The taxation structure includes the Central Government, State Government, and local Municipal Corporations, each imposing different taxes on different aspects of property ownership and transactions. These taxes, such as income tax, GST, stamp duty, open land tax, and property tax, contribute to the overall cost of owning and maintaining properties. Consequently, the real estate sector as a whole has frequently expressed concerns about the burden imposed by these taxes. Various taxes in India have a significant impact on real estate investing. Here are some of the key taxes and their effects on real estate investment in India.
Points to Know About Real Estate Taxes in India
Property taxes play a crucial role in the real estate sector, as they are collected at various levels of government. Let us dive into the points about real estate taxes in India and explore them in detail.
1. Goods and Services Tax (GST) :
GST is a comprehensive indirect tax levied on the supply of goods and services. In the case of real estate, GST is applicable to the sale of under-construction properties and the lease or rental of commercial properties. The rate of GST varies depending on factors such as the type of property and its location. This tax has streamlined the taxation process and reduced multiple tax burdens, making real estate investments more transparent and efficient.
2. Stamp Duty and Registration Charges :
Stamp duty is a state-level tax imposed on property transactions, including sale deeds, lease agreements, and gift deeds. The rate of stamp duty varies across states and is generally a percentage of the property’s transaction value. Registration charges are also levied for registering property transactions. These charges differ from state to state. High stamp duty rates can increase the overall cost of property acquisition and may impact the demand for real estate.
3. Capital Gains Tax :
Capital gains tax is applicable when a real estate property is sold, and it is categorized as short-term or long-term based on the holding period. Short-term capital gains tax is levied if the property is held for less than two years, while long-term capital gains tax applies if the property is held for two years or more. The tax rates for capital gains vary depending on the holding period and the type of taxpayer (individual, company, or non-resident).
4. Income Tax :
Rental income from real estate properties is subject to income tax. The rental income is added to the individual’s total income and taxed as per the applicable income tax slab rates. Additionally, if a property is vacant, it is deemed to be let out, and an assumed rental income is taxable. However, individuals can claim deductions on property taxes, mortgage interest, and certain other expenses related to the property.
5. Property Tax :
Property tax is a local tax levied by municipal corporations or local bodies. It is calculated based on the annual rental value or the property’s capital value. Property tax rates vary across cities and are typically a percentage of the property’s value. Mohali property tax revenue is utilized for the provision of local infrastructure and services. Higher property tax rates may impact the rental yields and profitability of real estate investments.
6. Wealth Tax :
Wealth tax has been abolished in India since the financial year 2015-16. Therefore, it no longer affects real estate investments.
It’s important to note that tax regulations and rates are subject to change. Real estate investors should consult with tax professionals or experts for up-to-date information and advice on tax implications related to their specific investments.
The State Government collects property taxes in the form of GST and stamp duty applicable on transfer of property. The burden of these taxes is borne by the buyer of homes and not covered by home loans. This puts additional financial burden on the buyers and investment in real estate becomes only possible when a certain percentage of upfront cash is available to the buyer. In such cases, properties under construction become the ideal time to make investments as taxes are spread over the installments and enable the buyer to plan their cash flows.
These include taxes for facilities like water, street, sewage, betterment, etc. Open land tax is tax levied on a property that is under construction and not ready for sale. This is borne by the developers of the property and directly impacts the selling price of properties. These property taxes are levied annually and collected in multiple installments over the year.
Conclusion
These measures aim to make housing more affordable and within reach for individuals and families with limited financial resources. They also aim to make things more clear related to tax on purchase of property in India. Moreover, the real estate sector recognizes the importance and potential of the affordable housing market. Developers and industry stakeholders are increasingly focusing on the development of affordable housing projects to cater to the needs of this specific buyer segment and there has been a significant rise in the affordable homes segment especially in Tier 2 cities.