The last 4-5 years have not been the best period for the real estate industry in India. Many real estate companies have become bankrupt and many still continue to be under great financial stress due to stalled projects. Even a normal home buyer is not in a profitable position due to declining property rates. The Government is taking steps to uplift the Industry. Passing of ‘RERA’ or Real Estate (Regulation and Development) Act, 2016, bringing in various amendments in both direct and indirect taxation laws are some of the notable steps taken by the government.
Despite the stumbling real estate sector, the home buyers are still made to pay income tax on real estate transactions done by them even if such transaction is done at a loss!!! Yes, that’s true.
Following are the main causes of such unjustifiable tax-
So, there can be a situation where the assessee has genuinely sold or purchased the property at a reduced price or has not actually made a profit from sale of property but has end up paying Income Tax due to the above laws. In this article we will discuss some peculiar circumstances where a genuine assessee can be protected from the tax burden by your advice as a Chartered Accountant or Taxation consultant to such genuine assessees.
Let’s get started-
Circumstance 1- Assessee tells you– I have sold a property for Rs. 50,00,000 which is at par with market value. The stamp duty value of the property was Rs. 60,00,000. What should I do to protect myself from Income Tax?
What can be your advice- As per Section 50C, sub section 2, clause a-
Then the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer.
In case the valuation officer reports-
a) Market value is less than Stamp Duty value and less than the actual sales consideration, then actual sales consideration shall be deemed to be sales consideration, or
b) Market value is less than Stamp Duty value but more than the actual sales consideration, then market value shall be deemed to be sales consideration, or
c) Market value is more than Stamp Duty Value then stamp duty value shall be deemed to be sales consideration.
Therefore, it is advisable that a valuation of the property as on the date of sale be done by the assessee and the actual sales consideration of Rs. 50,00,000 be considered as sales consideration for calculating capital gain, instead of considering Rs. 60,00,000 as sales consideration. It is very important to note that such valuation should be done by a registered valuer which adds to the authenticity of the valuation and whenever the case comes up for scrutiny, the assessee should contend to the assessing officer that the market value of the property is equal to or less than the stamp duty value, and therefore the property is sold for a price less than the stamp duty valuation.
Circumstance 2- Assessee tells you– I have sold a property for Rs. 50,00,000 which is at par with market value. The stamp duty value of the property is also Rs. 50,00,000. The Indexed Cost of the property is coming out to be Rs. 30,00,000. How can I Save myself from the Income tax? I am ready to make any kind of investment.
What can be your advice- The Long-term capital gain chargeable to tax shall be Rs. 20,00,000 (50,00,000- 30,00,000). Now, the only way to save tax is to invest the money in any of the following two alternatives-
The investment should be made by purchasing the new house property 1 year before or within 2 years after the date of transfer or by constructing a new house property within 3 years after the date of transfer. The new residential house purchased should not be transferred within three years from the date of its acquisition or construction.
The maximum investment that can be done in these bonds is Rs. 50,00,000 and must be done within 6 months from the date of sale of house property. These bonds give a moderate return of 5.75% and carry zero risk. Considering the tax saving and stumbling real estate sector, this investment option is very compelling.
Circumstance 3- Assessee tells you- I invested Rs. 30,00,000 in an under-construction property project in January 2011. I took a loan of Rs. 3,00,000 to make the investment and I was supposed to get the possession by December 2015. I got the possession in December 2017 and sold the property for Rs. 50,00,000 in December 2018 and repaid the bank loan. The Interest paid to bank from January 2011 till December 2018 was Rs. 20,00,000.
What can be your advice- The possession of the property was taken in December 2017 and the property was sold on December 2018. Therefore, the resulting gain will be short term in nature against which the investment options as discussed above shall not be available.
Also, the benefit of interest paid on housing loan shall not be available to the assessee (under section 24) till FY 2016-17 as the possession was not taken. It is advisable that the assessee should refrain from taking the benefit of interest paid during FY 2017-18 and FY 2018-19 also as the benefit will be restricted to Rs. 30,000 only (Possession not taken within 5 years from the end of the Financial year in which loan was taken).
Now, by not taking the benefit of interest paid on loan under section 24 or any provision of the act, the assessee can claim the interest paid to bank as part of cost of acquisition and therefore short term Capital gain shall be = (50,00,000-30,00,000-20,00,000)= Nil
Circumstance 4- Assessee tell you- I have sold a property for Rs. 50,00,000. The indexed cost of acquisition of the property is Rs. 40,00,000. The assessee has paid interest of Rs. 2,50,000 p.a. for 10 years to a bank on a loan taken to purchase this property. Assume that the property was self occupied and the assessee has claimed the benefit of interest paid on such housing loan every year (under section 24 of the Act).
What can be your advice- Under section 24 of the Act, the benefit of interest paid on loan taken for purchase of self occupied property is restricted to Rs. 2,00,000 p.a. It must be noted that the interest, whose benefit is not taken under section 24 or any other provision of the Act, shall be available as part of cost of acquisition of the property.
Therefore, Rs. 50,000 (2,50,000-2,00,000) × 10= 5,00,000 shall be included in the cost of acquisition (Subject of applying indexation every year). So, LTCG shall be = 50,00,000- 40,00,000- 5,00,000 (subject to indexation).