In this blog post, Suharshan Mohata, a student at K.C. Law College, Mumbai and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the process of taxation of immovable property in India.   

 

Introduction

India in the recent years gained popularity for its High Net worth Individuals (HNI) and every other transaction of immovable property estimating at amounts exceeding hundreds of crores. Altamount Road at Mumbai, was once ranked amongst the top 10 most expensive streets of the world.

Immovable property can serve as a recurring source of income, a rewarding investment and a valuable gift to your loved ones. It is essential for one to understand the various tax implications on the same to make the most out of his/her money without getting caught in a whirlpool of taxes.

The objective of this article is to introduce one to the various taxes subjected to transactions involving Immovable Property.

How is ‘Immovable Property’ and ‘Tax’ defined in India?

A] The definition of immovable property sought under the existing laws of India is as follows:

• Transfer of Property Act
  • Immovable property does not include standing timber, growing crops or grass

 

• General Clauses Act
  • Immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

 

Upon perusing the aforesaid definitions, one may still ponder onto what does and does not qualify as ‘immovable property’. The list shared below is by no means exhaustive, but gives a picture of the many interpretations of Immovable Property:

 

• Land
• House
• Trees attached to the ground
• Benefits to arise out of land
• Things attached to the earth or permanently fastened to anything which is attached to the earth

B] The word ‘Tax’ is defined in the Income Tax Act, 1961, as follows:

• ‘Tax’ in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date [and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA] ;]

Income from House Property – Head under Taxation

Income from House Property is recognized as a taxable component under the tax mechanism in India as a source of income. Income from House Property is recognized under Section 22 to Section 27 of the Income Tax Act, 1961.

Preconditions–

• There must be a Building or a Land appurtenant thereto i.e. a piece of land must be adjoined to a building
• Person must be owner of the property

Types of Income from Immovable Property–

• Rental Income

Rent in the hands of the owner by letting out the house property.

 

• Deemed Rentals

When rental income is not received by the registered owner of the property and such income is not charged as tax under the head “income from house property”.

Example-

 

• Transfer of property to a minor or spouse without adequate consideration.
• Holder of impartible estate is deemed as the owner of the property comprised in the estate.

Capital Gains tax on sale of Immovable Property

The difference between the cost of acquisition and the cost of sale of a certain capital asset (Immovable Property in our case) is called Capital Gain or Capital Loss.

Mathematical illustration: Cost of sale – cost of acquisition = Capital Gain/Loss

Illustration– Mr. Adam owns a flat which he purchased at a price of INR 1,00,000/- in the year 2000, he sells the same flat for INR 10,00,00/- in the year 2005. Capital Gains on this transaction amounts to INR 9,00,000/- (10,00,000 – 1,00,000).

There are two types of Capital Gains/Losses, namely:

• Short Term Capital Gain/Loss (STCG or STCL)

 

• If the land or other Immovable Property is held of 36 months (3 years) or less, the proceeds of sale of such asset would classify as STCG or STCL.
• Short Term Capital Gains are included in your taxable income and taxed as per applicable income tax slab rates.

 

• Long Term Capital Gain/Loss (LTCG or LTGL)

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• If the land or other Immovable Property is held for over 36 months (3 years), the proceeds of sale of such asset would classify as LTCG or LTCL.
• Long Term Capital Gains are taxed at 20%

Tax applicable on Lease, Rent, Leave & License transactions

Immovable Property such as home, land, and building make for an additional source of income for many. To understand the tax component with such income, it is primarily necessary to understand what transactions one could engage in, with reference to immovable property.

• Renting of immovable property

includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include —
(i) renting of immovable property by a religious body or to a religious body; or
(ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre;
Explanation—For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings

Renting of immovable property is a service and is subject to service tax.
The table below will give a summary of the various components that are subject to service tax:

Service Tax – Applicable	Service Tax – Not Applicable
Reimbursement of Actual Electricity Charges	Security or Rental Deposit
Maintenance Charges	Renting for Residential Purpose
Renting of Vacant Land
Renting for Commercial Purpose
Rent from Space Provided To Mobile Towers
Rent from Space Provided for Vending Machines
Renting of Convention Center

 

Note– Service Tax on rent of immovable property is charged at 15% currently.

Application of tax on gifts of Immovable Property

Indians are familiar with the concept of gifting immovable property within the family. Usually such gifts are not subjected to tax under the system established in India. However, there are certain types of immovable property, which when gifted, do attract a tax component. The Income Tax Act, 1961 specifies as to which gifts are not be taxed when received and those which are to be taxed.

The individual gifting the property (Donor) is usually not subjected to any tax upon making such a gift; it is the receiver (Donee) who is liable to taxes under the head ‘Income from Other Sources’ under the Income Tax Act, 1961.

• Tax Free Gifts

Gifts received under a will or from a relative; gifts received on the occasion of marriage; gifts received from local authorities or educational institutions are some examples of tax free gifts.

The word relative is construed as spouse of the giver, brother or sister, brother or sister of the spouse of the giver, brother or sister of either of the parents, lineal ascendant or descendant of the giver, lineal ascendant or descendant of the spouse of the giver and spouse of any of the above persons.

• Taxable Gifts

Immovable property (being land or building or both) stamp duty of which exceeds INR 50,000/- (Rupees Fifty Thousand only) will be taxable when received by an individual (without any consideration) who is ordinarily a resident in India.

Note– A gift of immovable property needs to be compulsorily registered with the sub-registrar in the area where the property is situated. The Indian Registration Act, 1908, mandates registration of the transfer of an immovable property subject to its value exceeding Rs. 100.

Wealth Tax on Immovable Property

Wealth Tax is no longer leviable from assessment year 2016-17.

Value Added Tax (VAT) paid by developers on immovable property

VAT is a multi-stage tax levied at each stage of the value addition chain, with a provision to allow input tax credit (ITC) on tax paid at an earlier stage, which can be appropriated against the VAT liability on subsequent sale.

VAT is intended to tax every stage of sale where some value is added to raw materials, but taxpayers will receive credit for tax already paid on procurement stages. Thus, VAT will be without the problem of double taxation as prevalent in the earlier Sales tax laws.

Presently the developer incurs various kinds of expenses in the construction of a project. These expenses include various taxes, one such being VAT. However, we can expect to see a change in the system as the Goods and Service Tax Bill (GST) finally got approved in August 2016. The ambit of GST is likely to cover under-construction flats and rental flats.

Conclusion

Indians have seen a boom and dip in the prices of immovable property and yet, each individual continues to await for either a boom to encash profits or a dip to make the best investment with his/her funds. It is vital to study the trends correctly before investing; immovable property doesn’t come cheap and can also depreciate in value; to add, one can only see a profitable exchange on the same in the long term (3 years or more) without losing a considerable percentage of the capital gains as taxes.



REFERENCE

1. House Property Income Computation

http://www.caclubindia.com/articles/house-property-income-computation-935.asp

 

1. FAQs on Income From House Property

http://taxguru.in/income-tax/faqs-income-house-property.html

 

1. Advance Learning on Income from House Property

http://www.incometaxindia.gov.in/tutorials/income-from-house-property-practical.pdf

 

1. Handbook on Service Tax

http://handbookonservicetax.blogspot.in/2013/08/service-tax-on-renting-of-immovable_9198.html

 

1. 13 Points About Service Tax On Renting Of Immovable Property

http://www.simplifiedlaws.com/13-points-about-service-tax-on-renting-of-immovable-property/

 

1. How to Save Capital Gains Tax on Sale of Land?

http://www.relakhs.com/how-to-save-capital-gains-tax-on-sale-of-land-house-property/

 

1. Selling a House? Watch out for tax implications

http://economictimes.indiatimes.com/wealth/tax/selling-a-house-watch-out-for-tax-implications/articleshow/52583834.cms