Real Estate Taxation-Income property tax law in India

Jan 10 2019

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 24 months is called as Short Term Capital Assets whereas an asset which held for more than 24 months, is called as Long term Capital Asset. In case of share and securities, this period is reduced to 12 months.

Ransfer [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 2 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 2 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 1-4-2001 as the base year and notifies indexation factor every financial year.

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.

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