Property checks for taxation before filing your returns

The financial year is almost coming to a close and you would be busy making your investments for tax saving purposes.

Here, we present before you a set of 10 property checks for taxation that you should be watchful of while filing your returns.

1. Principal paid on Housing Loan repayment

The Government of India encourages its citizens to invest in Housing and therefore provides benefits by giving tax relaxation for repayments of Home Loans.

If an individual can source for the down payment of a house (which is usually 15% of the total house value), then he/she can borrow the remaining 85% from a bank. The amount paid as repayment of Principal of a Home loan can be claimed upto a maximum of Rs 1.5 lakhs under section 80C of the Income Tax act (This was increased from Rs 1 lakh to Rs 1.5 lakhs in the 2014 Union budget).

In case the loan is in the names of more than one person, each co-owner can claim deduction under Section 80C to the extent of the amount paid from his/her own income.

However it has to be noted that this exemption can be claimed only after the construction of the house is complete and ownership certificate has been produced. Deduction under Section 80C cannot be claimed for the Principal amount for during the construction of the property.

Furthermore the loan should not be taken for improvement, renovation, extension or alteration of an existing house. It can also not be claimed if the individual has borrowed the money from family or friends who do not qualify as Banks/Specified Institution/Departments.

2. Interest paid on Housing Loan

In addition to the Principal, the interest paid on Home Loans is also eligible for deductions under Section 24 of the Income Tax Act. For a self occupied house, a deduction of upto Rs 2 lakhs (increased from 1.5 lakhs to 2 lakhs in the 2014 Union budget) or the actual interest paid; whichever is lower; is permissible for each owner. If the property is rented out, there is no restriction and each owner can deduct the entire amount paid as interest, in the ratio of ownership.

As opposed to the Principal, interest paid to friends and relatives can be claimed under Section 24, provided a certificate is received from them. Interest on funds borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of house property can be allowed as tax deductions.

Another difference between deductions of Principal and Interest amounts is that the tax deduction on Interest is deductible on payable basis. In other words, interest deduction should be claimed on an annual basis even if no payment has been made by the borrower whereas principal deduction will be allowed only on payment basis.

Under certain circumstances there will be a cap of Rs 30,000 on the deductions of interest payment under section 24. They are

• When the amount borrowed is for the purpose of repair, reconstruction or renewal
• When the loan was borrowed before 1^st April 1999
• Loan has been taken to purchase/construct a house, but the same hasn’t been completed in 3 years.

3. Capital Gains Tax

Whenever a property is sold, tax is to be paid on the gains earned on the sale. Such gains could be either Long Term Capital Gains (LTCG) or Short Term Capital Gains (STCG) depending on duration for which the property was held. If an investor sells a property 36 months or more after it was bought, the gains will be considered as LTCG.

If the property was sold within 36 months after it was bought, it will be treated as Short Term Capital Gains and tax as per Income Tax slab rates will be payable on the same.

LTCG are usually taxed at a flat rate of 20%, regardless of the income of the investor.

Recommended Read on Capital Gains Tax

The Long Term Capital Gains from the sale of an asset can be a huge amount and may in turn result in very heavy taxation for the investor. The Government of India has made provisions where by the LTCG can be reinvested and thereby exempted from taxes. The following sections describe how.

4. Purchase of residential property – reinvestment of Capital Gains

According to Section 54 of the Income Tax act, Long term capital gains shall be exempt from taxation if the capital gain is invested in the purchase or construction of another residential property.

• The exemption is applicable to Individuals and Hindu Undivided Family only
• The capital gains should be utilized to purchase another residential property during a period of within one year before the sale and two years after the sale.
• The capital gains can also be used to construct a residential house within a period of 3 years from the date of sale.
• The new residential property thus acquired, should not be transferred for a period of 3 years.
• The exemption allowed as per this section is limited to the capital gains or the cost of the house, whichever is lower.
• Even if the property sold is land without building, deduction is permissible u/s 54 F provided the sale consideration (not just the capital gains) is invested in the new house. Even if the entire sale consideration is not utilized, deduction is permissible; but only proportionately.

Recommended Read on Saving Capital Gains Tax

5. Capital Gains Accounts Scheme

The Income Tax Act allows a period of 2-3 years for the reinvestment of capital gains. However, there may arise situations where the due date for filing the income tax returns falls before this stipulated period. In such cases, the government allows the taxpayer to deposit the capital gains in a Capital Gains Account Scheme on or before the date of filing the returns. This amount can then be withdrawn only for the purpose of reinvestment in a residential property.

In case the amount is not utilized within the specified time, it will be taxed as capital gains in the financial year in which the time period expires.

6. Bonds/Infrastructure – Capital Gains Reinvestment

According to the Section 54EC of the Income Tax Act, the Capital gains can be exempt from taxes in the proportion of the amount of investment in specified bonds with respect to the total sale value. The investment can be made in the bonds of National Bank for Agriculture and Rural Development (NABARD) or National Highway Authority of India (NHAI) or Rural Electrification Corporation within a period of 6 months from the transfer.

It has to be noted that the investment made under section 54EC for capital gains relating to one year should not exceed Rs 50 lakhs.

7. TDS on purchases over Rs 50 lakhs – Resident Indian

According to the Section 194 IA of the Income Tax Act, the purchaser of an immovable property over Rs 50 lakhs should pay withholding tax at 1% from the consideration payable to the resident transferor. The entire amount credited to the seller should be taxed at 1%. Please note that this is not applicable to rural agricultural land.

The buyer should deposit the tax thus deducted, in the Government treasury through any of the authorized bank branches. The buyer of the property should also issue Form 16B which is the TDS certificate, to the seller, in respect of the amount deducted and deposited with the Government.

8. TDS on purchases from a Non Resident Indian

The Section 194 – IA mentioned above is specific to the case of residents. When it comes to purchasing property from an NRI, the rules are slightly different. This is governed by the Section 195 of the Income Tax Act and directs that the amount be credited to the NRI seller after deduction of income tax at the rates in force.

Long term capital gains from the sale of an immovable property by an NRI should be taxed at 20% and Short Term capital gains should be taxed at the slab rates under the Finance Act applicable to the year of sale.

Recommended Read Purchasing Property from NRI

9. Person in Possession of a Property

There are certain circumstances under which Capital Gains implications might arise for a seller of a property even though the actual sale deed has not been registered. They are

• The possession of property has been transferred to the buyer and the buyer would now be considered the owner of the property even though it is not registered in his name,
• The sale consideration has already been paid or promised to be paid to the seller by the buyer.
• The sale deed has not been executed but instead a power of attorney or agreement to sell or will, etc., has been executed.

In all the above cases, Capital Gains would arise for the seller and should be taken care of.

10. Special provision for full value of consideration in certain cases

According to Section 50C, in the sale of a land or building, if there is a difference between the guideline value of a property determined by the state Government and the actual consideration received or accrued; wherein the actual consideration is lower than the guideline value, the difference should be computed and taxed as “Other Income” by the buyer.

This particular section can affect the capital gains calculation where there is such a situation and hence needs to be factored in while calculating Capital Gains.