Simplification of Property tax issues

Investing in residential property forms a major investment decision for buyers in India. Due diligence should be employed while deciding on the property to invest as well as other aspects related to investment. In addition, buyers should be aware of various aspects related to their investment, especially with regards to taxes that they have to pay at different stages. This involves tax implications involved while buying, selling as well as renting property in India.

What is Property tax?

Property tax is the tax that should be paid by a property owner for the property he possesses. It is collected at local municipalities under which the property falls, and is levied every year. Besides collecting property taxes, the local municipalities are also in charge of assessing the property tax that has to be levied on a property under its purview. Taxes thus collected act a revenue for municipalities to undertake their responsibilities to the city under which they fall.

Property tax while buying property

For an Indian resident, the property tax levied for buying property that is valued at more than Rs 50 lakh is deducted at the rate of 1 per cent of the property value. However, if the stamp duty valuation of the property is less than the agreement value, then the difference in amount will be considered as the income of the buyer. In case the buyer is availing a home loan for purchasing the property, then he can claim a tax rebate on the interest payable upto Rs 1.5 lakh.

Wealth tax is applicable in case of buyers who own more than one house, which has been rented out. However, if an individual owns more than one house, but has rented out only one, then he will be exempted from paying wealth tax on the house that he has not rented out. Wealth tax is levied at the rate of one per cent of the annual rental earned for owners of more than one house.

Tax liabilities while selling property

In this context, it is important to understand two broad concepts namely, Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). STCG is applicable when a property is held for less than three years or 36 months before it is sold while LTCG applies to property that is held for more than three years before it is sold. While 20 per cent of the profits on LTCG is taxed, in case of STCG, tax is calculated as per the property owner’s income slab. The owner is also eligible to claim exemption so as to lower his tax liability for income under LTCG.

Tax saving measures while selling property after three years

·  Investment in another property: The property owner can avail of tax exemption from LTCG if the capital gains (while claiming tax exemption under Section 54) or the proceeds of the property sale (while claiming tax exemption under Section 54F) are invested in another property/house. However, it is imperative that the new house is bought within two years of the sale of the old one. The tax exemption allowed is equal to the actual investment or the capital gain, whichever is lower. If the owner plans to use the capital gains accrued from the old house to buy a new house, then he has to do so within three years of the sale of the old property.

·  Investment in bonds: After investing in a new property, if the owner has surplus of capital gains, then he can consider investing in government bonds. Such bonds which are issued by the Rural Electrification Corporation as well as the National Highways Authority of India are exempted from tax under Section 54 EC provided that such investments are less than or equal to Rs 50 lakh in a financial year. However, it is essential that such investments are made within six months from the date of property sale.

Tax on Rented property

As per the Income Tax Act, any property owned by an individual is considered for tax purposes. This includes property which the owned has rented out and he is receiving rent (let-out property) as well as property which is vacant and not rented out (deemed to be let out property). In case of Let-out property, earnings accrued form part of the annual income of the owner and are taxable based on the rental amount received as well as the income slab of the owner.