Property sale or purchase, do not forget these tax aspects

That’s not all. You, as a buyer, will also be responsible to issue Form 16B to the seller in due time.

This is one of the many things to take care of when purchasing a real estate property. Also, while finalizing the budget, a buyer should factor in the stamp duty, which can be as high as 9% of the total sale value of the property in some cities.

Mint tells you the tax implications of buying and selling a real estate property.

Capital gains on selling a property: Profits arising from the sale of a property are capital gains. It is calculated by deducting sale value, or total consideration value, of the property with its purchase price, also known as cost of acquisition. Capital gains (CG) are reported under schedule CG of the income tax return (ITR) forms.

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The tax rate depends on whether the capital gain is short-term or long-term. Property sold after two years of holding attracts long-term capital gains (LTCG) tax of 20%, whereas short-term capital gain (STCG) is taxed at applicable slab rate.

LTCG on sale of property enjoys indexation benefit, which means the seller can adjust the purchase price of the property to account for inflation. The indexed cost of acquisition is calculated by multiplying the purchase price of the property with the cost inflation index (CII) of the year of sale and then divided by the CII of the year of purchase. This applies only to those properties bought after April 2001.

“For properties bought before 1 April 2001, the seller can take the FMV (fair market value) of the property as on 1 April 2001 as the cost of acquisition for the purpose of calculating capital gains. The condition is that the FMV should be higher than the actual cost of acquisition of the property,” said Sandeep Jhunjhunwala, partner, Nangia Andersen LLP.

“With an aim of rationalizing the above provision, the Finance Act, 2020, has capped the FMV as on 1 April 2001 at the stamp duty value on such date. The stamp duty value is to be assessed by any authority of the central government or the state government for the purpose of payment of stamp duty in respect of an immovable property. Given the cap, the stamp duty value as ascertained by a government authority could be adopted as the FMV.”

For properties that were inherited or gifted, the original date of purchase, and not transfer date, is considered for calculating capital gains.

“In case of an inherited or gifted property, the period of holding (for the purpose of determining whether the capital asset is short term or long term) includes the period for which such property was held by the previous owner. However, for the purpose of indexation, there has been a controversy around whether the indexed cost has to be computed with reference to the year in which the previous owner first held the asset or with reference to the year in which the taxpayer became the owner of the asset. The Mumbai High Court in the case of Manjula Shah (355 ITR 474), which has been followed by other courts subsequently, has upheld the former approach,” said Jhunjhunwala.

If you have spent on improving or modifying your property that has contributed to its market value, all such expenses can be added under the cost of improvement column while filing the income tax return (ITR). “The condition is that the modification done should be immovable in nature. So, for instance, adding furniture will not qualify as an expense towards modification, but revamping the property’s flooring will,” said Karan Batra, founder, charteredclub.com.

Similarly, expenses incurred during selling the property, such as brokerage fees, legal fees, stamp duty, etc. can also be deducted after adding it to the cost of acquisition.

Indirect taxes in buying a property: Buying a real estate property mainly involves paying indirect taxes in the form of stamp duty and registration. Stamp duty varies across states and ranges from 4% to 9% (see graphic). The good news is that stamp duty paid towards a residential property can be claimed as a deduction under the overall ceiling of ₹1.5 lakh under Section 80C for the financial year when you buy the property.

Batra said if a taxpayer is unable to claim the entire amount paid as stamp duty as deduction under 80C, she has the option of adding the remaining amount to the cost of acquisition for deduction at the time of calculating LTCG when she sells the property.

“Stamp duty is an incidental expense that adds to the total purchase price of the property and can be claimed as deduction,” said Batra.

Another important part of buying a property is deducting 1% TDS from the payment to the seller. This rule applies to all types of properties worth ₹50 lakh and more. The buyer has to deposit the deducted TDS in the government account through form 26 QB within 30 days from the date of deduction.

After doing so, the buyer has to issue Form 16B to the seller. Defaulting on either of the steps attracts penalties (see graphic).

It should be noted that TDS has to be deducted for each payment made to the seller.

“The buyer has to deduct TDS even for an advance and for each instalment paid. Also, tax is to be deducted on the entire sale proceeds and not on the incremental differential beyond ₹50 lakh,” said Jhunjhunwala.

In the case of multiple co-owners of the property sold, the buyer has to deduct TDS, fill Form 26QB and issue Form 16B for each seller. Also, TDS needs to be deducted as per the ratio of ownership of each seller in the property sold. “Most people get this wrong by dividing total consideration value in equal parts for the purpose of deducting TDS,” said Batra.