If you are looking to buy a property or have already invested in one, you will know that there are tax implications involved. Let’s first examine the tax on property purchase and then elaborate on how one can save on it via tax exemptions and deductions.
To begin with, the taxation on property purchase has become much simpler than it was before. With the roll-out of GST, all taxes previously applicable on real estate purchase (VAT, Service Tax etc.) have been subsumed under this single unified tax system.
The overall costs involved in buying a property are broadly divided into two components – the first being the one paid to the builder/seller and other – the statutory and legal costs – to the government. While the former roughly comprises 80-85% of the overall property cost, the remaining 15-20% goes as taxes to the government coffers.
So, are the taxes same for both under construction and ready-to-move-in properties? The answer is ‘No.’
Taxes for Under-Construction Properties
Statutory and legal costs for under-construction properties vary between 15-20%, depending on the State in question, and broadly include stamp duty, registration and GST.
- Stamp Duty: Stamp duty is paid on the sale agreement to render a property transaction legal, and it varies from state to state. For example, in Maharashtra, the stamp duty is 5% (now proposed to be 6%), while in Karnataka it is currently 5.6%. As such, stamp duty accounts for between 5-7% to the total property acquisition cost. Interestingly, most states offer a rebate of 1-2% to women if a property is registered in their name.
- Registration Charges: To register a sale agreement with a government-approved registration officer, buyers have to pay a registration fee of 1% on the total cost of the property at the district sub-registrar’s office.
- GST: Under the new tax-regime implemented in 2017, under-construction properties are currently taxed at 12% on the base cost of a property. Most recently, the GST council is mulling to reduce this rate with many anticipating it to be reduced to either 8% or 5%. Thus, check the prevailing rate at the time of purchase.
- TDS (tax deducted at source): TDS is charged at 1% for properties priced below Rs. 50 lakh. It is deducted by the buyer at the time of payment to the seller. Thereafter, the builder needs to pay this amount to the central government online or via any authorised bank within 7 days from the end of the month in which such TDS is deducted.
A Case Study – Buying a Home in Karnataka
Let’s take these charges as applicable in Karnataka to illustrate the calculations for under-construction properties with a super built-up area is 1,000 sft (carpet area 780 sft) and priced at Rs. 6,000 per sft. We will divide the overall costs into the total cost paid to builder and to state government.
Total Cost Paid to Builder
- Basic cost = Rs. 60,00000/- (SBA* quoted rate i.e. 1,000*6,000)
- Cost of UDS/ Land Value (1/3 of basic cost as per notification) = Rs. 20,00000/-
Thus, the total taxable value (basic cost less cost of USD/land value) = Rs. 40,00,000/-
- BESCOM, BWSSB & legal charges (calculated on per sft rate) = Rs. 2,50,000/-
- GST on water, electricity & other services (18% on BESCOM, BWSSB & legal charges) = Rs. 45,000/-
- CGST (6% of taxable value) + SGST (6% of taxable value) = INR 4,80,000/- *
Thus, the total cost paid to the builder = Rs. 67,75,000/- (basic cost + BESCOM/BWSSB/legal + GST + CGST + SGST)
Total Cost Paid to State Government (during registration)
- Stamp Duty = INR 3,79,400 /- (5.6% of total cost to builder)
- Registration charges = INR 67,750 /- (1% of total cost to builder)
Grand Total (Cost paid to Builder + Stamp Duty & Registration)
INR 72,22,150 /-
(* If the GST rate is brought down to 8% in the next council meet in Jan., the new GST cost paid to govt. will be INR 3,20,000/- – a reduction of INR 1,60,000/-)