Taxation of Real Estate Investments in India

In this article, we go over the basics of TAXATION of real estate investments/transactions in India by individual investors. The information presented below is mainly applicable to RESIDENTIAL property transactions and does not necessarily pertain to commercial property transactions as rules may vary. Also unless otherwise mentioned, below information is applicable to both Resident Indians and NRIs as TAX rules pertaining to real estate transactions are almost similar for both types of investors.

When it comes to purchasing, owning/holding and selling of a property in India, only 3 kinds of taxes are involvedCapital Gains Tax (payable only once on SALE of property), Property Tax (payable every year while holding/owning a property) and Wealth Tax (payable every year while holding/owning a property).

When you purchase a property, NO TAX is payable – although you have to pay Registration & Stamp Duty which are not a form of TAX and hence are not discussed in this article.

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When is TAX payable on Real Estate Transactions in India ?

TAX is payable ONLY when you sell a property and is levied ONLY on the capital gains portion or profits that you make in the transaction (and hence the name – Capital Gains Tax).

If you sell a property at cost price or at a loss, NO TAX is payable and you may infact be eligible to use this loss to write-off current or future gains from either real estate transactions or other sources of income such as sale of equity mutual funds or shares, etc and thus reduce your overall capital gains tax. In other words, if you incur a loss by selling a property, you can set-off this loss against your capital gains or profits from sale of other investments and hence reduce your overall capital gains, which in turn means you have to pay lesser tax.*1

NO TAX is payable when you purchase a property (when you purchase a property, you have to pay Stamp Duty and Registration Charges – but this is not a form of tax and hence is not discussed here).

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Capital Gains on Sale of Property

The profit on sale of real estate assets is treated as capital gains. For calculation of tax payable on these gains, they are classified as either short term or long term capital gains on below basis :

Short Term Capital Gains : If asset is held for a period not exceeding 36 months from the date of acquisition. I.e. property is sold within 3 years from date of purchase.

Long Term Capital Gains : If asset is held for a period exceeding 36 months from the date of acquisition. I.e. property is sold after 3 years from date of purchase/registration (whichever is later).

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Rate of Capital Gains Tax :

After the capital gains are classified on above basis (i.e. short term or long term), the gains are taxed at following rates :

Short Term Capital Gains : Short term gains are simply added to your total taxable income for the year in which property is sold and taxed at your applicable slab rate. Due to this, they tend to be taxed at the maximum rate of 30.9% as such gains from even a small property would push your total income into the highest tax slab (i.e. beyond the Rs.10 lakhs tax slab/barrier).

Long Term Capital Gains : 20.6% after Indexation (concept of Indexation is explained below).

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Method of Computing Capital Gains :

Sale Proceeds Of Assets                                              : Rs.xxx

Less : Cost Of Acquisition Of Asset                            : Rs.xxx

Less : Expenses incurred on modification/upkeep : Rs.xxx

Capital Gains                                                                  : Rs.xxx

TAX is charged as per applicable rate ONLY ON THE CAPITAL GAINS portion. While the above method is common for calculating both shot term and long term capital gains, when it comes to calculating Long Term Capital Gains, the Cost of Acquisition is the “Indexed Cost of Acquisition” of the property.

Indexed Cost of Acquisition is a system that helps you claim higher cost than actual cost of acquisition. The term “indexed cost of acquisition” is the amount which bears, to the cost of acquisition, the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held (i.e. the year in which asset was acquired) by the assessee or for the year beginning on April 1, 1981, whichever is later.

In plain English, Indexed Cost of Acquisition or Indexation as it is popularly referred to, helps you decrease your overall tax liability by inflating/increasing your cost of acquisition of property – which in turn reduces the capital gains or profits – which in turn reduces the total tax payable on the capital gains or profits earned from the sale of such property.

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Exemptions Available for Long Term Capital Gains Tax :

If interested, both Resident Indians and NRIs can claim exemption from paying long term capital gains tax (this applies to residential property only ) if they satisfy any of the below conditions :

  1. They purchase a residential house property within specified period* from date of sale of existing house, [Section 54F of the Income Tax Act] or
  2. They construct a residential house within specified period* or within 3 years from date of sale of existing house, and
  3. They do not sell the new residential house in both above cases for a period of 3 years from the date of its purchase or construction, or
  4. They deposit the funds before due date of furnishing the return of Income into CAPITAL GAINS ACCOUNTS SCHEME 1988 and utilize the said deposit for purchase or construction of new residential house within the specified period as above; or
  5. They reinvest (within 6 months of sale) the long-term capital gains into any of the following assets : Bonds of National Bank for Agricultural and Rural Development (NABARD) / National Highway Authority of India (NHAI) / Rural Electrification Corporation Limited (RECL) / National Housing  Bank (NHB) / Small Industries Development Bank of India (SIDBI) – [Section 54EC of the Income Tax Act] or Eligible public issues of equity shares by Indian companies (in case of sale of listed securities) [Section 54ED of the Income Tax Act].

* Specified Period in this case means one year before or two years after the date on which the transfer took place or within a period of three years from the date of its construction.

No exemption is available for Short Term Capital Gains tax.

Amount of Exemption – Lower of the following :
a. The amount of capital gain generated on transfer of residential house property; or
b. The amount invested in purchasing or construction of new residential property (including the amount deposited in the deposit scheme/long term bonds)

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Indirect Tax on Real Estate:

While CAPITAL GAINS tax is the only tax levied on real estate transactions in India, owning or holding a property involves two types of taxes as explained below :

Property Tax

This is a tax that is payable on the registered or market value of the property every year and is payable to the local municipality or government body. The tax rate and basis of calculation varies from state to state and also from one municipality to the other within a city. It is generally between 0.5% to 2% of property’s fair market value (this rate is applicable only to residential property and rate for commercial property is generally higher and again varies from state to state).

Wealth Tax

Wealth tax is an additional (but rarely applicable) tax payable on non-productive assets over and above the minimum exemption limit of Rs.1 crore. UNPRODUCTIVE ASSETS are those that do not generate any revenue – such as farmhouses, vacation homes, cars, vacant lands, jewellery, vacant homes, etc. A taxpayer may own unrestrained value of PRODUCTIVE ASSETS such as shares, bank deposits, units, rented or leased commercial or residential property, industrial property, etc. without paying any wealth tax.

Wealth Tax is payable on net taxable wealth which is arrived at after deducting the debts and liabilities related to the taxable assets. The items of wealth which are either totally exempt from wealth tax and or which are so exempt from wealth tax up to a particular limit are deducted from the gross wealth to arrive at the taxable wealth on the valuation date. Because it is applicable to only UNPRODUCTIVE ASSETS, it is possible to not pay any wealth tax at all despite possessing assets worth crores of rupees; as long as one’s non-productive assets do not surpass Rs. 1 crore.

Wealth Tax Rate : Currently charged at 1% of net wealth subject to basic exemption of Rs. 1,00,00,000/- (Rupees One Crore) and is the same for Resident Indians and NRIs.

In case of NRIs having any of the following assets, the same are not taxable in the hands of NRI under Wealth Tax Act :
i. One house property or
ii. One plot of land provided area is less than 500 square meters or less.
In addition to the above, OVERSEAS ASSETS held by NRI are also exempt under Wealth Tax Act.

Specific exemption for an NRI returning to India:
Where an NRI/PIO returns to India for permanent residence, the money and the value of assets brought by him into India and the value of assets acquired by him out of such money within one year immediately preceding the date of his return and at any time thereafter are totally exempt from wealth tax for a period of seven years after return to India.

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CONCLUSION :

With proper planning and timing the sale of property and reinvesting proceeds in appropriate instruments on time, you can greatly minimize or even avoid having to pay any capital gains taxes. It is best to consult both your real estate adviser and your chartered accountant to figure out the best solution in this case as each one of you will have different variables to take into consideration.

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By Jhashank Roy Chowdary (About the Author)

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Disclaimer
These are the broad guidelines meant for ready reference with respect to acquisition and transfer of immovable property in India by NRI/PIO and in each case prospective buyer or seller of property in India must consult his/her own legal/finance/tax adviser and obtain suitable advise for their specific transaction. G&C Global Consortium Private Limited assumes no responsibility or legal liability for transactions entered into by placing reliance on these FAQs/guidelines. These guidelines are as applicable as on 1st January 2013 and are subject to amendment by the regulatory authority. G&C Global Consortium Private Limited assumes no responsibility for updating these FAQs/guidelines.
 
*1 – This depends on prevailing tax laws and hence please check with your tax consultant / chartered accountant or legal adviser.

One Comment

  • […] Irrespective of source of principal investment (i.e. whether investment was made using existing funds in NRO account (rupee funds) or through funds paid out of NRE/FCNR or external remittances, the entire capital gains / profit must be deposited in an NRO account. From here, you can repatriate upto USD 1 Million (approx Rs.5 crores) per financial year per person AFTER paying applicable capital gains taxes. For more information on capital gains taxes applicable on real estate transactions, read our article titled “Taxation of Real Estate Investments in India”. […]

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