Questions to ask your tax consultant before investing in a property

For an increasing number of Indians, especially young working professionals, buying a property is becoming a preferred investment option. Real estate purchases provide various tax advantages to buyers. At the same time, there are various taxes to be paid, including GST and stamp duty levied by the government. Thus, like any investment, purchasing a property should involve proper financial planning and include tax planning strategies to lower the tax burden. Consulting a tax expert can be a smart move, as it will provide the buyer with complete clarity on their tax liabilities and savings. In this guide, we list some important questions you should ask your tax consultant before buying a property. 

What are the tax implications of buying this property?

There are various tax aspects connected to a property purchase. A tax expert may help you understand the different taxes the property buyer is liable to pay before the property purchase and during the property ownership. These include: 

Goods and Services Tax (GST)

The GST, a simplified indirect tax introduced in 2017, is levied when purchasing a property. However, it is applicable to under-construction properties and not on ready-to-move-in and resale properties. GST charges are also applicable on services such as parking, clubhouse membership, maintenance charges, etc. Moreover, if the owner has rented out their residential property for commercial purposes, GST will be levied on the rental income received from such a property. Property buyers should also be aware of the different rates applicable in different cases. For example, investing in an affordable housing project comes with a lot of benefits, including lower GST rates. Consulting a tax expert will provide clarity on the GST impact of the property purchase. 

Click to read about GST impact on real estate

Stamp duty and registration charges

Stamp duty and registration charges are additional expenses that significantly increase the property purchase costs. While stamp duty is a tax imposed by the state government on various property transactions, registration charges refer to the fee one has to pay for registering the document in official records. A home buyer should know the stamp duty rates and registration charges applicable in different states. These costs should be considered when estimating the total costs of buying a property. A tax expert will provide insights on how these expenses impact the buyer. They will also provide ways to lower the burden of these costs. For example, some states offer rebates on stamp duty for female buyers. Similarly, senior citizens may also be eligible for some concessions on stamp duty.  

Click to view a detailed guide on stamp duty and registration process for home buyers

Property taxes 

Property taxes are levied by the relevant municipal authority of the city or locality where the property is located. Typically, property tax is paid annually and there are several factors impacting the rates. The primary factor is the property valuation, which can be based on methods such as market value, annual rental value, etc. Other factors influencing the property tax rates are property usage, built-up area, property age, location, etc. Like stamp duty, property taxes also come with rebates for specific groups. Since these are recurring costs that a buyer will incur, it is crucial to understand how they will be calculated and the impact they will have on the overall budget.

Tax Deducted at Source (TDS)

According to Section 194-IA of the Income Tax Act, 1961, if property transactions exceed Rs 50 lakh, then the buyer is required to deduct a TDS of 1% of the sale consideration before making the payment to the seller. There are various regulations pertaining to the TDS on the sale of a property, which buyers should know. There are also penalties for late filing or not filing the Form 26QB. 

What tax deductions and exemptions can I claim?

One of the biggest advantages of buying a property is the many tax benefits the buyer can avail. First-time buyers, in particular, have various benefits. For example, certain income groups can get interest subsidies under the Pradhan Mantri Awas Yojana (PMAY). If they are opting for a home loan, there are tax deductions of up to Rs 1.5 lakh on principal repayment and up to Rs 2 lakh on interest paid. Some states also offer concessions on stamp duty. Going for a joint home loan comes with additional advantages as each borrower can claim separate deductions, significantly reducing the financial burden for a family. To make the most of these tax benefits, it is important to speak to an experienced tax expert. 

How will the capital gains tax be calculated if I sell the property?

The value of real estate assets appreciates over time. A property owner may plan to sell their property to gain higher returns. However, property sellers should be aware of the tax implications, especially the applicable capital gains taxes. It is simply the tax levied on the profit earned through the sale of the property. There are two types of capital gains: short-term (STCG) and long-term (LTCG), depending on the holding period. The rates for STCG and LTCG differ, which is why every property owner should understand the tax implications when deciding to sell their property. A tax expert will also guide the seller in adopting various strategies to minimise capital gains tax. 

How can I lower my tax liabilities?

There are various tax implications to consider at different stages of home ownership. When purchasing a property, there are several ways a buyer can reduce their tax liabilities. For instance, applying for a joint home loan and registering the property in a female buyer’s name can help lower the tax burden. Similarly, joint ownership also helps in saving on the capital gains tax. Furthermore, there are some smart ways to reinvest after selling a property, which can help the seller reduce their financial burden and maximise their benefits. Speaking to a tax advisor who is aware of the nitty-gritties of property investment and reinvestment can ease the journey for a property owner. 

Benefits of tax planning before investing in a property

• Lower tax burden: Proper tax planning before investing in a property enables buyers to adopt legal methods to save money and reduce their tax liabilities. 
• Higher returns: Consulting a tax expert will help a buyer to invest wisely and discover strategies to maximise the returns on investment (ROI).
• Increased savings: A reduced tax burden will result in higher savings, which can be invested to pursue other financial goals. 
• Affordable home purchase: Utilising the various tax-saving strategies will ensure the buyer gets a home at an affordable price, without any financial strain. 

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Purchasing a property involves dealing with several tax aspects that directly impact the buyer’s financial health. Adequate tax planning not only enables the buyer to make significant savings but also ensures adherence to various tax regulations, thereby preventing any unwanted penalties or charges. Neglecting these may lead to unnecessary expenses for the individual. 

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