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How to deal with tax issues in property

Investing in property is an important investment decision as it involves spending a considerable portion of one’s income and savings. In addition to the financial aspects associated with dealing in property, there are several tax aspects that are involved. Here we will try to understand the tax implications for Indian residents for buying, selling and renting property within India.

Let us start with what property tax is and where it is utilized. Simply put, Property tax is the tax paid by a property owner for the property he owns. It is a tariff that is collected by the local municipalities across cities in India. These bodies are responsible for assessing the properties and collecting the tax levied on them. This is then used as revenue by the local municipalities for their duties towards the city in their purview.

Tax implications in case of buying property

If you are a resident Indian and are buying property which is more than Rs 50 lakh, you need to deduct tax at the rate of 1 per cent. Additionally, if the stamp duty valuation of the property is less than the agreement value then the difference will be considered as your income.

In case you have taken a home loan for purchasing your property then you can claim tax rebate on the interest of upto Rs 1.5 lakh. Most importantly, you must be aware of wealth tax. You can claim exemption for one house but if you own more than one, which is not let-out (rented out); wealth tax is
applicable at the rate of 1 per cent.

Tax liabilities in case of selling property

There are two broad concepts you need to understand – Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The former is applicable when a property is held for less than three years before selling it. On the other hand, if the property is sold after three years or 36 months, then it falls under the Long-Term Capital Gains (LTCG). In case of incurring LTCG, 20 per cent of the profit is charged as tax. The tax on Short-Term Capital Gains cannot be avoided and is calculated as per one’s income slab. However, you can claim exemption to lower the tax liability on long-term gains.

How to save tax when selling property after three years?

Invest in another property: This is one of the smartest investments one can make. You can get tax exemption from LTCG if the capital gains (in case of claiming exemption under section 54) or sale proceeds (in case of claiming exemption under section 54F) are invested in another property/house. The new house has to be bought within two years after the sale and tax exemption allowed is equal to the actual investment or the capital gain, whichever is lower. If you plan to use the gains to build a house, it has to be done within three years of the sale of the property.

Invest in Bonds: If after purchasing a new property, you still have gains leftover then invest them in government bonds. These bonds issued by the Rural Electrification Corporation and the National Highways Authority of India are exempt from tax under section 54EC, if the investment is less than or equal to Rs 50 lakh in a financial year. Such investment must be made within six months from the date of sale.

Tax on rented property or property with the owner and not rented out

The Income Tax Act considers all properties owned by you for the purpose of taxation. This includes property from which you are earning rent i.e. let out property as well as any other property which is vacant and not rented out (Deemed to be Let-Out Property). In the case of a Let-Out Property, the earnings form part of your annual income and are subject to tax based on the actual rent received and your income slab. The net annual value of the property is also taxable. On the other hand, for a property which you own that does not generate any rent and hence taken as a ‘Deemed to be Let-Out’ is only taxable based on its net annual value calculated as under:

Net Annual Value = Municipal Tax – Gross Annual Value

Gross Annual Value = (Expected Rent or actual rent
received) – (Amount lost due to vacancy)

Defaulting in property tax payments:

Failure in payment of property tax levied as per calculations attracts a 2 per cent interest per month under Mumbai’s BMC. Similar penalties are levied by respective city level local bodies as well. In commercial areas, the local body can take over the movable assets, in case of a default in payment. In extreme cases, the property itself can be seized by the local body and auctioned off in the market to redeem the outstanding tax amount.

In case of being wrongly billed, it is still safe to pay off the amount and then file a report in order to redeem the extra amount paid to the local body.