Are you aware of the income tax benefits available for property related transactions? Knowledge of such tax provisions and applicable laws can bring you substantial tax savings during the entire lifecycle of your property.
Buying a property involves significant investment, time and is directly linked with the sentiments of an individual; hence, the Government of India has provided number of tax incentives/ benefits under the Income Tax Act, 1961 (Act), to encourage people to buy/ invest in properties.
One such most acquainted benefit is available under Section 80C of the Act, wherein the repayment made towards the principal amount of housing loan is allowed as a deduction from the gross total income up to a maximum limit of Rs 1.5 lakh.
Further, deduction is also available in respect of interest paid towards the housing loan under Section 24 of the Act. While maximum deduction of Rs. 2 lakh can be availed for the self-occupied property, there is no limit for claiming deduction towards interest in case of a let out property.
It may be noted that above deductions are available only after obtaining the possession of the property. Deduction of interest payment for the pre-construction period can be claimed in five equal yearly installments, beginning from the year in which the possession is taken by an individual.
In addition to the above, the Act also provides for deduction of actual municipal taxes paid during the year along with a standard deduction @ 30% of the net rental income (Rent minus municipal taxes), in case of a let-out property.
Long-term capital gains tax on sale of a house property can be claimed as exempt by an individual or HUF, if such gains is utilized to purchase or construct another residential house. To avail such exemption, it need to be ensured that the new house property should be purchased one year before or two years after the date of sale. Further, in case of construction, the new house property should be constructed within three years from the date of sale.
It is important to note that if the individual is not able to make the above investments before the filing of the income tax return, then to avail such a benefit, individual has an option to deposit the unutilized amount under the Capital Gains Accounting Scheme in a designated Capital Gains Bank account. The amount so deposited in the Capital Gains bank account needs to be utilized for construction/purchase of the new house property as prescribed.
However, in case, the individual sells the new house property within a period of 3 years from the date of its acquisition, the cost of acquisition of the new house property shall be reduced by the amount of capital gains claimed as exempt.
The taxpayer also has an option to invest in the specified bonds (NHAI and RECL) within six months from the sale of the house property, to avail the deduction of LTCG (up to Rs 50 lakh) earned from sale of such property.
However, if the bonds purchased for claiming exemption are transferred or converted into money within a period of 3 years from the date of its acquisition, the amount of capital gains claimed as exempt, shall be deemed to be LTCG of the year in which the bonds are transferred or converted into money. It is imperative that the individual has a thorough understanding of the above provisions.
The writer is partner, Deloitte Haskins & Sells LLP. With inputs from Shaily Jain, manager and Priyanka Mital, deputy
manager, Deloitte Haskins & Sells LLP