Own a home? Know your taxes

At every stage in the life cycle of owning a house, be aware of the tax incidence. Here’s a ready reckoner

Most people aspire to own a home, a piece of earth that belongs to them, where a family is nurtured and dreams are realised. But behind this ideal picture lies a ton of paperwork, innumerable trips to the banks and lawyers and more importantly, many fracases with the tax man.

It is perhaps to avoid these hassles that some prefer to live in a rented apartment all their lives, letting the money that could have been used for home-buying grow through mutual funds or other investments.

But even if you take such a decision, you might inherit property that belonged to your parents, or a rich uncle or aunt might decide to leave you that sprawling ancestral bungalow in your home-town.

If, willy-nilly, you have become the owner of a house and are feeling overwhelmed by the various taxes that tag along with your property ownership, here is a lowdown.

Buying a house

If you are buying a house, you have to make sure that the taxman gets his due from the transaction. The stamp duty and registration charges you pay can be claimed as deduction under Sec 80C. Also, home purchases can lower your total tax outgo. But, if it is a gift, the value has to be added to your income.

One per cent TDS while buying

If you are buying a property for more than or equal to ₹50 lakh, remember that TDS (tax deducted at source) of one per cent of the total value has to be deducted before making the payment to the seller.

You can pay the amount of TDS deducted online by filing Form 26QB (in the NSDL website), by giving your (the buyer)PAN details and the seller’s. The due date to deposit the TDS is 30 days from the end of the month in which the transaction happened. You also have to issue to the seller, a TDS certificate (Form 16B), which can be downloaded from the TRACES website.

Note that, failure to deduct tax or deposit the deducted tax to the government attracts interest (1-1.5 per cent per month) and penalty charges.

If you are buying the property from a non-resident Indian (NRI), you have to deduct the TDS, irrespective of the value of the transaction. But the TDS has to be calculated on capital gains (profits) made by the seller, and not on the sale value.

If it is a gift, pay tax

If your uncle/aunt or any friend presented you a house valued more than ₹50,000, remember, you have to pay tax on it. You have to disclose the stamp duty value of the property received, under ‘income from other sources’ (IFOS), and pay tax as per the applicable income-tax slab rates.

But for every rule, there is an exception. If you receive a gift on the occasion of your marriage or under a will or by way of inheritance or from few specified institutions, you are exempted from paying tax on the gift.

Also, if you receive a gift from your relative, the gift is exempted from tax. Relatives include spouse, your lineal ascendant or descendant, lineal ascendant or descendant of your spouse, brother or sister and their spouses, your wife and your parents.

Claim 80 C deduction on stamp duty charges

While buying the home, you might feel the pinch of the stamp duty and the registration fee, as these charges, sometimes, total to almost 10 per cent of the property value. But you get some relief, as the IT department allows these charges to be deducted under Section 80C up to ₹1,50,000 in the year of payment.

But if you sell the property, after claiming the 80C deduction on these charges within five years from the time of possession, you will have to forego the benefit by adding back the deductions claimed, to your income in the year of sale.

Investment in home lowers tax out-go

Buying a residential property from the proceeds of sale of any long-term capital asset (including equity shares, gold, real estate, house property) reduces the capital gains tax out-go on the latter transactions.

Conditions: you should not own more than one house (other than the newly-acquired one) on the date of transfer; and the new property should be purchased within one year before the sale or two years (three in case of construction) after the sale of said capital asset.

 

If you cannot invest the whole capital gains amount in a new house before the due date of filing the return (July 31) for that financial year, but intend to invest within the stipulated time, the unutilised amount has to be transferred to ‘capital gain account scheme’ in specified banks to get the benefit of exemption.

Subsequently, if you sell the new residential property (bought with capital gains from sale of old assets) within three years after its acquisition, exemption allowed will be reversed in the year of such sale.

In the Budget, this exemption which restricts investing the capital gains in only one residential property has been relaxed a bit. From April 1, 2020, the LTCG on sale of residential property (not exceeding ₹2 crore), can be invested in two residential houses, not just one as it is now.

Owning a house

If you own a property, there are various rules that you need to be aware of, regarding self-occupied property and one that is let-out. Rental income is always charged to tax in the hands of the owner of the property. If the house is registered in your name, you are liable to pay the tax on rental income even if the rent is received by someone else.

Tax on rental receipts

Any income earned in the form of rent or lease from your house property is charged to tax under the head income from house property (IFHP). In other words, if you reside in your own house, which is called self-occupied property (SOP) throughout the year, without letting it out on rent, the annual value (see the table) will be taken as nil and you do not have to pay income tax on your house property.

Limits on SOPs

As SOPs are not taxed, the IT-Act caps the number of houses that can be SOPs. From FY19-20, an individual can have two SOPs (now, one). That is, a third and more than three houses, even if not let-out and retained for personal use, cannot be considered as SOP and taxes are to be paid on the notional rent.

It is up to you to decide which two houses will be SOPs. To save tax, specify properties having high annual value (explained in the chart) as SOPs and the others as let-out.

Unrealised rents are not taxable

As shown in the chart, the annual value of rent is higher of the actual rent and ‘expected rent’. The actual rent includes that received and to be received (even if not realised).

However, in the event of disputes when you are unable to realise the rents even after taking all steps to recover such amount, including legal proceedings, the actual rent need not include unrealised rents.

In another case, if you intend letting out the property, but it was lying vacant for a part of the year, and owing to such vacancy, the actual rent is lower than the ‘expected rent’, the actual rent received should be the annual value.

For example, a property is vacant for two months in a year, and actual rent received for 10 months is ₹50,000 (₹5,000 per month). Say, the ‘expected rent’ of the property for the year is ₹55,000. In this case, the actual rent received is less owing to the vacancy; otherwise, it would have been ₹60,000. Thus, the annual value of the property is the actual rent received — ₹50,000.

Deduction of interest on home loan

While repayment of a loan (prinicipal) taken for purchase or construction of a house is allowed as deduction under Section 80C (up to ₹1.5 lakh), the interest payable on that borrowed capital is allowed for deduction from the annual value, while calculating IFHP. Interest can be deducted only from the year in which construction of the property is completed or when the property is acquired.

 

If you let-out your property, there’s no limit on claiming deduction of interest payable on the borrowed capital. But if it’s a SOP, the maximum interest that you can claim as deduction is ₹2 lakh. However, there’s a caveat. If you took the loan before April 1, 1999 and could not complete acquisition/construction of the house within five years from the end of the financial year in which the loan was taken, the cap on deduction available for interest is just ₹30,000.

If you are a first-time home buyer, you are eligible to deduct interest of up to ₹50,000 under Sec 80EE over and above the ₹2-lakh limit available, under IFHP.

Interest paid during construction

Say, you were already paying interest during the construction period. The interest paid from the date the loan is taken to the end of the preceding year in which the construction is completed/property is acquired, can be claimed as deduction. Beginning from the following year, such interest is allowed for deduction under IFHP, in five equal instalments.

Restriction on loss from IFHP

The resulting figure after adjusting the annual value of the property with standard deduction of 30 per cent and interest on home loan is the IFHP (see the table).

It can be negative in two cases. One, due to the interest charges in case of a SOP (as annual value for SOP is nil). Two, if the interest charges are way higher than the net annual value in the case of let-out property.

The loss from IFHP could be set-off against income from any other head (in the year of incurring loss) but only to an extent of ₹2,00,000.

The balance can be carried forward for eight assessment years, including the year in which the loss incurred. The carried forward loss is to be adjusted only against income from house property.

Claiming HRA and home loan benefits

The house rent allowance (HRA) received by an employer is exempted from tax to the extent of least of the following: a) HRA received; b) 50 per cent of salary if living in metros, else 40 cent; c) rent paid in excess of 10 per cent of the salary.

If you are an employee receiving HRA, you will not be eligible to claim exemption if you are staying in your own house. But you will be eligible to claim deduction on home loan principal repayments and interest payments.

But in a scenario where you own a house but stay in a rented house at some other location due to a genuine reason, you can claim exemption on HRA as well as deduction on home loan payments (principal + interest).

For instance, you own a home in Noida, but chose to stay in a rented house in Delhi as it is closer to office. You will be eligible to claim both exemption on HRA received from your employer and deductions of home loan payments, irrespective of whether your home in Noida is let-out or not.

Selling a house

As house property falls under the definition of capital asset in the I-Tax Act, the sale of a house results in capitals gain or loss.

The period of holding determines the nature of capital gain. If the period of holding is greater than 24 months, LTCG applies; and up to 24 months, STCG.

For a house property, the LTCG is calculated by deducting expenses related to sale of the asset (including brokerage, stamp paper charges), indexed (to adjust price increase due to inflation) cost of acquisition and indexed cost of improvement from the sale consideration. The resultant amount, if it is a gain, will be charged to tax at the rate of 20 per cent (excluding surcharge and cess).

Inflation indexation benefit is not available for STCG and is determined by deducting directly the cost of acquisition, cost of improvement and expenses (on transfer) from the sale consideration.

STCG on sale of a house property is added to the total income of the seller and taxed at the applicable slab rate.

Sale value as per stamp valuation

The amount of capital gain depends on the sale value of the asset. To check the malpractices of sellers showing lesser sale consideration for the income-tax purposes, the IT department has introduced Section 50C.

The section is applicable when the sale value claimed by the seller is more than 5 per cent lower than the value used by stamp valuation authority for calculating stamp duty. In such a case, the value adopted for stamp value would become the actual sale value to the seller.

Save your capital gain

You can save tax your LTCG from the sale of house by investing the capital gain in a new residential property (see ‘investing in home lowers tax out-go’) or in bonds issued by National Highway Authority of India or Rural Electrification Corporation or Power Finance Corporation.

You can invest up to ₹50,00,000 of the capital gain incurred in these bonds. The said bonds are to be bought within a period of six months after the date of such transfer and can be redeemed only after five years.

Previous owner’s cost is yours

No capital gain occurs if your property is passed to someone either by inheritance or gift as there is no sale consideration.

But if you sell a property you acquired through inheritance or a gift, capital gain has to be calculated. When the asset is acquired by gift, will, succession or inheritance, the cost of acquisition for the previous owner would be the cost of acquisition to you.

Also, the period for which the asset was held by the previous owner is also to be included when determining whether it’s a short-term or a long-term capital asset.

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