Quality food, shelter and life are the primary needs. Purchasing a home in India is considered a significant investment that dates back ages. There are a lot of factors that people consider before buying a home. Seller Reputation, Pricing, Location, Layout, Design, and ROI are the most important factors a home buyer considers before making a purchase decision to investing in property.
But something very crucial is missing here— Tax Rules. Before investing in a property, knowing the important tax details will help you make a better purchase decision. Considering it as a secondary aspect of your buying decision can turn out to be very fruitful for you. This article brings you some relevant information regarding tax rules of buying property.
Home buyers base their buying decision mainly upon the location of the residence and other amenities such as public schools, bus stands, metro stations, local markets, and convenience stores. Contrastingly, it is also said that 95% of purchasing decisions are emotional and are made subconsciously. Yikes! As a matter of fact, this emotional link to a house or property influences the buyer’s decision. This further helps the buyer in wanting to acquire the property or not.
Emotions make a home buyer prone to making rash judgments. One may be forced to make a decision that affects their money and way of lifestyle if they do not balance it with sound reasoning. That is why you must have a good grasp of the Tax Rules of buying property.
It is necessary to understand when and where to buy a property and to think about the long-term capital gains one can acquire from investing in a property.
Capital Gains are the profit made from the sale of an investment or property. In layman’s language, this is the money you make after selling off a home. These capital gains are bifurcated into two categories which are:
This bifurcation is based on the holding period, i.e., the duration for which a person owned the land or property. As per the Income Tax Act 1961, a holding period of more than 24 months is considered a Long Term Capital Asset. It is crucial to understand before making a buying decision for a property. If one does not plan to keep ownership for the said duration as per the holding period, then the taxation of that property at the time of sale will not be liable as a long-term gain, no matter the size of the house.
Maintaining property ownership for over ten years makes it liable for Long Term Capital Gains under the Indian Tax Implications. The purchase value of a house bought ten years ago will substantially gain a copious amount compared to its original value. This happens due to the appreciation of price that occurs during the holding period. Ten years is a long duration to impact the price of a property if one accounts for the development in the area and other factors.
So keep the bigger picture in mind before buying a home! You will pay your tax for this appreciation or the gain in the property’s value since it is accounted as your earned profit.
Now that you know what a long-term asset means per the Income Tax Act 1961, let’s get deeper into it. The calculation of long-term capital gains goes about somewhat like this:
Sale Value- Expenditure in transfer- Cost of acquisition of property- Cost of asset improvement
=Gross Long-Term Capital Gains
But the accounting does not stop here since there are many exceptions per the Income Tax Act 1961. So the overall calculation is completed when the exemptions are adjusted as mentioned in Section 54, Section 54EC and Section 54B. It is done as given below:
Gross Long-Term Capital Gains- Exemptions
= Net Long-Term Capital Gains
Moreover, inflation rates can cause a sustained rise in prices. Thus, high asset valuation is also accounted for by India’s Cost Inflation Index (CII).
As of 2022 in India, the tax rate on the property is 20% for long-term capital gains. Moreover, any cess and surcharge are imposed by the budget of the assessment year in which the sale of the property occurs.
However, there is an exception to it. This tax effect does not apply to any inherited property. For instance, ancestral properties. These long-term properties acquired as presents from family members as heritage are not taxed until the inheritor decides to sell them. If the individual sells the property, its long-term capital gains will be taxed in accordance with the regulations that apply to other assets.
Aside from inherited property, there are some more exemptions. They do not apply to everyone, but they are beneficial in lowering an individual’s tax obligation. As a result, assessors must evaluate the available exemptions before computing total taxes on their long-term capital gains from property. You must look into the conditions for the Tax Exemptions if it can be helpful for you.
Aside from that, to put it out there in a brief pointer, here are some of the tax rules for buying a property in India:
One can adjust the sale consideration of their asset to include any commission or brokerage charges they might have paid to gain possession of the property.
The Capital Gains from Property are competent for Tax Exemptions under Section 54, Section 54EC and Section 54B of the Income Tax Act 1961.
Deduction of any additional expenses during a home improvement or construction during the holding period of the property can be made by the assesses
It is highly mindful of being updated with the recent tax laws before deciding to invest in a property. This article gave you some insight into the tax rules in India.
At CS Realty, we make it an utmost priority to bring you the most suitable residence for your lifestyle. We counter all the factors such as location, commute, amenities and even tax rules. If you still need a better grasp on these rules, worry no more because we’ve got you covered. What are you waiting for? Make the first move by getting in touch with our representatives. Our realtors will do everything in their power to assist you in making the best investment that will substantially prove beneficial for you in the long run.
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Owning a home is a keystone of wealth… both financial affluence and emotional security.Suze Orman