When purchasing a property, the cost goes beyond the asking price. There are several additional considerations, with taxes being a significant one. Different types of properties are subject to various taxes, which can impact the overall expense of your investment. Understanding these taxes is crucial for taking informed decisions and potentially saving money. Read on to explore the different taxes levied on property purchase and tips on how to minimise them.
Taxes on property purchase
Here is a list of some taxes levied on the purchase of a property.
Goods and Services Tax (GST)
Under the new unified tax regime introduced by the central government, under-construction properties were initially taxed at 18%. The government included a provision allowing a deduction of land value equivalent to one-third of the total amount charged by a developer, effectively reducing the GST rate on such units to 12%. However, in February 2019, the government revised the tax slab for real estate, lowering it to 5% for under-construction units and 1% for affordable homes. It is important to note that stamp duty and registration charges are also applied on the purchase of under-construction units, as these are state levies.
Tax Deduction at Source (TDS)
TDS was introduced under Section 194-IA of the Income Tax Act, 1961, by the Finance Act, 2013. According to this section, any individual buying a property must pay TDS to the seller for the transfer of immovable property, excluding agricultural land. The TDS must be submitted in the name of the seller. The government amended Section 194-IA of the Income Tax Act to encompass all residential society-based charges, such as car parking fees, club membership fees, water or electricity facility fees, advance fees, maintenance fees or any similar charges related to the transfer of immovable property for TDS levy. Since September 1, 2019, TDS is levied at 1% if the property value exceeds Rs 50 Lakh.
Stamp duty
Stamp duty is levied by the government on property transactions, akin to income or sales tax. It generally amounts to about 5% of the property’s market value, although rates may vary across states and can sometimes be higher. The buyer is required to pay this duty at a designated bank or collection centre before property registration, with penalties for delays. Stamp duty is calculated based on government-issued ready reckoner rates and is essential for legally validating the property transaction. This tax applies to every transaction involving the exchange of documents and execution of instruments related to property.
Registration fee
Registration charges are essential fees incurred during the registration process, which involves recording sale documents with a registering officer. According to Section 17 of the Indian Registration Act, 1908, it is mandatory by law to register documents related to property sales, transfers or leases. Failure to register these documents can prevent owners from pursuing legal action. The registered document represents the final agreement between parties, establishing the buyer’s rightful ownership and safeguarding against potential disputes or fraud. Typically, registration fees amount to 1% of the agreement value, although this percentage can vary by state, determined by local government regulations.
How to save taxes levied on property purchase?
After understanding how taxation impacts property purchase, let’s now delve into tax deductions and exemptions that can significantly alleviate a homebuyer’s financial burden.
Tax deductions on stamp duty and registration charges
While stamp duty and registration charges typically amount to 5%-7% of the property cost, they are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. Buyers can claim up to Rs 1.5 Lakh, provided the payments are made in the same year of claim, the property is fully constructed, and intended for self-use rather than investment.
Tax deductions on home loans
Homebuyers financing their purchase through a home loan can avail of deductions under Sections 24, 80C, and 80EE of the IT Act, subject to specific conditions:
- Interest repayment: Section 24 allows a maximum deduction of Rs 2 Lakh on interest for a self-occupied property, with no upper limit for rented properties.
- Principal repayment: Section 80C offers a deduction of Rs 1.5 Lakh on the principal amount repaid annually, contingent on not selling the property within five years of possession to avoid reversal of claimed deductions.
- Additional benefit for first-time buyers: Section 80EE provides an additional Rs 50,000 deduction for first-time homebuyers if the loan amount is Rs 35 Lakh or less and the property value does not exceed Rs 50 Lakh.
- Joint home loan: In the case of joint loans, each co-owner can claim deductions of up to Rs 2 Lakh on interest and Rs 1.5 Lakh on principal under Section 80C, provided they are co-owners of the property purchased through loan.
Housing.com POV
Navigating the landscape of taxes on property purchase reveals a complex but essential aspect of real estate investment. Beyond the initial purchase price, various taxes, such as GST, TDS, stamp duty and registration charges significantly impact the overall financial outlay. Understanding these taxes is crucial for prospective buyers to make informed decisions and potentially save costs. By exploring tax deductions and exemptions available under the Income Tax Act, such as those on stamp duty, registration charges and home loans, buyers can strategically mitigate their financial burden. Armed with this knowledge, buyers can navigate the complexities of property taxation more effectively and optimise their investment decisions.
FAQs
What is GST in relation to property purchase?
GST, or Goods and Services Tax, is a unified tax regime introduced by the central government for under-construction properties. Initially set at 18%, it was reduced to 5% for under-construction units and 1% for affordable homes from February 2019 onwards. GST is in addition to stamp duty and registration charges imposed by state governments.
What is TDS and when is it applicable in property transactions?
TDS, or Tax Deduction at Source, is levied under Section 194-IA of the Income Tax Act, 1961, on payments made during property transactions exceeding Rs 50 Lakh. It applies to any residential society-based charges incidental to property transfers, such as club membership fees and maintenance charges.
How is stamp duty calculated and when should it be paid?
Stamp duty is a state-imposed tax on property transactions, typically around 5% of the property's market value but varying by state. It must be paid at a designated bank or collection centre before property registration to validate the transaction legally. Delayed payment may incur penalties.
What are registration charges and when are they applicable?
Registration charges are fees incurred during the registration of property sale documents under the Indian Registration Act, 1908. These charges amount to approximately 1% of the property's agreement value, though this can differ across states. Registering documents is mandatory to establish legal ownership and protect against disputes.
Are there any exemptions from paying GST on property purchases?
GST exemptions are generally not applicable to property purchases, except for certain categories like affordable housing units where a reduced rate of 1% is applicable. However, specific exemptions may vary based on government policies and notifications.
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