Basic regulations, tax implications involved in real estate transactions – Part I
First time home buyers are mostly unaware of many regulations and processes involved in a real estate transaction. Here is a simple guide to know the basic real estate regulations and tax implications, which are crucial elements for a prospective buyer.
Transfer of property
‘Transfer of Property Act’ makes it mandatory for the registration of real estate transactions. In general, transfer of property is transferring the rights over a property from person/s to person/s. The property transfer is mostly done in two stages.
1. Buyer and seller signing an ‘Agreement to Sell’ denoting that they agree on the terms of the sale. The agreement to sell includes all the details of the property being sold, total selling price and the schedule of payments as per which the buyer has to pay to the seller. The agreement to sell should be stamped and registered to be legally valid.
2. ‘Sale Deed’ denotes that the transaction is completed. It is executed by both the buyer and the seller before the Registrar of Assurances.
Only when all the payments are made as agreed by both the parties, the Sale Deed is executed marking the change in ownership. Within a certain time-frame, the registration and paperwork formalities have to be completed. During the execution of the Sale Deed, two witnesses should be present, one each from the side of both the parties.
However, if an owner wants to transfer his property to relatives, then a sales deed would not serve the purpose. In that case, instruments like a gift deed or relinquishment deed can be used which have their own advantages and disadvantages.
Power of attorney
‘Power of attorney’ is referred to a written document in which a person or agency appoints another person, called the attorney or attorney in fact, to act as an agent on his behalf. The attorney in fact will be conferred the powers by the actual owner to perform certain acts or functions on behalf of the principal.
In case of leasehold properties, in which houses are built on land leased from the government, transactions cannot be made in the buyer’s name unless there is a No Objection Certificate (NOC) issued by the land allotting agency. The Power of Attorney process is largely followed in these kind of transactions. Once the buyer makes payment, the seller executes an irrevocable and delegable General and Special Power of Attorney conferring all the decision-making rights over the property to the buyer. In this process a sale agreement is drafted on a stamp paper showing full receipt of the sale consideration.
Besides this, the seller should also provide an affidavit confirming the details of his property purchase with his own funds, reiteration of his sole ownership rights along with the property’s present status with respect to liabilities such as property tax, utility bills payments, etc. The seller should also give letters addressing various authorities stating that the property now stands sold to the buyer and that he has no objection to the buyer’s name being put on the property records at various authorities.
Rent Control Act
The Rent Control Act controls the rental real estate market of India. It serves property owners as well as tenants. Besides protecting the tenants against eviction, the rent legislation ensures payment of fair rents to the owners.
After certain acts and orders were passed in the past, the Delhi Rent Control Act of 1958 was passed which is still in force today. Taking cue from Delhi, other states in the nation too have enacted Rent Control Acts. Over a time, some amendments have been made in some of the rental laws while some cases are still in the need of improvements.
Service Tax
Service Tax is levied on an under construction property for the services provided by builders or any other person, where a building structure (or a part of a civil structure) is offered for sale but the payment is received prior to the issuance of completion certificate.
The Government in its Negative List of Services (applicable from July 1, 2012) has clearly mentioned that service includes ‘Declared Service’ which includes construction of a building/complex/structure, etc. There is no doubt that it is mandatory to pay Service Tax on Construction as per the service tax rates in force.
However, there are certain exceptions for the payment of service tax on construction activities. As per the notification issued by the Ministry of Finance on 20th June 2012, the following cases are exempted from Service Tax on Under Construction Property.
1. Construction of a single residential unit , i.e, a single unit designed for use of a single family. If the house has more than one floors or units and if the title of each floor/unit is capable of being transferred to another person by Mutation in land/municipal records, then every unit/floor would be considered as a separate single residential unit. In that case, service tax would not be exempted.
2. Construction of low-cost housing units upto a carpet area of 60 square metres per unit in a residential project approved by competent authority that is empowered under the ‘Scheme of Affordable Housing in Partnership‘ framed by the Housing ministry.
Service tax is only levied on service and thus it cannot be levied on land costs. It is levied as per the rates in force on the total value of the services provided by the builder. For this, it is necessary to show the price of land and the cost of construction services separately. But in case if it is not possible to show the costs separately, then the government has an Abatement scheme wherein the service tax is levied on a small portion if the total amount. An abatement of 75 percent is allowed and the Service tax is levied on the remaining 25 percent of the total purchase cost (including land cost).
Service tax of 12.36 percent is levied on 25 percent of the total purchase cost of under construction property. In other words, service tax of 3.09 percent is levied on the total price (100 percent) of the under construction property.
According to the Budget 2013, an amendment has been introduced to these provisions. The abatement has been reduced from 75 percent to 70 percent for flats above 2000 sq ft or costing Rs 1 crore and more. So in such cases, the service tax will be levied on 30 percent of the total amount or a service tax of 3.71 percent is levied on the total cost. Since the Service Tax is levied by the central government, it is applicable to all the states.
