Tax Implications while purchasing or selling of

residential property
As per section 22 of the Income Tax Act, 1961 (‘the IT Act’) one of the basic conditions for
charging income tax on income from house property is that, the assessee should be the owner
of such property.
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Investment in house property is not only an indispensable necessity for

an Individual but is also one of the crucial tax saving avenues, which
when optimally channeled could reduce the tax burden and thereby bring
in tax efficiency.

We have endeavored to provide an overview of tax implications on

purchase or sale of residential house property.

Chargeability of Income from house property

As per section 22 of the Income Tax Act, 1961 (‘the IT Act’) one of the
basic conditions for charging income tax on income from house property
is that, the assessee should be the owner of such property.

In a case where assessee is already having one or more residential

properties and buy another residential house property, then benefit of Nil
Annual value can be claimed only in respect of one house property. All
remaining house properties will be taxed on deemed basis i.e. deem to be
let out based on the prescribed valuation rules.

Under Direct Tax Code 2010 (‘DTC’), only actual rent received from house
property is proposed to be taxed. Present system of taxing notional value
called ‘annual value’ is proposed to be done away with.
Availability of Tax benefits on purchase of house property
Generally, the loans are taken from the financial institutions to acquire a
house property. Under the IT Act, Interest payable on loans borrowed for
the purpose of purchase or construction, is allowed as deduction provided
construction is completed within 3 years from the end of financial year in
which capital was borrowed, subject to maximum limit of Rs. 150,000 in
case of self occupied property. There is no maximum ceiling in case of a
let out property.

In case of a joint home loan, the co-owners can separately claim the
benefit of deduction of interest on loan subject to maximum limit of
Rs.150,000 and fulfillment of certain conditions. Interest accrued and /
or paid during the construction period preceding the year of completion
of construction can be accumulated and claimed as deduction over a
period of 5 years in equal installments commencing from the year of
completion of construction of the property.

The repayment of the Principal amount towards the housing loan as well
as any stamp duty (including registration charges) paid on the purchase
of house property shall be allowed as deduction under section 80C of the
IT Act. If the assessee transfers the house property in respect of which
deduction has been claimed under Section 80C before the expiry of 5 year
from the end of financial year in which possession of such properties was
obtained ,no deduction shall be allowed in the previous year in which
house property is transferred and the aggregate deductions allowed in the
past years shall be deemed to be the income the assessee for the previous
year in which house property is transferred.

Under DTC, interest on housing loan for self occupied property up to Rs.
1,50,000 is allowed as deduction from the Gross total income whereas no
deduction is proposed towards repayment of principal amount of housing
loan.

Tax Implication on sale of Residential House property

On transfer of the house property, there will be capital gains tax
implication in the hands of the seller. The taxability of the capital gains is
dependent on the period of holding of the asset. An asset is classified as
long term capital asset if the asset is held for more than 36 months or
otherwise as short term capital asset. The indexation benefit on the cost
of acquisition shall be available in case of sale of a long term capital
asset.

Under the IT Act, long term capital gain is taxable @ 20% plus education
cess whereas short term capital gains is taxable as per the normal slab
rates.

It is important to note that, in case the sale consideration is less than the
stamp duty valuation as prescribed under Section 50C, the stamp duty
value shall be deemed to be the full value of the consideration on such
sale and capital gains shall be calculated accordingly.

Under DTC, no distinction has been made between long term capital gain
or short term capital gain. Benefits of indexation is available if investment
assets are transferred at any time after 1 year from the end of financial
year in which the assets is acquired by the person. Further no special
rates are provided for capital gains. The Capital gains shall be taxable at
normal slab rate subject to indexation benefit.
Re-investment Benefits on sale of house property
For an Individual, the long term capital gains exemption shall be
available on reinvestment of capital gains / sales proceeds in specified
investment avenues, subject to certain prescribed conditions.
An individual may invest the entire capital gains proceeds under Section
54 of the IT Act in Purchase of a another Residential house property
subject to certain conditions and can claim the exemption from long term
capital gains tax. The other investment avenue could be in the bonds
issued by National Highway Authority of India and / or Rural
Electrification Corporation subject to a maximum cap of Rs. 50 lakhs. The
investments made under section 54 & 54EC are required to be held for a
specified period of 3 years and are subject to certain conditions.

Under DTC, deduction in respect of capital gain arising from transfer of

any investment asset shall be allowed if new investment asset (i.e.
residential house property) is purchased provided taxpayer does not own
more than 1 residential house other than new investment asset on the
date of transfer of the original investment asset.

As such, purchase of residential house property besides being one of the

inevitable requirements when properly planned can also be leveraged as
one of the efficient tax saving tool.

Implications under the Wealth Tax Act , 1957

Wealth tax is chargeable in the hands of an Individual in respect of assets
specified under the Wealth Tax Act, 1957 and one of assets covered
therein is a residential house property. However, one house or part of a
house belonging to an individual is exempt without any monetary ceiling
under section 5(vi) of the Wealth Tax Act, 1957.
Currently, wealth tax is charged at a flat rate of 1% of net wealth
exceeding Rs. 30 lakhs (surcharge and / or education cess, not
applicable).

Under DTC, the threshold limit for wealth tax purpose has been proposed
at net wealth exceeding Rs.1 Crore and chargeable at the rate of 1%.