Finance Minister Arun Jaitley focussed a great deal on the real estate sector in the Budget. While developers cheered the infrastructure status accorded to affordable housing segment, home buyers hailed some of the tax tweaks. Tenants paying rent above ₹50,000 per month and home loan borrowers in case of let-out property, though, have had less to cheer.
Tax relief
The good news first. If you are an investor, then there’s some relief for you on capital gains tax. The Budget has reduced the holding period of a property to qualify for long-term capital gains tax from three years to two years. Earlier, if you had sold a property within three years of buying, you were liable to pay short-term capital gains tax as per your slab rate. Long-term capital gains, on the other hand, is taxed at 20 per cent with indexation benefits.
There’s more. The Budget has shifted the base year for indexation from 1981 to 2001 for capital gains calculations from April 1, 2018 onwards. This is also expected to reduce the tax burden.
This is because indexation takes into account the inflation during the holding period and in effect adjusts the purchase price. This reduces the tax burden on the seller. Earlier, the benefit of indexation could be availed of, either from the year of acquisition of the property or from the base year 1981-82, whichever was later.
For instance, let us assume that you bought a house for ₹10 lakh in 1990 and sold it now for ₹70 lakh. Based on the cost inflation index (CII) put out in the income tax website, CII is 199 and 1125 for the years of purchase and sale respectively. So, indexed cost of acquisition would be around ₹56 lakh.
You would have had to pay long-term capital gains tax of around ₹2.8 lakh at the rate of 20 per cent.The Budget now proposes to shift the base year to 2001-02. This will imply two things.
One, the cost of purchase (₹10 lakh) will be revalued based on fair market value as on 2001-02. Two, the CII (the numbers reflecting 2001-02 as the base year is expected to be updated in due course) will be applied on the revised purchase price. This will offer wider tax relief to investors, as the indexed cost of purchase is likely to be much higher, reducing the capital gains.
More clarity
In case of joint development of property, land owner and builder enter into an arrangement to develop a property together. The land is transferred by the owner and the builder constructs the houses, a certain percentage of which is earmarked for the owner. It was earlier unclear as to when the tax liability arose for the land owner.
The Budget has put to rest any uncertainty and clarified that capital gain tax liability will arise only when the certificate of completion for whole or part of project is issued. This comes as a relief to land owners, as in some cases, projects get unduly delayed by developers, leaving owners in a lurch.
Capping interest deduction
There were other tweaks in the Budget that took away some of the benefits other category of home buyers enjoyed. Capping the interest deduction for home loan borrowers in case of let-out property is one such proposal in the Budget.
At present, a home loan borrower can claim tax deductions for interest paid on home loan. In case of self-occupied property, the deduction is allowable up to ₹2 lakh. But there is no such limit applicable in case the property is let-out/deemed to be let out, implying that such home loan borrowers could claim the entire interest as deduction. To iron out this anomaly, the Budget has now capped the interest deduction in case of such property also at ₹2 lakh. This indirectly disincentivises those buying multiple homes, by limiting tax benefits available on the subsequent buys.
TDS on high-value rent
For those paying rent above ₹50,000 per month, a 5 per cent tax deduction at source (TDS) will now be applicable. For ease, the Budget has proposed that the tax deducted by the tenant can be deposited once a year, for the full financial year. This provision will come into effect from June 1, 2017.
(The article first appeared in The Hindu BusinessLine.)