Tax Implication on Sale of Residential Property
The first concern which will make house in the mind of the seller is what amount of tax will he have to pay on such sale, how he can avoid tax on such sale. Under the The Income Tax Act, 1961 income arising on the Sale of Residential Property , shall be chargeable to tax under the head of Income “Capital Gains
Chargeability of Income from house property
As per section 22 of the Income Tax Act, 1961 (‘the IT Act’) one of the basic conditions for charging income tax on income from house property is that, the assessee should be the owner of such property.
In a case where assessee is already having one or more residential properties and buy another residential house property, then benefit of Nil Annual value can be claimed only in respect of one house property. All remaining house properties will be taxed on deemed basis i.e. deem to be let out based on the prescribed valuation rules.
Under Direct Tax Code 2010 (‘DTC’), only actual rent received from house property is proposed to be taxed. Present system of taxing notional value called ‘annual value’ is proposed to be done away with.
Availability of Tax benefits on purchase of house property
Generally, the loans are taken from the financial institutions to acquire a house property. Under the IT Act, Interest payable on loans borrowed for the purpose of purchase or construction, is allowed as deduction provided construction is completed within 3 years from the end of financial year in which capital was borrowed, subject to maximum limit of Rs. 150,000 in case of self occupied property. There is no maximum ceiling in case of a let out property.
In case of a joint home loan, the co-owners can separately claim the benefit of deduction of interest on loan subject to maximum limit of Rs.150,000 and fulfillment of certain conditions. Interest accrued and / or paid during the construction period preceding the year of completion of construction can be accumulated and claimed as deduction over a period of 5 years in equal installments commencing from the year of completion of construction of the property.
The repayment of the Principal amount towards the housing loan as well as any stamp duty (including registration charges) paid on the purchase of house property shall be allowed as deduction under section 80C of the IT Act.
If the assessee transfers the house property in respect of which deduction has been claimed under Section 80C before the expiry of 5 year from the end of financial year in which possession of such properties was obtained ,no deduction shall be allowed in the previous year in which house property is transferred and the aggregate deductions allowed in the past years shall be deemed to be the income the assessee for the previous year in which house property is transferred.
Under DTC, interest on housing loan for self occupied property up to Rs. 1,50,000 is allowed as deduction from the Gross total income whereas no deduction is proposed towards repayment of principal amount of housing loan.
Tax Implication on sale of Residential House property
On transfer of the house property, there will be capital gains tax implication in the hands of the seller. The taxability of the capital gains is dependent on the period of holding of the asset. An asset is classified as long term capital asset if the asset is held for more than 36 months or otherwise as short term capital asset. The indexation benefit on the cost of acquisition shall be available in case of sale of a long term capital asset.
Under the IT Act, long term capital gain is taxable @ 20% plus education cess whereas short term capital gains is taxable as per the normal slab rates.
It is important to note that, in case the sale consideration is less than the stamp duty valuation as prescribed under Section 50C, the stamp duty value shall be deemed to be the full value of the consideration on such sale and capital gains shall be calculated accordingly.
Under DTC, no distinction has been made between long term capital gain or short term capital gain. Benefits of indexation is available if investment assets are transferred at any time after 1 year from the end of financial year in which the assets is acquired by the person. Further no special rates are provided for capital gains. The Capital gains shall be taxable at normal slab rate subject to indexation benefit.
Re-investment Benefits on sale of house property
For an Individual, the long term capital gains exemption shall be available on reinvestment of capital gains / sales proceeds in specified investment avenues, subject to certain prescribed conditions.
An individual may invest the entire capital gains proceeds under Section 54 of the IT Act in Purchase of a another Residential house property subject to certain conditions and can claim the exemption from long term capital gains tax. The other investment avenue could be in the bonds issued by National Highway Authority of India and / or Rural Electrification Corporation subject to a maximum cap of Rs. 50 lakhs. The investments made under section 54 & 54EC are required to be held for a specified period of 3 years and are subject to certain conditions.
Under DTC, deduction in respect of capital gain arising from transfer of any investment asset shall be allowed if new investment asset (i.e. residential house property) is purchased provided taxpayer does not own more than 1 residential house other than new investment asset on the date of transfer of the original investment asset.
As such, purchase of residential house property besides being one of the inevitable requirements when properly planned can also be leveraged as one of the efficient tax saving tool.
Implications under the Wealth Tax Act , 1957
Wealth tax is chargeable in the hands of an Individual in respect of assets specified under the Wealth Tax Act, 1957 and one of assets covered therein is a residential house property. However, one house or part of a house belonging to an individual is exempt without any monetary ceiling under section 5(vi) of the Wealth Tax Act, 1957.