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Flat sale on monthly instalment basis

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Querist : Anonymous

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Querist : Anonymous (Querist)
25 June 2014 Hello all,

I am planning to sell a flat and I have a friend who is willing to buy it. He is paying some down payment and needs to get a bank loan for 75% amount.

Rather than involving a bank, I am fine if he can repay me directly by paying out monthly installments, equal to EMI over a longer duration.

Can this be done ? Can we have an agreement to achieve this ? And, does this have any tax implication for me as a seller ?

26 June 2014 you can decide whatever payment schedule you prefer. but the capital gains shall accrue as and when the possession is handed over the friend irrespective of when you receive the consideration

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Querist : Anonymous

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Querist : Anonymous (Querist)
28 June 2014 In the scenario above, suppose following is the sequence of events -

1) Original Possession of the flat has been taken by the seller(me) just recently.

2)Now both parties enter into agreement to sale, say today.

3) Possession is given after 3 years, to the friend to avoid short term capital gains

4) Sale deed is done after 3 years at the time of possession with some initial down payment and installments spread over 10 years ( from year 4th to 10th )

In this scenario, what is the tax treatment on the instalments received each year ??

And what would be the circle rate applicable ?


25 July 2024 In the scenario you've described, where you are selling a flat to your friend on monthly installment basis instead of involving a bank loan, here are the key points and tax implications to consider:

### Agreement to Sell and Tax Implications:

1. **Agreement to Sell**: You can indeed have an Agreement to Sell where your friend agrees to purchase the flat from you and pays you monthly installments. This agreement should outline the terms of sale, including the total sale price, down payment, monthly installment amount, and any other relevant terms and conditions.

2. **Tax Implications for Seller (You)**:
- **Nature of Income**: Since you are selling the flat on installment basis, the income received from your friend will generally be considered as business income under the Income Tax Act. This is because you are engaged in the business of real estate development and sale.

- **Tax Calculation**: The tax liability arises each year based on the amount of installment received during that year. The taxable income would be calculated as per the percentage completion method. Under this method, each installment received is proportionately allocated to the total profit from the sale. This means a portion of each installment is considered as profit and taxed accordingly.

- **Interest Income**: If you charge any interest on the outstanding amount of installments, that interest income will also be taxable under the head of 'Income from Other Sources'.

3. **Circle Rate Applicability**:
- The circle rate is the minimum value at which the sale or transfer of a property is registered. It is determined by the state government and varies from area to area within the state. When selling a property, the transaction value cannot be lower than the circle rate; otherwise, income tax implications could arise based on the differential amount.
- It's essential to check the current circle rate applicable for your area to ensure compliance with this requirement.

### Sequence of Events and Possession:

1. **Possession Given After 3 Years**:
- Giving possession after 3 years from the date of Agreement to Sell may have implications for the treatment of capital gains. It could potentially be considered as long-term capital gains if the property is held for more than 3 years.

2. **Sale Deed Execution**:
- The sale deed should be executed at the time of possession, which typically happens after the completion of all payments. This document finalizes the transfer of ownership from you to your friend.

### Conclusion:

- **Tax Treatment**: The installment payments received from your friend will be taxed as business income under the percentage completion method, spread over the duration of the installment plan.

- **Circle Rate**: Ensure the transaction value (including the installment payments) meets or exceeds the applicable circle rate to avoid potential income tax implications based on differential valuation.

Given the complexities involved, especially with taxation and legal aspects, it's advisable to consult with a qualified tax advisor or a chartered accountant who can provide guidance tailored to your specific situation and local regulations. They can help ensure compliance and optimize the tax implications of your real estate transaction.



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