Understanding Real Estate Tax in India: A Guide for Property Owners

Buying, owning, and selling a property involves financial planning. There are several taxes involved in real estate dealings, but there are also deductions and exemptions that homeowners, buyers, and sellers can benefit from.

Here is a complete guide to all the different taxes you may incur while dealing in real estate properties. 

Tax Deductions on Home Loans

If you are looking to buy a real estate property, a clear understanding of the various exemptions and deductions available to you can help you plan your financial outflow and balance your monthly budget as well. Repayment of your home loan makes you eligible for income tax deduction under two different sections of the Income Tax Act. 

Section 80C allows you to claim an annual deduction of up to INR 1.5 lakhs towards repaying the principal component of your home loan. This can be availed if you do not sell the property within five years of possession. You can claim an additional tax deduction of INR 2 lakhs per year under Section 24 B. This is towards the repayment of interest on the home loan and is available when the construction of the property is complete. These provisions of the real estate tax in India encourage people to buy residential properties.

Property Tax

As a property owner, you are liable to pay property taxes to the local municipal corporation. For example, if you own a flat or apartment in Mumbai, you must pay property tax to the BMC or Municipal Corporation of Greater Mumbai (MCGM) each year. 

The local municipal government collects property tax from all the homeowners within its jurisdiction and spends these funds on developing the infrastructure of the city. So all the spending towards building parks, repairing the drainage systems, reconstructing roads, etc., comes from these funds. Your tax is assessed based on a number of factors, including the location of your property, its size, and current value. If you have recently purchased a property, you must apply for an assessment by the corporation. The property tax in most major cities can be paid online, and the process is rather hassle-free. 

TDS on Sale of Property

TDS or tax deduction at source is applicable on the sale of real estate property. This is an important aspect of real estate tax in India. The buyer of any real estate property (except agricultural land) is required to deduct 1 per cent of the stamp duty value or sale proceeds over INR 50 lakhs. The property buyer must deposit the TDS, and it can be verified by the seller in the Form 26 AS tax statement.

Capital Gains on Sale of Property

According to the current taxation system in India, the sale of capital assets such as equity, jewellery, and property attracts capital gains. Land, apartments, flats, and residential and commercial properties are all considered capital assets, and the sale of these attract a capital gains tax.

The tax applicable on the sale of your property may be Short-Term Capital Gains (STCG) Tax or Long-Term Capital Gains (LTCG) Tax, depending on how long you have owned the property. When you resell the property within 24 months of buying it, STCG tax is applicable, and if you have held the property for a longer duration, LTCG tax is applicable.

When you sell a real estate property within 24 months of buying it and make a profit, your Short-Term Capital Gains (STCG) is calculated as the difference between the net income from the sale proceeds and the cost of acquisition. This amount is taxed according to the applicable income tax slab while filing your returns.

On the other hand, Long Term Capital Gains (LTCG) are calculated as the difference between the sale proceeds and the indexed acquisition cost. The indexed acquisition cost takes into account the inflation rate. Additionally, LTCG is determined after deducting amounts under Sections 54, 54EC, and 54F of the Income Tax Act. The LTCG tax applicable is 20% of the property sale price, along with an additional health and education cess and surcharge. An additional surcharge may also be applicable based on the sale value.

Several available exemptions can help you reduce your capital gains tax. If your capital gains are less than INR 2 crore, you can reinvest the amount in one or two properties to avail of these exemptions.

Seeking Professional Help

Tax norms related to real estate can be confusing for homebuyers and property owners. In such scenarios, it is advisable to seek guidance from a financial advisor or a chartered accountant specialising in real estate tax in India. 

A financial expert can help you understand your tax liability depending on the various real estate laws. They can also help you utilise the various exemptions and deductions in the Income Tax Act. Getting the help of a professional can help you manage your finances better and remain stress-free.