It’s that time of the year again when you have to submit the investment proofs to avail tax deductions. So, we thought it would be the right time to share some tax saving tips while buying or selling a property.
Under a unified tax regime, the taxation system has become much more straightforward. Unlike the older days, a homebuyer now doesn’t have to pay value added tax (VAT) or service tax as these are subsumed under a single tax- Goods and Services Tax (GST). To make things simpler, let’s understand the tax implications construction stage wise.
Ready-to-occupy properties
Ready-to-occupy properties have become a great value proposition these days for both end-users and investors. While unending project delay is one of the reasons, exemption from GST has encouraged many to opt for ready properties. Thus, when you buy a ready-to-occupy property, you only pay stamp duty and registration charges. These two combined accounts for about 6-8% of the total property cost.
As mentioned in our post titled Your Guide to Stamp Duty and Registration Charges, we explained how one can save taxes on these two charges. A homebuyer can avail tax deductions on stamp duty and registration charges if paid within the overall limit of Rs 1.5 Lakh. However, it is only valid for new residential properties.
Also, the payments must be mandatorily made in the previous financial year. If you bought a house in 2018 for Rs 50 Lakh and paid Rs 5 Lakh as stamp duty and registration charges, then you are entitled to tax benefits computed during the fiscal year 2019-2020, only if all the expenses have been paid during 2018-19.
Under-construction properties
For under-construction properties, you have to shell out a little more from your pocket. In addition to stamp duty and registration charges, a homebuyer has to pay GST of 12%. Added to this is 1% TDS (tax deducted at source) for properties priced below Rs 50 Lakh.
So, how can you save money while investing in an under-construction property? Well, you can avail certain tax deductions if you have taken a home loan. Under Section 24, 80C, and 80EE of the Income Tax Act, you can claim deductions on principal and interest paid. You can read in detail about these deductions here.
In case you have a joint home loan, each loan holder can claim a deduction of Rs 2 Lakh for interest paid and up to Rs 1.5 Lakh for the principal amount, provided they are the co-owners of the property.
Other deductions
The government has extended GST benefits to the Credit-Linked Subsidy Scheme (CLSS) for
EWS, LIG, MIG-I, and MIG-II homebuyers. Such buyers can avail a lower concessional GST rate of 8%.
Under Section 80EE, first-time homebuyers can also claim an additional Rs 50,000 deduction, provided the loan amount is Rs 35 Lakh or less, and the property value does not exceed Rs 50 Lakh.
Saving tax on rental income
If you have a property on rent, then the income derived from that is subject to tax. But you can save on that as well. You can claim municipality taxes like property tax, sewerage tax, etc. from the rental income, provided these charges are paid by you and not by the tenant.
One of the easiest ways of saving tax on rental income is to exclude maintenance charges from the rent received. You can, however, include it in the rental agreement. Another common way is to deduct an outright 30% of the annual rental income for repair and maintenance of the property. This 30% is irrespective of the actual expenditure incurred during the year.
Lastly, if you have a jointly-owned property, the rental income can be divided in the proportion of ownership of the property.
Tax savings while selling a property
While selling a property, the seller has to pay tax on the total profits. If the property is sold within two years of buying, the seller has to pay short-term capital gains, and if the property is sold after two years of buying, then the seller has to pay long-term capital gains (LTCG). The LTCG is levied at 20% rate.
There are no ways to save short-term capital gain tax, but you can save on long-term capital gains. Wondering how? You can invest in another property within one year from the sale date or construct a property within two to three years from the sale date.
“In case the entire capital gains are not invested within the time specified under section 54, 54B, 54F, 54GB, etc. then the balance unutilised amount should be deposited in a separate bank account called capital gain account on or before the due date of return filing (July 31) as applicable to the taxpayer,” informs Chetan Chandak, Head- Tax Research, H&R Block India Pvt.
One of the easiest ways to save tax is to deposit your gains in a public-sector undertaking bank, or other banks as per the capital gains account scheme. However, you must invest this money within the period specified by the bank.
If you are not convinced with the above two options, you can also invest in bonds issued by the National Highway Authority of India or Rural Electrification Corporation to save tax. These bonds should be purchased within six months from the date of transfer. Though these bonds earn you an interest of 5.25% per annum, your investment in these bonds will be locked for five years.
Very delighted to come across this insightful blog. We must agree to this fact that no one wants to miss out on the opportunities to save money on taxes. Some people have different preferences when it comes to saving tax.
The article gives a piece of good information about tax while buying a property also easy to understand the process.