TAXATION OF PROPERTY TRANSACTIONS

[Dr. Sanjiv Agarwal]

Budget 2013-14 has brought in certain proposals which could impact your decision to buy (or sell) a property in the current financial year – both in direct taxes and indirect taxes.

When you are buying a property from a builder or developer (not on resale), it is subject to levy of service tax. In case of residential property where the carpet area is below 2000 sq ft or where the value of property is below rupees one crore, service tax shall be levied on 70 percent of the total value (no service tax on 30%) . where as if such residential property has a carpet area of 2000 sq. ft. or more or its value is equal to or more than rupees one crore, service tax would be levied on 75% of the total value (no service tax on 25% of the value). In such cases, one ends up paying 12.36% of service tax more on 5% of the value. For example, if property is for Rs 2 crore, the service tax liability would be Rs 1,23,600 more.  The same would apply to all non- residential properties irrespective of size or amount.

In income tax, w.e.f. 1 June 2013, the law would require any purchase of an immovable property (not an agricultural land) to deduct income tax @ one percent of the total consideration, where such consideration exceeds Rs 50 lakhs (no tax deduction below Rs 50 lakhs). While this may be aimed at creating more transparency in the property transactions, the tax deducted by the buyer will have to be deposited to the credit of Government in prescribed time. In many cases, buyer could be illiterate or not aware of provisions and may pose problems of collection or non-compliance. This will require every buyer to have a TAN number and file TDS returns. Mentioning PAN of the seller will also be mandatory. This may enable Government to collect the tax at the earliest point in time, reporting of transactions and tracking of parties. This would apply to land and buildings both but not to agricultural land.

A new deduction under section 80 EE of income tax law has also been provided in respect of interest on new loans sanctioned during the financial year 2013-14 (w.e.f 1.4.2013) for acquiring a residential house property subject to certain conditions. Accordingly, in computing total income of individual assessee, interest on loan taken from any bank or financial institution for purchasing new residential house property will be deducted upto Rs 1 lakh . However, this benefit comes with certain conditions as it would not apply to existing loans and it has to be a new sanction. The value of property should be upto Rs 40 lakhs and loan upto Rs 25 lakhs . Further,  no deduction should be allowed for such interest under any other provision and that the assessee should not have any other house property. It should be specifically borne in mind that this benefit is available only in respect of interest on a loan taken by assessee from any bank, financial institution or a housing finance company.

This, if one intends to buy a house from today onwards, one ought to know these provisions which may help in taking an informed decision. In any case, Service Tax would be payable.