Taxation In Real Estate

Real estate involves high value transactions and also different types of taxation. The taxation on real estate is a bit of a complex and confusing process. Often people get confused and get cheated too on the name of various taxation and then regret. Today we will literate you about every tax imposed on real estate and their brief overview. So that you will be literate enough while purchasing any property to understand if you are on the right path or not.

Capital Gain Tax

In India, capital gains tax on property is levied when a property is sold for a profit. The tax treatment depends on whether the property was held for the short term (less than 2 years) or long-term (more than 2 years).

Short-term capital gains (STCG)

•  If a property is held for less than 2 years before selling, the profit is treated as short-term capital gain.
•  Short-term capital gains are taxed at normal slab rates applicable to the taxpayer's total income for that financial year.
•  For example, if you bought a property in January 2023 for 50 lakhs and sold it in December 2023 for 60 lakhs, making a profit of 10 lakhs, this 10 lakhs would be added to your total income for the year and taxed accordingly.

Long-term capital gains (LTCG)

•  If a property is held for 2 years or more before selling, the profit is treated as long-term capital gain.
•  Long-term capital gains on property are taxed at a flat rate of 20% after allowing indexation benefits.
•  Indexation adjusts the purchase price for inflation, reducing the taxable capital gain.
•  For example, suppose you bought a property in January 2010 for 50 lakhs and sold it in January 2024 for 1 crore. In that case, the capital gain will be adjusted for inflation using the Cost Inflation Index (CII)  to determine the indexed cost of acquisition. The resulting gain (after indexation) would be taxed at 20%.

Example Calculation:    

       1.  Assume the indexed cost of acquisition after inflation adjustment is 80 lakhs.
       2.  Long-term capital gain = Sale price (1 crore)
       3.  Indexed cost of acquisition (80 lakhs) = 20 lakhs.
       4.  Tax on LTCG = 20% of 20 lakhs = 4 lakhs.

Additionally, exemptions and deductions may apply under certain conditions (like reinvestment in specified bonds or purchasing another property), which can reduce the taxable capital gains.

How To File TDS On Property With Ease In India 2024?

TDS On Sale Of A Property

One percent TDS is deducted on the sale of a property. It is the buyer's responsibility to deduct the TDS on behalf of the seller. The consideration value to deduct TDS is 50 lacs or more, the amount less than 50 lacs do not come under TDS and is exempted from the deduction. The buyer has to deduct the TDS on behalf of the seller and will deposit it on the PAN number of the seller. The buyer is liable to deposit it within 30 days or till the 7th day of next month. 

To understand the taxation of the TDS: just assume you have bought a home for 60 lacs and it exceeds the value of 50 lacs which was exempted from the TDS. Now the 1 percent of 60 lakhs is 60 thousands. The buyer will deduct 60 thousands and will deposit it in the PAN number of the seller. The seller can claim the tds amount while filing ITR.

TDS On Rent

TDS on rent will be deducted if the rental amount is 2.40 lacs or more than that annually. The tenant is required to deduct 10 percent TDS and will deposit it on the pan card of the landlord. 

Section 54: Rebates on real estate

This clause states that an assessee may be eligible for a tax exemption if they sell a long-term capital asset, such as a residential property, and purchase a new residential property.The only entities that can receive this benefit are people or HUFs.

Rebates on real estate: Section 24

If the owner or his family resides in the house property, homeowners are eligible to deduct up to Rs. 2 lakhs (or Rs. 1,50,000 if you are filing returns for the previous financial year) from their home loan interest under Section 24 of the Income Tax Act.

Section 80C

1.  Principal Repayment of Housing Loan (Qualifying for 80C Deduction)    

Section 80C allows taxpayers to claim deductions on the principal repayment component of a housing loan taken for a residential property. This means the amount you repay towards the principal of your home loan can be deducted from your total taxable income up to a maximum limit of Rs. 1.5 lakh per financial year (as per the latest tax laws, this limit may vary from year to year).

2.  Direct Investments in Real Estate Properties or Land :

Direct investments in real estate properties or land, such as purchasing a house or buying a plot of land, do not qualify for deductions under Section 80C. The purpose of Section 80C is to encourage savings and investments in specified instruments that have a lock-in period and contribute to long-term financial planning and security.

Investments in real estate are considered differently under the Income Tax Act. Income from real estate, such as rental income or capital gains from the sale of property, is taxed under different sections (like Section 24 for rental income and Section 54 for capital gains exemption).

3.  Key Points to Remember :

•  Housing Loan: The deduction under Section 80C applies specifically to the principal repayment part of the housing loan for a residential property that the taxpayer has borrowed.
•  Investments: Investments in real estate (buying property or land) are treated separately under the Income Tax Act and do not fall under the purview of Section 80C deductions.
•  Tax Planning: Taxpayers need to carefully plan their investments and understand the tax implications related to both housing loans and real estate investments to optimise their tax liabilities.