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Taxation on Purchase or Sale of House Property

Arjuna(fictional character): O Lord Krishna, food, clothes and house, being the basic necessities of life, hold an important place in human life. But nowadays lot of money is needed to buy or construct a house and property transactions have also become very complicated. People strive hard for earning money and also take loan to own a house. Please Explain, the legal provisions related to House Property.

Lord Krishna(fictional character):Look Arjuna, home does not mean only a building made of mud and bricks, rather love, affection and good values make up the foundation of a home. It’s true that a common man has to take too many efforts to own a house. Also many rules and regulations are applicable for property transactions, but in urge to earn or save money, people often get cheated.

Arjuna: What care and precautions should be taken while purchasing land, flat, bungalow etc.?

Lord Krishna: Builders and Developers come out with various exciting housing schemes to attract customers. Firstly these schemes should be properly checked. Other important points include:

1. Permission for construction from all government departments.

2. The carpet area or super built up area of the house

3. Is the value of house greater than or less than government valuation(Stamp duty Value).If it is less, then the purchaser needs to pay income tax on the difference amount.Similarly the builder also has to pay tax on difference amount.

4. Documents like Title deed, Development agreement, PR Card, 7/12 etc, Pher-Phar Patrakand also the search report given by an advocate should be verified.

5. Approval of the Housing scheme by Bank for giving loan.

6. If booking or purchase of house is made before the completion certificate for construction is obtained, then Agreement to Sale is to be made and VAT and Service tax needs to be paid.If purchase is made after obtaining completion certificate then VAT and Service Tax is not payable.

7. Hidden charges other than Purchase cost like Society Registration, Lift, Light,etc, should be checked beforehand.

8. From June 2013 onwards, on purchase of land or house above Rs.50 lacs, purchaser has todeduct TDS (Tax Deducted at Source) at the rate 1% and pay the same.

9. Every purchase and sale transaction should be registered.

Arjuna: How many residential flats/house can be owned by an individual and HUF and what are related income tax provisions?

Lord Krishna: Individual, HUF can purchase any number of residential flats, house as per their requirements. Income tax is not levied on one self-occupied house. The deduction is available for Interest on home loan upto`.1.50lacs with certain conditions. Interest pertaining to the period prior to the year in which property is acquired or constructed is allowable in five equal annual installments from the year in which is house is acquired or constructed. If funds are borrowed for repair, renovation, or reconstruction of the residential house property, interest is allowable upto`.30000. If there are more than one residential house, which have not been given on rent, then they are assumed to be deemed let out i.e as if they are rented and rental income is calculated as per market valuation and tax needs to be paid on it. Repayment of principal amount of loan is deductible under section 80C along with other deductions upto`.1 lac. From 2013-14, additional deductionupto`.1 lac is allowable under section 80EE for interest payable on loan taken from financial institution if amount of home loan sanctioned does not exceed `.25 lacs and value of house property does not exceed`.40 lacs in case of purchase of house property for the first time.

Arjuna: What is tax treatment for house, office, shop, godown, etc. given on rent?

Lord Krishna: The rent is taxable under the provisions of income from house property. The Municipal tax (only if paid) is allowed as deduction and on the balance 30% is allowed as standard deduction for repairs and maintenance irrespective of actual expenditure incurred. Further, deduction of interest payable on loan taken for the property (even if not paid) is allowed.

If the amount of annual rent received is more than 10 lacs then service tax @12.36% will be levied.If annual rent exceeds `.1.80 lacs and TDS provisions are applicable to Payer then TDS @10% of rent to be deducted.

As per the agreement, if any other services are also provided then those services would be taxable as Business income or Income from other sources subject to certain conditions.

Similarly exemption from House Rent allowance received by the salaried person paying house rent will be available as per Section 10 (13A).

Arjuna: What are the exemptions available under income tax act for Individuals or HUFs for purchase or construction of house by selling old house, immovable property, jewellery, other capital assets, etc?

Lord Krishna: As per Section 54, capital gain on sale of residential house property which is acquired atleast before three years of sale will be exempt, if the amount of capital gain is utilized for acquisition of new House property either by purchase 1 year before or 2 years after the sale or by construction of new house within 3 years.

Further as per section 54F, capital gain on sale of any capital asset like gold jewellery, plot, etc, other than house property which has been held for more than 3 years will be exempt to the extent of utilization of sale consideration(not only capital gain) in acquisition of new residential house property as mentioned above. Also as per section 54F, not more than one house property should be held as on the date of sale. For example, if sale of old Gold jewellery is made for Rs.10 lacs and the whole amount is used for purchasing or constructing new house, then Long term capital gain on sale of gold jewellery will be exempt.

Similarly, exemption is also available in case more than one house have been acquired. For example old asset is being sold for Rs.50 lacs and 1st house at Pune purchased for Rs.25 Lacs and 2nd at Mumbai for Rs.25 Lacs. Registry of New house should be in the same name or it may be in joint names (Husband, Wife, Children, etc.).  New house can be purchased outside India also.

Listen Arjuna, If new house is not purchased or constructed within the date of filing return of income, then for claiming exemption, that amount of money should be deposited in Capital Gains Deposit Accounts Scheme within the date of filing return of income and to be utilized within the time limit mentioned above otherwise the unutilized balance will be taxable. And it is to be kept in mind that, if new house is sold within 3 years, then Exemption given will be withdrawn.

Arjuna: Krishna, is Wealth tax applicable on residential house property?

Lord Krishna: For Individuals and HUFs, there is exemption in Wealth tax for any one residential house or part of house or plot not exceeding 500 sq.mtrs without any monetary ceiling.

Arjuna: What about the money earned by selling house or plot of land and invested in Specified Companies?

Lord Krishna: From financial year 2012-13, as per Section 54GB, consideration received on sale of house or plot of land by individual or HUF which is held for more than 3 years before the date of sale,ifutilisedfor subscribing shares of an SME company which uses the same for purchase of new plant and machinery then Tax willbe exempt on fulfillment of certain conditions. The Company should be engaged in business of manufacture or article or thing and utilize the amount within one year from the date of subscription of shares.

Arjuna: Krishna, even after making investing in house property, why people are not satisfied?

Lord Krishna: Arjuna, men should go out of house for earning money. In today’s era, women should also go out for earning money only after taking care of all the household work. All the family members living together with satisfaction and happiness make a true home. Where all family members share their responsibilities and create atmosphere of peace and love, home turns out to be like temple. Money should be earned by good deeds only as the same has effect on house. Money earned by unethical means will never bring peace in your family life. Where money is spent to build luxurious and comfortable houses but if there is negligence of good cultural values, it will let your home down. Where children respect their parents and elders, will always have their blessings and bring prosperity to home. If there is no peace and happiness at home, the money eared is of no use. Also note that there is difference in House and Home. House becomes "Home" because of love and affection of human being living in it. So pay tax on “House” and relax at “Home”.

Disclaimer: Above article is for knowledge purpose. Its fictional writing on tax matters.

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Category Income Tax, Other Articles by - CA Umesh Sharma 



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