Does it make sense to take legal opinion when buying a property funded by home loan?
Why it makes sense for you to obtain legal opinion while buying a house even if it is done by the legal team of the bank while grating home loan on the same.
When a person buys a property he, generally, exhausts all his past savings as well as future savings in the form of EMI if he takes home loan. For majority of the buyers it is once in a lifetime investment having life long implications. The law applicable to transactions of property are complicated and thus are beyond comprehension of a layman. This equally applies even in case you are going for home loan to buy the property. Let us discuss why taking legal opinion and help is important for you even when the property is funded through home loans.
Evaluation of property laws
The lender generally appoints a legal consultant to do the due diligence of the property for which the home loan is being granted. The due diligence done by the lawyer appointed by the lender has limited scope of ascertaining that the seller has clear legal title to the property and there is no charge on the property which is subject matter of sale. The investigation is done from the angle of the lender and may not necessarily cover the aspect which a buyer is supposed to look into. As in the case of medical treatment there is a concept of “Taking a Second opinion” where the opinion given by one doctor is validated by another doctor before actual treatment is started so as to avoid any complication in future and rule out the possibility of wrong diagnosis and thus wrong treatment. Since you yourself are not aware about the professional capabilities of the legal consultant appointed by the lender, it is logical for you to have your own legal consultant to carry out due diligence from your angle and derive the satisfaction as regards due and proper compliance of the various laws applicable to the building including the local municipal and state laws as regards development and construction of the property in question. It is not necessary that the consultant appointed by the lender is knowledgeable and fully capable to carry out the due diligence, especially in case of public sector lenders where more than the capability of the person but the networking ability and other considerations weigh while selecting such people. Since you are putting your life saving for buying the property, you should not mind spending additional 1% or 2 % for ensuring that the property which you are buying does not suffer from any legal infirmity.
Importance from other angle
The due diligence done by the representative of the legal firm will cover only the aspects of compliance of laws fully in respect of the marketability of the property and title of the seller and probably not beyond that. Buying a property is not just about paying the money and taking possession. It involves compliance of various other laws as well. Compliance does not mean over compliance. For example , As a buyer you have to pay stamp duty in respect of market value of the property in case you do not take help of any legal professional and thus you may probably land up paying higher stamp duty than what is legitimately due. This is because though the stamp duty is payable on the basis of stamp duty rates as per ready reckoner but there are certain deduction available from the stamp duty ready reckoner based on whether the building has a lift and age of the property which are allowed by certain states from the stamp duty valuation. Even in cases where the stamp duty rate is higher than the actual price at which you are buying the property, a legal consultant can help you file an appeal with the stamp duty authorities appropriately to get relief from payment of higher stamp duty in such cases.
Since buying a property is one of the most important life time decisions, it is very important to understand the legal implications of various clauses of the property purchase agreement. People generally appoint estate agents to draft a property purchase agreement, which does a job of “find and replace” on any old agreement without understanding peculiar situation of yours, to save money on it. But the small saving in cost of drafting and understanding the agreement sometimes may cost your dearly in monetary terms.
Implications under the income tax laws
As per Section 50 C of the Income Tax Act, 1961, where the stamp duty valuation of a property is higher than the stated consideration as per the agreement, in addition to the buyer having to pay higher stamp duty on the stamp duty valuation, the difference is treated as income of the seller in case the stamp duty valuation exceeds 105% of the agreement value of the property.
It is not that only the seller has to face the music if the stamp duty valuation is higher than the agreement value but as per Section 56(2)(x) of the income tax Act, 1961, for the buyer the difference is treated as his income and taxed under the head “income from other sources”.. The difference in the hands of the buyer will be taxed if the difference is higher of Rs. 50,000 and 105% of the agreement value.
So a layman who buys a property will not be able to understand the implication of all the matter discussed above and may land up paying more or may land in a problem in future. So it is strongly advised that you should engage a legal consultants and preferably a firm of solicitors who can appreciate the implications of various aspect of the law on the deal. Paying a solicitors firm may sometimes help you save lots of financial costs and mental agony in future.
So do not go for self medication to save a few cents but engage a firm of solicitors to save dollars in future.
The writer is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on his twitter handle
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