house. What constitutes a sale and transfer has been specified under the Income Tax Act.
    Capital gains tax is computed on the indexed cost of the asset purchased, which is deducted from the consideration received by an assessee. The indexed cost is computed according to the indexation rates notified by the Income Tax Department for each year.

    In case you purchased a flat for Rs 25 lakhs and sold it off for Rs 55 lakhs, you could avoid paying the capital gains tax capital tax if the profit of Rs 30 lakhs is used to buy a new house within three years of the sale. Alternatively, you can invest it in bonds issued by the National Housing Bank, National Highways Authority of India, Nabard or Rural Electrification Corporation. The seller also has the option to keep aside the money in a separate account and use it to build a new house over the next three years.

    The asset transferred should include a building or land attached to it. Further, the income from the house should be chargeable to tax under the head 'Income from House Property' . The capital gains should arise from the transfer of such a long term capital asset .The house must be held for a period of more than 36 months before the date of sale or transfer. The house may be self-occupied or rented out.

    In order to avoid being liable to pay capital gains tax, you should have either purchased a house within a period of one year before or should do so two years after the date on which the transfer took place, or construct a house within a period of three years after the date of transfer.

    In case the amount of capital gains is greater than the cost of the house purchased or constructed, the difference will be charged as income of the previous year. If the new house (2nd house) is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains, the cost will be nil (full amount will be taxable) In case the amount of capital gains is equal to or less than the cost of the new house, it will not be charged to tax at all. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains, the cost will be reduced by the amount of the capital gains.

    The amount of capital gains which is not used for the purchase of a new house within one year before the date of transfer of the original house, or which is not used for purchase or construction of a new house before the date of furnishing the returns of income, should be deposited in a specified bank before the due date of filing income tax returns. The amount can be used in accordance with a scheme the central government may frame in this behalf. The proof of such deposit should be attached with the income tax returns. The amount already used by the assessee for the purchase or construction of a new house together with the amount deposited is deemed to be the cost of the new house.

    -economic times
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  • प्रॉपर्टी बेचनी हो तो बारगेनिंग का मौका न दें



    प्रॉपर्टी बेचते वक्त भी हमें कई चीजों पर ध्यान रखना होता है। सबसे पहले तो यह कि आपके कागजात अप-टु-डेट हों। यानी हाउस टैक्स, लोन या फिर किसी और तरह का बकाया जैसे बिजली-पानी वगैरह पेड हो। इन चीजों के उलझे रहने की स्थिति में सबसे ज्यादा खामियाजा इस बात का होता है कि खरीददार को बारगेन करने का बेवजह मौका मिल जाता है।

    वेस्ट दिल्ली के एक प्रॉपर्टी कारोबारी पवन सिंघल कहते हैं, 'आजकल खरीददार घर खरीदते किसी तरह की टेंशन नहीं लेना चाहता। वह पूरी तरह से मेंटल पीस चाहता है। लेकिन कुछ लोग ऐसे भी होते हैं जो इन वजहों के आधार पर बारगेन में लग जाता है। सिंघल के मुताबिक दोनों ही स्थितियों में नुकसान बेचने वाले का होता है। उसे इन छोटी बातों से जो रेट मिलना चाहिए नहीं मिल पाता है।

    फ्री या लीज होल्ड
    कागजात की बात करें तो प्रॉपर्टी ट्रांसफर में ओनरशिप का रोल भी अहम हो जाता है। यानी अगर प्रॉपर्टी डीडीए या किसी अन्य एजेंसी की हो, तो बेचने वाले को लीज होल्ड से फ्री होल्ड करा ही लेना चाहिए। इससे उसकी प्रॉपर्टी की कीमत काफी बढ़ जाती है। वेस्ट दिल्ली के ही प्रॉपर्टी एक्सपर्ट विकास की मानें लीज होल्ड से फ्री होल्ड कराने में कुछ समय और कुछ हजार का खर्च जरूर लगता है, लेकिन इसका फायदा कहीं उससे ज्यादा होता है। इसलिए कुछ हजार का मोह सेलर न हीं करें तो अच्छा रहेगा। इसका सबसे बड़ा फायदा यह होता है कि फ्री होल्ड प्रॉपर्टी पर खरीददार लोन ले लेता है।

    हड़बड़ी न करें
    आज कल ज्यादातर सौदे चूंकि लोन पर ही हो रहे हैं, इसलिए सेलर के लिए इमरजेंसी न हो, तो नॉर्मल से ज्यादा समय देने का ऑप्शन भी रखना चाहिए। हड़बड़ाहट में नुकसान उठाने का कोई मतलब नहीं बनता। और, ज्यादा समय के साथ साथ पेमेंट का फ्लेक्सी मोड भी चलन में है। यानी अगर खरीददार कुछ चेक से और कुछ कैश का ऑप्शन दे तो मार्केट हालात को देखते हुए स्वीकार कर लें। लोन की स्थिति में ज्यादातर ऐसे ही मामले बनते हैं। मना कर आप अपने ऑप्शन ही कम करते हैं। हां, सेलर को टैक्स आदि का डर रहता है। लेकिन यहां यह भी ध्यान देने वाली बात है कि सर्किल रेट अब पहले जैसे नहीं है कि आप ज्यादा फायदा उठा सकें।

    प्रॉपर्टी वैल्यूएशन
    अब आखिर में बात यह आती है कि अपनी प्रॉपर्टी का वैल्यूएशन कैसे करें? इसका सामान्य तरीका जो प्रचलन में है वह तो यही है कि आप आसपास की प्रॉपर्टी की खरीद-फरोख्त से पता कर सकते हैं कि आपकी प्रॉपर्टी का क्या रेट मिलेगा? लेकिन दिल्ली में एक घर से दूसरे घर का रेट लाखों में अंतर खा जाता है। इसकी कई वजहें हैं। एक तो यह कि प्रॉपर्टी कितनी पुरानी है? यानी खरीददार को इसे लेते ही तोड़ कर बनाना तो नहीं पड़ेगा या फिलहाल रहने लायक है या फिर एकदम नए अंदाज में बनी नई प्रॉपर्टी है?

    -Navbharat times
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  • If house is sold within 3 years of possession then short term capital tax has to be paid on the gains. Only for long term gain (after 3 years) one can save tax by buying another house.
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  • Good thread
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  • Everything pertains to registered house.

    For under-constrction house there is no consideration until it is registered.

    Even after registration, you have to keep the house - if you sell it you lose all tax advantages.

    Thats what the article is trying to say on complicated way.
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  • Originally Posted by Venkytalks
    Everything pertains to registered house.

    For under-constrction house there is no consideration until it is registered.

    Even after registration, you have to keep the house - if you sell it you lose all tax advantages.

    Thats what the article is trying to say on complicated way.



    So if an under construction house which is yet not registered is sold, then what are the laws?

    And if user wants to invest the proceedings into another property then what are the provisions?

    Also, the law and example of Kapoor ji stated above wasvery complicated to comprehend..
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  • Originally Posted by Gagandeep
    So if an under construction house which is yet not registered is sold, then what are the laws?

    And if user wants to invest the proceedings into another property then what are the provisions?

    Also, the law and example of Kapoor ji stated above wasvery complicated to comprehend..


    If you sell under construction in all white deal, you have to pay 30% of profit to govt. And if you bought with loan, then no tax exemptions are applicable.

    Which is why people take the profit in black and take purchase amount in white to show no profit no loss deal.

    Who will like to pay 30% to govt?

    Also, buyer will have to pay higher amount as stamp duty based on actual purchase price. Buyer also wants to avoid.

    Black deal is inevitable in such situation. All these recent 20L and 1Crore cash heists in the newspapers are because of this cash culture.
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  • How is the profit or loss calculated in propertry transactions ?

    Taking an example:
    Suppose I bought a RTM flat for 30L two yrs back, got it registered by paying another 2L , and now I am selling it for 40L.
    Assuming I had taken a loan of 25L, in these 2 yrs, I would have paid almost 5L as bank interest.
    In these 2 yrs, lets say I have claimed the interest component on the loan, so tax advantage = 0.3%1.5L*2yrs = 1Lakh

    So in this case, it has actually cost me :
    30 + 2(registry) -1 (rebate from IT) +5 (interest component in loan) = 36L

    So, profit will be 40 - 36 = 4L ?

    Or will profit be straightaway calculated as 40-30 = 10L?

    Thanks in advance.
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  • Originally Posted by skoda0505
    How is the profit or loss calculated in propertry transactions ?

    Taking an example:
    Suppose I bought a RTM flat for 30L two yrs back, got it registered by paying another 2L , and now I am selling it for 40L.
    Assuming I had taken a loan of 25L, in these 2 yrs, I would have paid almost 5L as bank interest.
    In these 2 yrs, lets say I have claimed the interest component on the loan, so tax advantage = 0.3%1.5L*2yrs = 1Lakh

    So in this case, it has actually cost me :
    30 + 2(registry) -1 (rebate from IT) +5 (interest component in loan) = 36L

    So, profit will be 40 - 36 = 4L ?


    Or will profit be straightaway calculated as 40-30 = 10L?

    Thanks in advance.


    KISS (Keep it Simple Silly) - 40-30 = 10L

    R
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