All About Taxes- Property Investments

Property is a capital asset and a source of income. We discuss various kinds of taxes as applicable to residential property.

Capital Gains Tax

If the house or land you own is sold and you make a profit it is called capital gain and the tax paid on it is called capital gain tax. If the property was owned by you for less than 3 years then the capital gain is a short term capital gain and if it was owned for more than 3 years it is a long term capital gain.

Short term capital gain is added to your total income and taxed at the marginal rate as per applicable tax slab. Long term capital gain is lower than short term capital gain. It is taxed at the rate of 20% with indexation. Indexation allows you to factor in inflation in your original purchase price which lowers the actual profit made.

However you can save the entire capital gains taxable amount by investing it in another residential property. Read this in the article Save on Capital Gains Tax in Viewpoints section of this page.

Income Tax on Property

If you own property you are liable to pay the government a tax on the income you earn out of it. The IT laws regard property as an income head and it is treated as 'income from house property'. Tax is levied on real estate, that is buildings and the land attached to the building.

Calculating income tax on house

This is calculated on the basis of annual value of the property. Annual value for property that is rented is the greatest of 1) the annual rent actually received, 2) fair rent in your locality (as determined by the IT guys) and 3) municipal valuation of it. If a house is not rented and not used for self occupying there is still an income deemed to have come from it and this is also calculated in one of the 3 ways above.

  • Self-occupied property

Annual value of the house you reside in is zero because there is income from it. But if you own more than one property, tax will be charged on the other properties. Even if it lies vacant and you don't earn rent on it property tax has to be paid. In case of property that is not let out on rent you can deduct from the annual value 1) 30% of annual value for repair and maintenance and 2) if you are paying home loan EMI on it you can also deduct a maximum of Rs 1.5 lakhs paid as interest.

If you own just one house but employment keeps you in another location then the annual value of your property will be considered nil if you have not let out your property and the reason for your not occupying your house should be employment or business.

  • Rented out property

For property rented out, you can deduct local municipal taxes from the annual value if you as the landlord have paid dues in the same year. For arriving at the taxable value for rented properties two more deductions can be availed: 1) 30% of the annual value, 2) If you've taken a loan for buying, building, renewing or repairing the house the interest amount on the loan can also be deducted.

  • Multiple self-occupied properties

Suppose you live and work in Mumbai for most part of the year. You own a flat in Mumbai. You also own a house in Nagpur your hometown. You spend a few months of the year in that house too. In this case both houses are self-occupied. Imagine you are paying home loan EMIs on both houses. But you cannot get the benefit of deducting the entire interest paid that year from annual value for both properties. One of the houses will have to be declared as self-occupied. On the other house a maximum amount of Rs 1.5 lakhs can be deducted.

Service Tax on Property

Most new home buyers purchase homes before it is completed as under construction homes cost lesser than complete ones and payment is made conveniently in stages. However when you buy a property that is under construction a service tax of 10.3% must be paid on it. 

Service tax is payable by the service provider, the builder, in case of a house but as a buyer this would mean your total house cost will be higher by a few lakhs in lieu of service tax. The builder gets an exemption of 67% on the cost of land, materials, etc. Therefore effectively a tax of 10.3% on the remaining 33%, which is 3.4% service tax is payable. Subject to certain conditions up to 75% exemption can be availed by the builder.

This tax is payable only for houses including flats, row house, duplex and so on under construction. Until the builder gets the Completion Certificate from the local government authorities the building is considered as 'under construction'. If some amount is paid after the builder gets completion certificate that amount would not be charged service tax. If you paid the builder extra money for a flat on a preferred floor or one with a specific number or facing a particular direction and so on that money will also attract service tax. But the parking slot the builder sold you will not be charged service tax.

Low cost houses costing less than Rs 20 lakhs under JNNURM and Rajiv Awaas Yojana are exempted from service tax.

Wealth Tax on Property

If you own more than one house property, the other house/s that is unoccupied attracts wealth tax of 1% a year if the value of the house along with other assets which are chargeable under wealth tax exceeds Rs 30 lakhs and if it is not let out for more than 300 days a year.

Income Tax Exemptions on Home Loan and other initial expenses

1. Deduction on Interest on Home Loan under Section 24

While filing Income Tax Returns you have to declare income earned from house property. This is the annual value of your house as explained above. A maximum of Rs 1.5 lakhs paid as interest on home loan can be deducted under this section. So for a self-occupied house (whose annual value is nil) would have a negative income on deducting interest.

If the house is rented out you can deduct the entire amount of interest paid in a year from the annual value.

In case you buy a house on loan in a place and live in a rented accommodation in another place (situated at a considerable distance) you can actually claim benefits on the principal, interest and HRA (provided you are entitled to it).

This entry is made in the cell for 'Income from House Property' in relevant ITR form. There is no restriction on the number of properties on which you can claim this benefit.

2. Loan Principal Repayment under Section 80 C

If you are a house owner paying EMIs on a self occupied house you can pay lesser tax equal to the principal of the EMI subject to a cap of Rs 1, 00,000 a year. EMI has an interest component and a principal component. Towards the beginning the interest component makes the larger chunk of the EMIs which keeps reducing as payments are made and towards the end principal component makes the larger component.

3. Expenditure towards registration, stamp duty under section 80 C

If you have purchased a home the amount you paid as registration charges, stamp duty and other expenses can be claimed for exemption in the year the transaction was made under section 80 C subject to the overall cap of Rs 1, 00,000. Expenses like admission fee, initial deposit, etc for becoming a member of the housing society and the cost of renovation, rebuilding, etc and the cost of land are not included in the expenditure.

Together the last two benefits can be clubbed along with other deductions under section 80 C. The total deduction under 80 C cannot exceed Rs 1 lakh in a given year. This is entered in the cell under Chapter VI A deduction in relevant ITR form.

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