Be aware of pre-possession costs


Taking possession of your apartment can prove costly, if your developer levies additional charges and escalated costs. Understand these charges fully, to ensure a smooth transfer

Divyansh Sharma, a first-time home buyer, who invested in a two-bedroom flat knew little about the additional charges on his property. When he received the pre-possession demand letter, the developer had asked for an extra Rs 2.5 lakhs against the original payment plan, for completing the possession formalities of the property. This amount included escalation charges, labour welfare fund, maintenance charges, etc.

Sharma’s experience only highlights the fact that property transactions can be tricky, if it is not understood properly.

“There are certain charges which become evident, only at the time of taking possession or when your developer raises the demand. These collectively form 12%-15% of the property’s total value,” says Jakirat Singh, a New Delhi-based real estate consultant.

While some charges are mandatory, others may be raised as special charges by your developer, who may grant possession, only after you settle these dues.

 

Charges that home buyers may need to pay, before taking possession of their property

Names of the chargesDescription
Stamp duty5%-8% on market value entered in your agreement deed.
Interest on delayed payments18%-24% (as on date).
Labour welfare charges1% of the construction cost.
Advance maintenance chargesRs 1.5-3 per sq ft for a year.
Holding chargesIf applicable, varies with developers.
Water connection chargesRs 20,000-40,000
Power back-up chargesRs 20,000-30,000 per KV
LPG connection chargesRs 5,000-8,000
Additional compensation chargesConditional
Escalation chargesConditional

The above table is indicative of the charges. It may vary, depending upon the conditions and nature of agreement.

 

Stamp duty: This is a government tax that is levied on property transactions and is charged by the development authority. The stamp duty varies from one city to another and ranges from 4% of the property value, to as high as 8%. The tax may also differ, depending on whether the property owner is a male or female or if the property is jointly owned.

Interest on delayed payments: This can force the buyer to overshoot one’s budget drastically. This scenario usually arises, when a buyer is booking a property and is simultaneously applying for a bank loan. The builder may charge you for the delay in payment, before the loan is disbursed.

Labour welfare charges: The development authority charges around 1% of the construction cost, as a basic welfare fund from all buyers. Your developer will simply pass this on to the authority. For example, if the construction cost of your two-bedroom, 1,100-sq ft apartment, is Rs 1,400 per sq ft, you will incur around Rs 15,400 as labour welfare charge.

Holding charges: If you receive a demand letter from your developer for the possession of the property, he will mention a particular date for depositing the due amount. Usually, this period varies from 30 to 60 days. After this date, your developer may levy holding charges, till the time you take the possession. After three months of holding, the developer may even initiate a cancellation of your allocation or charge interest on delayed payment.

Advance maintenance charges: Developers may raise this demand, for maintenance of the project’s premises. The maintenance cost is generally higher in group housing societies.

See also: Maintenance charges that buyers need to be aware of

Other miscellaneous costs: These may include charges for power back-up, firefighting, installation of gas pipelines, water connection, etc. Apart from these, developers may also levy escalation costs, on the condition that market rates for raw materials have gone up.

No service tax, only Goods and Services Tax: The government has put in place the Goods and Services Tax (GST), which the developer may levy on you. The GST has replaced the service tax, which was applicable earlier. “A simple tax of 12% of the purchase amount, will be charged to buyers investing into under-construction properties. In the current format, the prices are likely to reduce due to the input tax credits. This benefit should be passed on to the consumers. The GST will not be charged in stages, like service tax. It would be charged in the initial phase of the purchase. This tax excludes stamp duty and registration charges and does not apply to ready-to-move-in properties,” explains Delhi-based chartered accountant, Nkhil Agarwal.

 

What should be done?

As the market is adapting to the new GST regime, there is some uncertainty among buyers and development firms. Once the transition is complete, the process of taxation will become easier. “Moreover, with the implementation of the Real Estate (Regulation and Development) Act across states, sales have been slow and are taking place in projects that are registered,” says Rajiv Mehrotra, a Noida-based real estate consultant. It will take some time, for buyers and builders to become accustomed to the new receipts, he says.

Meanwhile, buyers who get demand letters should be cautious and verify the additional charges levied at the time of possession. “Often, there can be mistakes in the overall calculation,” cautions Singh. In Sharma’s case, the developer had wrongly included preferential location charges (PLC). “According to my allotment letter and the agreement, the PLCs were not to be charged,” he says. After tough negotiations and follow-ups, the developer had to remove the amount charged as PLC.

Buyers should also complete all formalities within the stipulated timeframe. Your case becomes stronger, if all your payments are done on time and it also ensures smooth transfer of the property in your name.

 

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