SMART SOCHO: How to make the most of tax benefits from realty investments

Buying or selling residential property in India comes with its own set of tax implications that one needs to carefully consider prior to sealing the deal. However all it takes is adhering to a few simple points to maximize the tax benefits, writes Rajesh Kulkarni.  

When it comes to purchasing property, most buyers tend to focus more on negotiating the price, ensuring the paperwork is in order and specific attributes of the property itself like its locations, connectivity, the availability of social infrastructure and so on.

While these are important aspects that need careful consideration, another equally important aspect that is often left out or ignored by property buyers is how they can maximize the accruing tax benefits from their investments in residential property.

It's no secret that buying property in India or anywhere else for that matter is a game of very high stakes, often involving a buyer's life savings or a massive loan component. In either case, it's very important for a buyer to give serious consideration to the key tax aspects involved in the purchase or sale of residential property.

First time buyers in particular need to be aware that the end use of the property comes with several tax implications. For example, a property brought for self-use, carries a deduction of INR 30,000 p.a for interest payable.

Moreover a buyer can also avail of an added deduction of upto INR 2 lakh p.a for a self-occupied property, provided the purchase or construction (as in the case of under-construction properties), is completed within a period of three years, calculated from the end of the year when the loan was availed.

In the case of a property that is rented out, the full interest amount can be included as a deduction while calculating taxable income, thereby lowering the post-tax interest component. In cases where the deducted interest is higher, the surplus is classified as a loss that can be offset against other income or simply forwarded to the next year.

The scenario is slightly different in the case of under-construction properties wherein interest deduction from taxable income is not permitted till the project is completed. However the interest component paid on the housing loan during the period of construction can be claimed as a deduction - in five equal installments - beginning with the year of completion of the said project.

Experts add that while an under-construction property is not eligible to be treated as residential property from a tax perspective, it may qualify for a short-terms capital gains or long-term capital gains tax depending on its period of holding. If such a right is sold post-completion, it would be taxed as STCA or LTCA after the careful consideration of various parameters, based on judicial precedents.

It needs to be noted here that all the co-owners of a new property an avail of tax benefits, as long as they all are co-applicants on the home loan as well. In addition to the interest, a buyer can also claim a deduction from his/her taxable income on account of repayment of the principal amount of the loan and related expenses (stamp duty, registration charges etc). However this is permitted upto a maximum limit of INR 1.5 lakhs only and is subject to certain conditions.

On the flip side, a person selling his/her property is eligible to pay a capital gains tax on the sale proceeds if they are not re-invested into specified assets tax-saving instruments. The tax is applicable on the differential amount between the initial purchase price and the sale price after considering added costs incurred (if any) like renovations, additions and transfer fees.

Here again the timing of the sale is crucial in deciding the tax burden to be borne by the seller. For example, if the property is sold within three years of its purchase, the seller is liable to pay a short-term capital gains tax on the differential amount.

Therefore it makes sense from a seller's perspective to hold onto a property for atleast three years before selling it since unlike the short-terms capital gain tax which is paid as per slabs rates, the long-term capital gains is taxed at a concessional rate of 20 percent.

The cost-inflation index which details the inflationary impact on the cost of a property can be a potential ally when calculating the long-term capital gains tax applicable on the sale of a property.

As per existing laws, a tax exemption on the long-term capital gains tax is available on the re-investment of the amount accrued from the sale of property, provided the new property is constructed within a period of three years from the sale.

In the case of purchase of new property, this exemption can be availed either one year before or two year after the sale of the original property, subject to certain stipulations.