Property Tax Laws in India

September 9, 2016

About various property tax laws in India including:

I. Income Tax
II. Wealth Tax
III. Service Tax

I. Income Tax:

Understanding of Income Tax laws is important in any property transaction. Few terms and provisions which are important to know are:

Capital Asset [Sec 2(14)]

Capital Asset means property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible, but exclude:

  1. Stock in trade held for business
  2. Agricultural land in non-urban area i.e., an area with population less than 10,000.
  3. Items of personal effects, i.e., personal use excluding jewellery, costly stones, silver, gold
  4. Special bearer bonds 1991
  5. Special bearer bonds 1991 5%, 7% Gold bonds & National Defence Bonds 1980.
  6. Gold Deposit Bonds 1999.

Real estate is a Capital Asset. Even Letter of Allotment if containing legal bindings is considered as Capital Asset.

An asset which is held by an assessee for less than 36 months is called as Short Term Capital Assets whereas an asset which held for more than 36 months, is called as Long term Capital Asset. In case of share and securities, this period is reduced to 12 months.

Transfer [Sec 2(47)]:

Transfer includes;

  1. Sale, exchange or relinquishment of a capital asset
  2. Extinguishment of any rights in a capital asset
  3. Compulsory acquisition of a capital asset under any law
  4. Conversion of a capital asset into stock-in-trade
  5. Transfer of rights in immovable properties through the medium of co-operative societies, companies etc.
  6. Transfer by a person to a firm or other Association of Persons [AOP] or Body of Individuals [BOI]
  7. Distribution of money or other assets by the Company on liquidation
  8. Distribution of capital asset on dissolution.

Capital Gains:

If the Property is held for less than 3 years from the date of purchase, the same is termed as ‘short term capital asset’ and the gain on sale of such property is taxed at applicable normal rate of tax.

However, if the asset is held for more than 3 years from the date of purchase, the same is treated as ‘long term capital asset’ and becomes entitled to host of tax benefits like:

  • Cost adjustment for inflation
  • Reinvestment benefit
  • Concessional rate of tax at 20%

Cost adjustment for Inflation:

Section 48 of Income Tax Act provides that the cost of acquisition and improvement thereon shall be adjusted upwardly for inflation referred as cost inflation indexation. The Act has provided 1-4-1981 as the base year and notifies indexation factor every financial year. The cost inflation index stands at 1125 for F.Y. 2016-17. This means that if one has purchased a property in the year 1981-82 for Rs.1 lakh, the cost of the same, if sold in the year 2016-17, shall be taken as Rs.11.25 lakh, giving a substantial relief in quantum of capital gain.

Reinvestment Benefit:

Sections 54, 54EC and 54F provides various kinds of tax reliefs if the capital gain or sale consideration is reinvested in purchase of another residential house or invested in specified bonds. The maximum limit of investment in specified bonds is Rs.50 lakhs. The benefits under these sections are mutually exclusive and can be taken together. However, the tax benefit varies depending upon whether the sold property is residential or commercial.

Concessional rate of tax at 20%:

The Act provides that capital gain on sale of immovable properties as finally computed after taking benefit available under various sections, shall be taxed @ 20%.

The above benefits of long term capital gain are available only for personal assets and not for assets held as business asset.

Tax Deducted at Source (TDS):

Tax Deducted at Source or TDS as its commonly known refers to collecting income tax from the payment source. Under the scheme of TDS, Deductor who is a person/company is liable to deduct the Tax at source from the payment being made to the other party. Deductee is the person, from whom the tax is being deducted or accrued for deduction.

In India, w.e.f. 1-6-2013 the Buyer is required to deduct tax @ 1% from the payment made to Seller/Developer and deposit the same with the Government authorities.

The cut-off value for such a transfer of property is above Rs.50 lakh. So if you have a house or a plot of land, which is valued above Rs.50 lakh at the time of sale, then you will have to pay a TDS of 1% while selling it which will be deducted by Buyer and deposit with Government on Seller’s behalf. Agricultural land is exempt from this. TDS @ 20% is applicable for NRI, at the time of sale or transfer of property. However, such NRI seller or the Buyer may apply to Income Tax authorities for lower rate of tax deduction.


II. Wealth Tax:

[Abolished w.e.f. 01-4-2015 (A.Y. 2016-17)]

Wealth tax is a direct tax, which is charged on the net wealth of the person. It is a tax on the benefits derived from ownership of property. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income.

Wealth tax, in India, has been abolished w.e.f. 1-4-2015

Prior to abolition, wealth tax was charged @ 1% of the amount by which the net wealth exceeds Rs.15 Lakhs.


III. Service Tax:

 Service Tax on Under Construction Property:

Service Tax is levied only on Under Construction Property. Service Tax on Under Construction Property is levied by the Builders or Real Estate Developers on the sale price of the under-construction property.

At the time of sale of property, the amount paid by the purchaser to the Builder is for :-

  1. Value of Land
  2. Construction cost

Service Tax won’t be levied on the Value of Land and would only be levied on the Construction cost provided by the Builder/Developer as per the rates in force which currently is 15% (incl. of Education Cess, SHEC and Swachh Bharat Cess)

Considering that the total consideration charged has two components namely land and construction value, of which land is significant part which is not chargeable to Service Tax; abatement of 70% in the Service Tax is provided. At present, Service Tax @ 15% on 30% (70% Abatement) of the total purchase price is levied on “under construction property”.

No Service Tax is chargeable after the property is completed and Completion/Occupation Certificate is received.

Service Tax on Rentals:

Renting of commercial property is considered as Service. Thus, Service Tax is applicable on rental income from commercial property. Renting of residential property is exempt from Service Tax. At present, Service Tax rate is 15%.

The procedure for registration for Service Tax:

–     The assessee shall make an application in Form ST 1 to the Superintendent of Central Excise in duplicate.

–     The application shall be filed within 30 days from the date of providing taxable service and shall bear the address sought to be registered.

–     The application should be filled up carefully without errors and columns and boxes which are not applicable may contain “NA” stated across them. All the taxable services provided should be mentioned on the application and there would not be separate applications for each of such taxable services.

–     The Form should be signed by the director/partner/sole proprietor as the case may be or the authorized signatory.

The application shall be filed along with the following documents –

  • Self certified copy of PAN (where allotment is pending, copy of the application for PAN may be given).
  • Copy of MOA/ AOA in case of Companies
  • Copy of board resolution in case of Companies
  • Copy of Lease deed/Rental agreement of the premises
  • A brief technical write up on the services provided
  • Registration certificate of Partnership firm
  • Copy of a valid Power of Attorney where the owner/MD/Managing Partner does not file the application.
  • Once filed, the acknowledgement for having filed the application is to be obtained on the duplicate copy for one’s own reference.

If the Particulars stated in the Form are correct, then the Registration Certificate would be provided within a period of 7 days. Where not so provided, the registration is deemed to have been granted.


IV. Value Added Tax (VAT):

A Value Added Tax (VAT) is a modern and progressive form of sales tax. It is charged and collected by dealers on the price paid by the customer. VAT paid by dealers on their purchases is usually available for set-off against the VAT collected on sales.

VAT on Sale of Property:

Before 2006, no VAT was levied on property sale. The state introduced it in 2006 after the Supreme Court passed an order in 2005, putting Builders and Contractors in the same bracket.

W.e.f. 01-4-2010, the applicable tax rate is fixed @1% of the agreement value.

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