Income Tax

Whenever there is income derived by the way of sale or transfer of property or capital asset, then provision relating to Income Tax Act, 1961 gets applicable. Some of the key terms in the act are mention below:

Capital Assets [Sec 2(14)]

Capital Asset means property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible, held by the assessee, whether or not Connected with his business or profession, but does not include, i.e., Capital Assets exclude:

  1. Stock in trade held for business
  2. Agricultural land in India not in urban area i.e., an area with population more 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 6.5%, 7% Gold bonds & National Defence Bonds 1980.
  6. Gold Deposit Bonds 1999.

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 Gain.

Transfer [Sec 2(47)]

Transfer includes;

  1. Sale, exchange or relinquishment of a capital asse
  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. Gold Deposit Bonds 1999.
  7. Distribution of money or other assets by the Company on liquidation
  8. Distribution of capital asset on dissolution. ix) The maturity or redemption of a zero coupon bond.
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:

  1. Cost adjustment for inflation
  2. Reinvestment benefit
  3. 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 1081 for F.Y. 2015-16. 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 2015-16, shall be taken as Rs.10.81 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 altogether. 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):

TDS or best known as Tax Deducted at Source or collecting income tax from the assessees in India. Under the process of TDS, Deductor is a person/company who is liable to deduct the Tax at source, from the payment being made to the party. Deductee is the person, from whom the tax is being deducted or accrued for deduction.

As per the finance budget of 2013-14 it was proposed that 1% tax will be deducted at source (TDS) on immovable property w.e.f. 1-6-2013.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. Agricultural land is exempt from this. TDS @30% is applicable for NRI, at the time of sale or transfer of property.

Annual Information Report:

As per Section 285BA of the Income Tax Act, 1961, read with Rule 114E of the Income Tax Rules, 1962, specified entities (Filers) are required to furnish an Annual Information Return (AIR) in respect of specified financial transactions registered/recorded by them during the financial year (beginning on or after April 1, 2004) to the income tax authority or such other prescribed authority.

CBDT (Central Board of Direct Taxes) has authorized National Securities Depository Limited (NSDL) to receive AIR. NSDL receives the AIRs through its country-wide network of front offices called TIN Facilitation Centers (TIN-FCs) and on-line through web-based facility. The data received by TINFCs and data received on-line is collated by NSDL and disseminated to the Income Tax Department. An entity that is required to file AIR has to file one single AIR for the whole organization.

AIR is required to be presented in the following cases:
  1. Purchase or sale of immovable property.
  2. Cash deposits in savings account.
  3. Payment by credit cards.
  4. Investments in units, shares, debentures, etc.
  5. Investment in Bonds of RBI.
AIR Required in Purchase or sale of immovable property:

A Registrar or Sub-Registrar appointed under the Registration Act is required to file AIR, stating “Purchase or Sale by any person of immovable property valued at Rs.30 lacs or more” in a financial year. It appears that in this case the word ‘value’ will mean the value determined for the purpose of stamp duty and not actual consideration stated in the document registered.

Upload Procedure:

The AIR can be directly uploaded through NSDL-TIN website at as per the procedure prescribed at the website. These returns furnished online shall be digitally signed using a digital certificate (Class II or III) issued by a Certifying Authority under the Information Technology Act, 2000 which has been enabled by NSDL. There is no need to furnish Form No 61A (Part A) in physical form to NSDL with respect to the AIR furnished online.

These returns furnished online shall be digitally signed using a digital certificate (Class II or III) issued by a Certifying Authority under the Information Technology Act, 2000 which has been enabled by NSDL. There is no need to furnish Form No 61A (Part A) in physical form to NSDL with respect to the AIR furnished online. The AIR should be submitted in a CD/floppy along with Form No. 61A (Part A), duly filled and signed, in paper form to any TIN-Facilitation Centers of NSDL.

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 assessee. 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, is levied under Wealth-tax Act, 1957.

Wealth tax is not levied on productive assets. Hence investments in shares, debentures, UTI, mutual funds, etc are exempt from it. The assets chargeable to wealth tax are:-

  1. Guest house, residential house, commercial building
  2. Motor car
  3. Jewellery, bullion, utensils of gold, silver etc
  4. Yachts, boats and aircrafts
  5. Investment in Bonds of RBI.
  6. Cash in hand (in excess of 50,000), only for Individual & HUF

Wealth tax is chargeable in respect of Net wealth corresponding to Valuation date. (Net wealth means all assets less loans taken to acquire those assets. Valuation date means 31st March of immediately preceding the assessment year). In other words, the value of the taxable assets on the valuation date is clubbed together and is reduced by the amount of debt owed by the assessee. The net wealth so arrived at is charged to tax at the specified rates. Wealth tax is charged @ 1% of the amount by which the net wealth exceeds Rs. 15 Lakhs.

Wealth Tax on Property:

It is to be noted that all residential houses and properties are not included for the purpose of computation of wealth tax. Some are exempt from wealth tax. These include: One house or part of a house or a plot of land belonging to an individual or a Hindu Undivided Family. The house may be self-occupied or let out. In case the house is owned by more than one person, exemption is available to each co-owners of the house.

Any building owned or occupied by a cultivator, or receiver of rent. The building should be in the immediate vicinity of the land, and it should be a building which the cultivator or receiver of rent requires as a dwelling house.

An asset, being a plot of land comprising an area of upto 500

Any house for residential or commercial purposes which forms part of stock-in-trade.

Any residential property that has been let-out for a minimum period of 300 days in the previous year.

Any property in the nature of commercial establishments or complexes.

A house meant exclusively for residential purposes and which is allotted by a company to an employee having a gross annual salary of less than Rs 5 lakhs. Any house which an assessee may occupy for the purposes of any business or profession carried on by him.

In addition to these, the following are also not treated as an asset and hence not included for the computation of wealth tax: Any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him. Any land held by an assessee as stock-in-trade for a period of 10 years from the date of its acquisition by him.

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 on the Services provided by Builders or Real Estate Developers or any other person, where Building Complexes, Civil Structure or part thereof are offered for sale but the Payment is received before the Issuance of Completion Certificate by a Competent Authority.

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

  1. Value of Land
  2. Construction Service provided by the Builder/Developer

Service Tax can only be levied on Services and not on sale of goods/immovable property & therefore in the above case Service Tax won’t be levied on the Value of Land and would only be levied on the Construction Service provided by the Builder/Developer as per the rates in force which currently is 14.50% (incl. of Education Cess, SHEC and Swachh Bharat Cess)

Considering this, abatement in the Service Tax is provided. At present, Service Tax @ 14.5% on 30% (70% Abatement) of the Total Purchase price is levied on under Construction Property.

The procedure for registration of service tax is as follows:

  1. The assessee shall make an application in Form ST 1 to the Superintendent of Central Excise in duplicate.
  2. The application shall be filed within 30 days from the date of providing taxable service and shall bear the address sought to be registered.
  3. 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.
  4. 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 –

  1. Self certified copy of PAN (where allotment is pending, copy of the application for PAN may be given).
  2. Copy of MOA/ AOA in case of Companies
  3. Copy of board resolution in case of Companies
  4. Copy of Lease deed/Rental agreement of the premises
  5. A brief technical write up on the services provided
  6. Registration certificate of Partnership firm
  7. Copy of a valid Power of Attorney where the owner/MD/Managing Partner does not file the application.
  8. 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.

Value Added Tax

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.

On August 6, Maharashtra State sales tax department issued a circular to developers saying value added tax (VAT) at the rate of 5% of the value with retrospective effect would be levied
on flats, shops and bungalows sold by them between June 20, 2006, and March 31, 2010.
This came after the Bombay high court rejected the real estate developers’ appeal against the
tax. W.e.f. 01-4-2010, the applicable tax rate is fixed @1% of the agreement value.

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