Skip to main content

Sale of Residential Property and Taxation

Residential Property is Capital Asset, it Attracts Tax on Purchase, Sale



Before buying or selling a house, it would be prudent to know the tax considerations.


Here, we discuss the tax implications/benefits of purchasing a house and the taxation of gains from the sale of a house.

Owning A House

The Indian Income Tax Act, 1961 (IT Act), considers a residential house as a source of income. Under the I-T Act, the owner of a house is taxed on the income, in the form of its annual value, under the head 'Income from House Property'. The annual value of a house property is higher of the income earned or the fair rent (expected reasonable rent for properties of a similar size in the same locality).


In the case of a self-occupied house, the annual value is nil. However, in the case of more than one house property, only one house property can be considered as self-occupied, and the higher of the rent earned or the fair rent would be treated as annual value for the other house(s). Municipal taxes (including property tax, water tax, etc) are deductible from the annual value (other than from the house property where the annual value is nil); 30% of such net annual value is available as standard deduction from the rental income. In the case of a housing loan, additional deduction is available for the interest paid for the loan. The deduction, however, is restricted to a maximum of . 1.5 lakh in the case of self-occupied property where the annual value is taken as nil. In other cases, there is no such restriction on the deduction for interest. In cases where the deduction for interest is higher than the net annual value, the excess of the interest is treated as loss. Such a loss can be set off against income from other house property or from any other income of the owner for the same year. In the absence of sufficient income, the balance loss can be carried forward to the following year and set off against 'Income from House Property'. However, such a loss cannot be carried forward for more than eight years.


Additionally, under section 80C of the I-T Act, the repayment of principal amount of up to . 1 lakh is available as deduction from the taxable income of the owner.
The proposed Direct Taxes Code (DTC) has similar provisions for the taxability of income from house property. However, the standard deduction, currently at 30% under the I-T Act, has been reduced to 20% under the DTC.


Selling A House

Under the I-T Act, a residential house property is treated as a capital asset. Any gain or loss on sale/ transfer of such capital assets is treated as capital gains or loss. If the house property is held by the owner for three years or more, it is treated as a long-term capital asset and capital gains arising from the sale/transfer are accordingly taxable at a reduced rate of 20%.


Where the holding period is less than three years, the house property is treated as short-term capital asset and the capital gains on its sale/transfer are taxable at normal rates (as applicable to the taxpayer).


In order to compute the capital gains in the hands of the seller, the consideration for sale/transfer is reduced by the cost of the acquisition. In case the assessable value as determined under the Stamp Act of the state concerned (or Indian Stamp Act where applicable) is higher than the consideration, then the same is substituted for consideration while computing capital gains. In the case of sale/transfer of a house property held for a period of three years or more, the cost of acquisition is increased to compensate for the proportionate increase in the cost inflation index. Under the DTC, no distinction is made between short-term and long-term capital assets. Both would be taxable at normal rates (as applicable to the tax payer). However, the benefit of an increase in the cost of acquisition, proportionate to an increase in cost inflation index, would be available if the house property is held for a year or more.

Stamp Duty

Typically, the stamp duty is payable on the purchase/sale of the house property. The levy and computation of duty is prescribed under the Stamp Act of each state, or in the absence of a state Act, under the Indian Stamp Act, 1899. If borne by the purchaser, the stamp duty would be added to his cost of acquisition of the house property for the purpose of computation of any gain on subsequent sale/transfer. The stamp duty is also payable on lease/leave & licence agreements.

WEALTH TAX

According to the provisions of the Wealth Tax Act, 1957, any immovable property, whether residential or commercial, is considered as a taxable asset. However, specific exclusion is provided in respect of the following house properties: those used as stock-in-trade, or occupied for conducting business or profession, or given on rent for more than 300 days in a year.


Wealth tax is payable at the rate of 1% on the taxable wealth exceeding . 30 lakh. The DTC has proposed to increase this exemption limit from . 30 lakh to . 1 crore.

 

Popular posts from this blog

HSBC Mutual Fund - Change in Fund Manager

  Mr. Jitendra Sriram is moving to another HSBC group company. Hence, he will cease to be the fund manager of these schemes with effect from November 16, 2011. The fund management responsibilities have been realigned as following :   Schemes    Fund Manangers HSBC Equity Fund   Tushar Pradhan HSBC Unique Opportunities Fund   Tushar Pradhan HSBC India Opportunities Fund   Tushar Pradhan HSBC Dynamic Fund   Tushar Pradhan (for equity) & Sanjay Shah (for fixed income) HSBC Tax Saver Equity Fund   Aditya Khemani HSBC Progressive Themes Fund   Dhiraj Sachdev HSBC MIP - Savings & Regular Plan   Aditya Khemani (for equity) and Sanjay Shah & Ruchir Parekh (for fixed income)   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in...

Templeton India Corporate Bond Opportunities Fund (TICBOF)

Income Fund from Templeton India Templeton India Corporate Bond Opportunities Fund (TICBOF) is an open-end income fund, which seeks to provide regular income and capital appreciation by focussing on corporate securities. The fund manager will invest in corporate securities with an optimal liquidity and credit risk. He will follow an active investment strategy taking defensive/ aggressive postures depending on the opportunities available at various points in time. The minimum amount on application is . 5,000. The NFO closes on November 29. An income fund invests in a mix of corporate bonds as well as government securities. The fund manager has the option to change the maturity profile of the fund based on the interest rate environment. So, in a rising interest rate scenario, the average maturity period of the portfolio is low (typically 1 to 2 years) while in a falling interest rate environment, the average maturity period is high (typically 4 to 5 years). TICBOF will not invest in go...

PSU insurers withdraw no-claim bonus benefit on health insurance

Start Saving for Tax 2018 by Investing in ELSS Funds Online Policyholders are starting to feel the pinch of steadily increasing health insurance premiums. To make matters worse, some PSU insurance providers are withdrawing benefits such as no-claim bonus (NCB) and family bonus. However, there has not been any major exclusion by private insurers in terms of extended benefits of NCB and family cover discounts. So should you switch? Here are the pros and cons.   Should you port your policy?   Private insurance companies like Aditya Birla Health Insurance and HDFC Ergo General Insurance provide NCB and family discount in floater for more than two or more individuals. Similar benefits are offered by Cigna TTK and SBI General insurance.   While porting is always an option, there are a few issues to consider. Subramanyam Bhrahmajosyula, Head, Underwriting & Reinsurance, SBI General Insurance, says, Keep in mind that the company you're porting to is not obliged to match the premium or ...

Gifts to relatives will not attract tax

Tax Saving Mutual Funds Online Current open Infra Bond Application form Gifts are always special to the recipient and it would be extra-special if there is no tax payable on these. The taxman believes so, too. In the provision introduced in Section 56 of the Income Tax Act, if any sum of money is received gratis by an individual or Hindu Undivided Family (HUF) during any year, it shall not be taxable if from a relative. The law has already defined the term 'relative' and HUF. However a case that came up before the Income Tax Tribunal shows that some clarifications were still needed. Background The law also exempts gifts during special occasions like marriage of an individual or under a will or by way of inheritance and even in contemplation of death of the payer. Money received as grants or loans from educational institutions/universities, charitable trusts or similar institutions is also exempt. The term relative has been defined in the law to include spo...

Mistakes Smart Investors avoid

Tax Saving Mutual Funds Online Current open Infra Bond Application form   Stay the course in a bear market and think long-term to gain from stock play    Stock market was not a great place to be in last year. A host of issues like the euro zone crisis, slowdown in the domestic economy and the policy paralysis spooked investors in 2011. While the broad-based Nifty lost 21% during the year, the CNX Mid Cap lost 32%. Some sectoral indices like the CNX Infrastructure and Bank Nifty were down 39% and 32%, respectively. And things don't look rosy for 2012. Most investment experts believe the stock market is likely to remain subdued this year too.   However, these don't mean you (or investors) should stay away from the market, as the market can always spring a surprise. For example, not many people were bullish on the market in 2009, but it gained over 80% that year. That is why it is important that you tread cautiously in the market so that you can reap the...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now