Home buying and selling impacts the taxability of an individual and it must be assessed before decisions or transactions are made. There are various factors determining taxability in this regard.
Let’s look at these scenarios in greater depth.
While buying a property
Home buyers who have availed Home Loans can enjoy substantial tax benefits. There is an exemption of Rs. 1.5 lakh under Section 80C of the Income Tax act on the principal paid against the Home Loan. A deduction of Rs. 2 lakh is allowed on the interest payment if the property is self-occupied.
However, such benefits can only be availed when the construction of a property is completed and not when it is under construction. The amount paid towards recovering the interest during the pre-construction period can be claimed as a deferred deduction in five instalments after possession of the property. The deferred deduction needs to be claimed within five years.
In case you purchase a ready-to-move property, the tax benefits are available with immediate effect. A first-time home buyer gets an additional tax benefit of Rs. 50,000 against the loan amount if it is not more than Rs. 35 lakh and the property value is not more than Rs. 50 lakh.
Home owners also need to pay property tax as per prevalent local municipal laws. The tax rate is typically decided by the size of the property, the area rates and whether the property is being used for residential or commercial purposes.
While selling a property
The time frame during which a property is sold also defines the taxability of an individual. If a property is sold within two years of its purchase, the gain from the invested capital is called short-term capital gain (STCG). If it is sold after two years from the date of possession (applicable from April 1, 2018), the gain from the invested capital is called long-term capital gain (LTCG).
If a property is sold within five years after taking possession of it, the tax deduction benefits availed during this period for principal repayment cease immediately along with the deduction benefits claimed for stamp duty and registration charges. Such benefits are considered as taxable income in the year the property is sold.
The tax on LTCG is 20% with indexation benefit. The base year for indexation is April 1, 2001. To avoid tax deduction on LTCG, you can invest capital gains up to Rs. 50 lakh in specified bonds such as NHAI Bond, REC Bond within six months from the date of sale. Such bonds have a lock-in period of three years and provide interest at 5.25%, which is taxable in the hand of the investor.
The tax on STCG is imposed as per the tax slab applicable on the seller.
| Tax implication on buying/selling a property | |
| Situation | Tax Applicability/Benefit |
| When Buying a property | Tax exemption of Rs. 1.5 lakh U/s 80C of the IT Act for principal repayment
Rs. 2 lakh deduction is allowed on interest payment for self-occupied property
Tax deduction of Rs. 50,000 against Home Loan up to Rs. 35 lakh and property value up to Rs. 50 lakh |
| When Selling a Property | Tax on LTCG at 20% with indexation benefit and 10% without indexation benefit
By investing in specified bonds under Sec 54 (EC) an individual can save LTCG tax up to Rs. 50 lakh
Tax on STCG at applicable tax slab of the individual |
While it is recommended not to purchase a house just to reduce your tax burden, you might want to weigh your benefits against the costs when you decide between buying a ready-to-move or under-construction property.
An under-construction home costs less, but comes with reduced tax benefits and requires you to arrange for accommodation till you get possession. However, a ready-to-move home on the other hand may cost slightly higher, but offers you immediate tax benefits.