What is Property Tax / House Tax in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Municipalities across all cities in India charge a levy from local residents to maintain the city’s infrastructure such as sewerage, park, roads, other civic amenities, lighting, etc. The property tax shall not be confused with income tax payable on income generated from the property. While income generated from the property by renting it out comes under the ambit of income tax authorities and is calculated as per the income tax guidelines, the property tax is a municipal level subject. Income generated from the property is a central subject whereas property tax is a local subject. Property tax is also sometimes referred to as ‘house tax’.

Some municipalities do not charge property tax and instead bill separately for the services rendered to the residents. There are municipal bodies who charge residents for water and drainage facilities, maintenance charges. Moreover, MLA (Member of Legislative Assembly) and MP (Member of Parliament) funds are also utilized for the upkeep of the city.

How is property tax calculated? The tax is computed on the basis of rental income that the property under consideration may generate by way of letting it out. Usually, the property tax or house tax is a small percentage of the yearly rental income that the property can generate if it is rented-out. And it varies from state to state and from city to city. The property tax / house tax in India is to be paid once every year or every 6 months.

Below are the types of properties that are liable to be taxed under property tax / house tax provision in India:

• Residential house (self-occupied or let out)
• Office Building
• Factory Building
• Godowns
• Flats
• Shops

More details about property tax in India:

Property tax or house tax in india from Green Realtech Projects Pvt. Ltd

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HRA Exemption, Rent Deduction and Tax Benefits for Home Loan in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Many a times, we are all confused with tax calculations on House Rent Allowance (HRA) and tax benefits on home loan, etc. Believe it or not, planning your HRA carefully can go a long way in your financial planning and therefore studying and understanding the various guidelines related to HRA is paramount for a salaried class and a business person.

• HRA Exemption:

According to section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules, least of following three is exempt from tax:

1. Actual HRA received 
2. Rent paid in excess of 10% of salary (Basic + DA) 
3. 40% of salary (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai) Salary for the above purpose means BASIC + DA.

Let’s take an example. 

Suppose that you’re residing in Mumbai and paying a rent of Rs 20,000 per month and that your salary package comprises of the following: 

1. Basic — Rs. 50,000 per month
2. DA — Nil 
3. HRA — Rs. 20,000 per month (40% of basic)

Now, the exempted amount of HRA will be least of the following three figures: 

1. HRA received i.e., Rs. 20,000 
2. Rent above 10% of basic i.e., Rs. 15,000 (Rs. 20,000 – Rs. 5,000) 
3. 50% of basic i.e., Rs. 25,000

The least of the three is Rs 15,000; therefore, in this particular case you’re entitled for HRA tax exemption of Rs. 15,000 p.m. (per month) out of total HRA received of Rs. 20,000 per month.

In other words, net taxable portion of the HRA works out to be Rs 60000/- per year. 

net taxable portion of the HRA = Total HRA received per year – HRA Tax exempt per year

                                                    = (HRA received per year Rs 240000/-) - (HRA tax exempt per year Rs 180000/-)

                                                   =Rs. 60000 per year

There are four variables in HRA tax calculations namely, salary (i.e. basic pay plus DA), HRA received, rent paid and the city of residence (whether metro or non-metro). In case all of the four elements remain same throughout the year, the HRA tax exemption calculation is to be done on ‘annual’ basis. On the other hand, if there is a change in any of the variable during the year then HRA tax exemption calculation is to be done on monthly basis.

In case the place/city of residence and place/city of working is different, for the purpose of HRA calculation, place of residence will be considered and not place of working. Suppose that you’re working in a factory or a company located in Meerut (near New Delhi) while residing in New Delhi. So, for the purpose of HRA, your maximum entitlement for tax purpose will be 50% of the basic instead of 40% because for metros HRA tax entitlement is 50% and for non-metros it is 40%.

If the employer refuses to allow the HRA tax benefit, then in that case just claim it while filing your return of income and get the refund of excess TDS deducted from your salary. Further with effect from AY 2014-15 a person claiming HRA of more than INR 100000/- will have to submit the PAN of the landlord to claim the exemption. 

Both the working spouses can claim HRA tax benefit separately, if both of them are paying rent and landlord issues either two separate rent receipts or only one receipt specifying the amount or proportion paid by each, then both husband and wife are entitled for HRA exemption according to the amount of rent paid. 

One can avail tax benefit of HRA if the person is living in the house of his/her parents. In such a case, one will be entitled for HRA tax exemption, but the owner of the house who may be the father/mother is assessable for the rental income derived from the house, provided such transaction should be genuine & not with an intention to evade tax. However tax benefit of HRA will not be available if one is living in the house of his/her spouse as no commercial transactions can occur between Husband & wife.

• Deduction for Rent Paid

A self-employed person can claim tax benefit for the rent paid for his residence and can claim a deduction under section 80GG of the income tax act. As the self-employed person doesn't receive any salary, so there is no HRA and consequently question of HRA exemption – under section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules –doesn't arise.

As far as home loans are concerned following tax benefits are available to the tax payer:

1. Tax benefit on principal repayment under Section 80C – Repayment of Housing Loan subject to maximum limit of INR 100000/-. (Maximum deduction under section 80C is INR 100000/-).
2. Tax benefit on interest payment under Section 24(a) & (b). For self occupied property INR 150000/- and for let out property or deemed to be let out property there is no monetary limit to for interest payments.

• Claiming both HRA and Home Loan Tax benefit

You can Claim both HRA and Home Loan Tax benefit provided you have a house in one city for which you have taken a home loan and you reside in another city due to work or similar reasons, then you are eligible to avail all the benefits including HRA, tax benefits on principal repayment of home loan and tax benefit on interest payments of home loan. But, if your house is vacant then you still have to pay notional rent income.

In this case the following situations will arise:

Your own house remains unoccupied while you stay in any other accommodation due to employment/business/profession reasons.  You may stay at a place – it may be a different city or a different location within the same city - different from the place where your own house is situated.  

• Rented accommodation – You are paying rent:  In this case, you can claim HRA tax exemption while your house will lose the status of self-occupied property and will be treated as deemed to be let out, and thus its notional rental income will be taxable in your hands. However you'll get all the housing loan tax benefits i.e. both interest deduction u/s 24(b) and principal repayment under section 80C.

• Non-rented accommodation i.e., you're not paying rent as the rent is not being paid, the question of HRA tax exemption does not arise. However, your house will be treated as self-occupied and you'll get the housing loan tax concessions i.e. interest deduction under section 24 and deduction for principal repayment under section 80C. 

In a nutshell, if you have a house, either stay in it or rent it out. Don't leave it vacant else notional rental income of your house (even if it is the only house you own) becomes taxable in your hands although you continue to get the interest deduction on housing loan u/s 24(b) and deduction for principal repayment of loan u/s 80C. Furthermore, as regards the HRA, you will be getting the tax exemption under section 10(13A) so long as you are staying in a rented accommodation and actually making the rent payment, irrespective of whether you are having your own house(s) or not.

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6 steps that can make real estate efficient and corruption free in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

We have been writing a lot about the inefficiencies and mal practices in real estate sector in India. A lot of focus of our writing has been on highlighting the issues that plague the industry and how those issues can be tackled. While other ideas such as RTI; Aadhar; and recently Jan Lokpal bill has seen the light of the day, issues in real estate sector still remains unresolved. There is no denying that implementation of RTI, Aadhar, and Jan Lokpal bill will help in eliminating corruption from the government-public interface. But, what about real estate, where most of the cash finds its way? Why is the government not bringing in policy measures to cure the sector? We list some of the measures that can help in eliminating corruption from the real estate sector. In no way, these are the only measures, but, we are confident that implementation of the following measures will certainly help the sector.

• Equalize market rate and circle rates

As the name suggests, market rates are determined by the economics of demand and supply equilibrium. Buyers and sellers participate in the market and transactions take place fairly & without any stimulus. Circle rates are the minimum rates fixed by the state government and a buyer of the property is entitled to pay stamp duty charges on these rates whenever a transaction takes place. For example, in Gurgaon, the market rate of an apartment in a multistory building is 7000 Rs/sqft, while the circle rate for the same apartment as fixed by the state government is 4000 Rs/sqft. For a 1000 sqft apartment, the stamp duty charges as per the circle rate would be Rs. 320000. While the stamp duty charges as per the market rates would be Rs. 560000. Therefore, it presents an opportunity for the buyer to under report the apartment value on papers in order to save on stamp duty charges. Equalizing market rates and circle rates would eliminate the practice of under-reporting of the property value. However, this may affect the growth of real estate sector because of fewer transactions between buyer and seller. And this can lead to an adverse impact on GDP of the state as well as the country. Well, the move to equalize market rates with circle rates should also be complemented with reduction in stamp duty charges.

• Reduce stamp duty charges:

Stamp duty charges are exorbitant in most states across India. Stamp duty charges are least in Madhya Pradesh at 0.5%, while they are about 8% in states like Haryana, Punjab, Rajasthan, UP. Now, let’s say stamp duty charges are brought down in all states to a uniform level of 1%. Therefore, one would now pay Rs. 70000 as stamp duty charges on a flat of 1000 sqft with a market price of Rs 7000 per sqft. This move will not only encourage buyers to report market value of the property but will also lead to more and more transactions. Research based on past transactions can result in the optimum value of stamp duty charges which incentivizes true reporting as well as increased velocity of transactions across states in India.

• Cap on property transfer on government sponsored schemes

On government sponsored schemes such as the recent DDA flats scheme, there should be a tenure cap. In other words, people who applied for the scheme and got allocation should not be able to sell the allocated apartment in secondary market for a fixed time period (say, 5 years). This happens in many countries in EU. The tenure cap will drive away speculators and only the real needy people will participate in the whole process. Can you imagine for 15000 DDA flats, some 15 Lacs application came. But this one looks impractical because banks, government bodies, and agencies all made money by issuing a lottery system. And then, they would say, we are pro-poor and these schemes help poor of the country. We came across a property dealer in Delhi who filled 8 forms for the DDA scheme. He called in various relatives and friends from his native Bihar and he made sure that at-least 8-9 forms were filled. He paid for the whole process and in return if a flat was allotted to any of those 8-9 members, he would share 50% of the proceeds. Everyone knows what a big lottery this whole flat allocation system is, yet government is not changing the policy. And who is benefitting? Government bodies by charging a fee for every form sold; banks for providing upfront money to the customer at an interest; and the rich who already owns multiple properties.

• Cap on home ownership in certain cities

Certain cities such as Mumbai, Delhi, and other major metros have become unaffordable for the masses. A basic 2BHK is virtually out of the reach for a salaried person and he/she has to go to the outskirts of the city to fulfill his/her dream of home ownership. People with deep pockets own multiple properties in these cities. Housing is considered an investment vehicle first and then the basic need. In China, the government has moved in recent years to quell home price amid worry that surging costs could lead to social unrest and has set Home-Ownership Curbs in Shanghai and Beijing. Can it be done in India?

• Computerization of property titles across the country

E-governance is the need of the hour. When there is no dearth of talent in the country when it comes to software development and technology, why don’t we see the computerization of property records? In many instances, a single property is registered under 2 or 3 names and this leads to disputes. Computerization of property titles will not only eliminate property disputes but it will also help in land acquisition processes for mass urbanization.

• Make it easy as far as capital gains tax are concerned

An individual is liable to pay capital gains tax whenever there is significant gain over the buying price. Applicability of long term and short term Capital gains taxes should be made simple. In order to reduce or avoid being liable to pay capital gains tax, an assessee can either purchase a house within a period of one year before or two years after the date on which the transfer took place, or construct a house within a period of three years after the date of transfer. Why can’t we have a common wealth tax instead of so many complicated tax structures?

Is it desirable as far as real estate is concerned or are we just getting too ahead of ourselves?

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Looking to sell the house or your property? Pay attention to these tips!

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

In May 2012, one of our colleagues decided to sell his 250 square yard plot in Delhi NCR region. He has bought the plot in 2003 and therefore, the capital appreciation gains were substantial. He wanted to sell this piece of plot and buy another plot in different city. The idea was to build a house on this new plot and live there. Therefore, he has reasons to sell the plot. However, when looking to sell your property, the first question you should be asking is “do I really need to sell?”

• Do you really need to sell?

There can be in-numerous reasons to sell the piece of property you own and these reasons can range from shifting to new city, family wedding, education, or building/buying a bigger property, etc. Analyze those reasons carefully and discuss within your family members before arriving at the decision to sell the current property you own. Because make no mistake, selling is no easy job, it takes time as well as it incurs unwanted expenses such as brokerage fee, advertising fee, paper work, no-due certificates fee, etc. One can also explore the possibilities of obtaining loan against property (LAP) in order to fulfill the current need for funds rather than selling the property. However, once, you have considered all the possible options and selling is the best bet, then pay attention to the following advice.

• Verify the prevalent market sentiments

The true value of the property is what a buyer is willing to pay in a transparent and mature market. Therefore, once you have decided to sell, do the quick check of property valuation and this is how you do it:

• Check the selling price of highly similar properties which have been sold in recent months/days within the same locality. As a seller, you would not like to sell at below market prices. If there is no data available for similar properties, then check the selling price of dissimilar properties and adjust for dissimilarities in the selling price. For more on, property valuation, visit Property Valuation in India

• Check for the time-duration it took others to sell their property. If it takes longer to sell, then it can be safely concluded that market sentiment is low and you would have to wait for long time period before being able to sell your property. However, one can always 'sell in distress' at high discount. This is what happened to our colleague since market sentiments in 2012 were low and he had to wait for 6 months before selling the property at a substantially lower price.

• Check for the rental values of the similar properties within your locality and city as a whole. Sometimes, property transactions (sale/purchase) might be slow but there is demand for the housing and therefore, rental values may be appreciating whereas capital values have remained stagnant. This is what is happening in the current real estate market across India. In this scenario, it will be advisable to stay invested in your property and earn decent monthly income by renting it out for some time and sell the property when market sentiment is strong.

• Selling process

Finding the right buyer for your property is not easy. Because property transaction involves large amount of money, one needs to be careful in advertising the property, dealing with brokers, and prospective buyers. 

• Online classifieds: list your property on online classifieds portals. Don’t just list the property blindly on all available classifieds portals. Rather select the ones which have high degree of trust among other sellers and buyers and at the most list your property on 2 online classified portals.

• Brokers: approach the local area property brokers and enquire about current property market sentiments before listing your property with them. One should never list the property with multiple brokers. Rather list with 2-3 trustworthy brokers. "The best approach is to ask some brokers about buying the similar property and ask some brokers about selling the property. If there is substantial difference in the buying price and selling price as quoted by the brokers, then it indicates that there is demand for the property in the market but real estate brokers are downplaying that demand". In that scenario, it is better to wait and strike the deal when you get the best possible price for your property.

• Agreement to Sell: once you have identified the buyer, check for his/her credential to pay the required amount in mutually agreeable time period. It is advisable to ask the buyer to make reasonable advance payment (say 20% of the property value) with the condition that in case the buyer subsequently backs out from the deal or fails to make full payment and take possession of the property in accordance with the terms & conditions of the deal/agreement, such advance payment will stand forfeited and will not be paid back to the buyer. This is known as “option” and should be included in the “agreement to sell” paper. The time period between “agreement to sell” and “sale deed” can be mutually decided between the buyer and seller. The prevalent trend is about 45 days or 2 months.

• Sale deed: after the “agreement to sell”, the next step is to formalize the “sale deed”. ‘Sale Deed’ should be signed and title documents handed over to the buyer only on the receipt of full and final payment. Once the deal is concluded, full payment is received and Sale Deed signed, insist on the registration of the property in the name of the buyer with the Sub-registrar of assurances under the provisions of the Indian Registration Act. Consulting and engaging a good lawyer before selling the property to a person or organization is a good and sensible idea.

• What are the risks in property selling?

As explained in the article above, the property selling process is long and there are inherent risks and one should be careful with the following elements:

1. Inappropriate valuation of the property
2. Selling through too many real estate agents
3. Dubious buyers

• Taxes

In case of sale of house property, long-term capital gains are taxed at the rate of 20% after availing indexation benefit. The indexation rates are released by the Income Tax department each year, which can be applied to arrive at the indexed cost of acquisition of the property sold. Short terms capital gains on house property, on the other hand, are included in the gross total income and normal tax rate is applicable.

Exemptions from Tax

The Income Tax Act 1961 contains certain provisions that offer exemption from tax on long term capital gain arising on sale of house property, these are as under:

• If capital gain is invested in new residential property: Section 54 of the Act protects capital gains arising out of sale (or transfer) of a residential house (original asset) in either of the following situations:

1. One has purchased a new residential house either within a period of one year before the date of sale of the original asset or two years after the date of sale of the original asset.
2. One has constructed a residential house (new asset) within three years after date of sale of the original asset.

• If long term capital gain is invested in capital gain bonds issued by specified institutions:

Section 54EC, under various schemes (as listed below), provides exemption to capital gains arising from any long term capital asset (original asset), provided the capital gains are invested in long term specified assets covered by Section 54EC within 6 months from date of sale of the original asset. The said Section requires locking of the funds for 3 years. However, the investments made on or after 1 April 2007 in the long term specified assets during any financial year should not exceed Rs. 50 lakhs.

Section 54EC Schemes for Capital Gains Tax Savings

1. NHAI Capital Gains Bonds issued by National Highways Authority Of India.
2. REC Capital Gain Bonds issued by Rural Electrification Corporation Of India.

• Stamp duty and registration charges:

Stamp duty and registration charges are borne by the buyer and these charges differ from state to state. Visit Stamp duty and registration charges in India for more.

Above all be patient in the entire property selling process!

Data Source For Tax considerations: National Housing Bank

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What are the various kinds of taxes and charges you have to pay when buying a property, residential plot, or apartment in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Ok, you have finalized your property; i.e. residential plot or an apartment. Now what? Well, in addition to paying the property price, there are other charges which are incurred and are broadly categorized as follows:

1. Transaction charges
2. Stamp duty and registration charges
3. Service tax
4. Value Added Tax (VAT)
5. Capital gains tax to be borne out by the seller for a resale transaction

Transaction charges:

Transaction charges are those that are spent in availing the services of property broker. In case, you are buying an under construction property from real estate developer, then transaction charges are Nil. However, if you are buying the property from resale market such as a residential plot or a completed apartment, you will be paying the brokerage fee which is equivalent to 1% of the property value.

Stamp Duty and Registration Charges:

Real Estate Stamp duty is a type of tax accumulation by the Government of India. Stamp duty is established on the agreement value or on the market value whichever is greater.

For other states across India, click stamp duty and registration charges in India

The procedure also includes a registration fee for properties costing more than Rs. 30,000, which is fixed at 1% of the market value or the agreement value, whichever is higher.

Service Tax:

Service tax is applicable for under-construction property. In other words, if you are buying in an under construction project (apartment, flat, villa, etc.) from real estate developer, then you will be liable for service tax on property price. 

Service tax under composition scheme stands at 3.71% of property price.

Value Added Tax (VAT):

Recently, supreme court of India ruling states that the sale of an under construction property would be liable to VAT. It is likely that real estate builders will pass on this additional VAT on buyers. The VAT under composition scheme stands at 3% of property price.

Here is an example showing different charges for buying an apartment in Gurgaon, Haryana.

So the question to be asked is, if you would like to purchase an under construction property or completed one? While, in an under-construction property you will pay as per the construction plan whereas in a completed project the entire amount is payable within mutually agreed upon time period of 2-3 months.

In an under-construction property, you can make payment through cheque (white) whereas for a completed property you will end up paying by cheque and cash (black). The amount of money you pay by cash is dependent on the market value of the property minus the value of property as per the government circle rate. Why do a seller prefer cash component? Well, to save on capital gain taxes which stand at 20%.

Now, that you have a bit of information about various charges and taxes in property transaction. You decide J

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