Pay 'Capital Gains', Avoid future pains

The government levies a variety of taxes pertaining to property purchases, and capital gains tax is one of them, which is probably in the pecking order of a house buyer’s priority pyramid.

January 13, 2016 11:47 IST | India Infoline News Service
We make many purchases and investments in our daily lives, but the most essential one is when we purchase a house. Most of us aim to own a house one day as it is a status symbol. Further, as buying a house is the most important decision in one’s life, it has a tinge of emotion entwined in it. Emotion aside, every individual would want the entire process of buying a house to be as smooth as it can get devoid of any hurdles or impediments. Therefore, it is essential to do a thorough research and due diligence before finalizing the purchase of a house. Treading into uncharted territories is always a risky proposition and one is best advised to avoid getting into such situations.

The government levies a variety of taxes pertaining to property purchases, and capital gains tax is one of them, which is probably in the pecking order of a house buyer’s priority pyramid. This is because capital gains tax is a direct determinant of the cost price incurred by the house buyer. Barring specified agricultural lands, sales proceeds over and above the cost of acquisition would be taxable as capital gains. If the property is held for more than three years immediately before the date of transfer, the tax rate will be at 20%, after applying the benefits of enhanced cost. Otherwise, the entire gain will be taxed at normal slab rates, without any benefit of enhanced cost.

When a person sells a property, it is no rocket science to understand that one would have to pay tax on the profits made. If the property is sold within three years of acquisition, the seller needs to pay short-term capital gains tax. In this case, the profits are combined with the income and taxed as per the applicable I-T slab.

If one owns a property for more than three years, then one would have to pay a long-term capital gains tax. However, a person can avoid paying the tax amount, if the proceeds of long-term capital gains are used for buying a new house located within the country in the span of a year after the sale of the property. If the property is under construction, the permissible time period is three years.

If say a house purchase is not being made immediately, then one has the option to invest the money in Capital Gains Account Scheme (CGAS) and withdraw within the stipulated timeframe.

Generally, it has been observed that many people are not aware of this provision as this not a sector they deal in regularly. Below are some key aspects that one needs to consider while making a house purchase:
  • Registering
As most cash transactions slip through the tax net, the tax department has proposed a deduction to avoid this scenario. Thus, one is best advised to be on the right side of law and avoid cash transactions for a purchase as important as a house. Registration of a house purchase deal needs to be done in a way, which is transparent and appropriate as per the law of the land.
  • Basic Conditions

For any property transaction starting after June 1, 2013, the person would be liable to pay tax on the source, if the property exceeds Rs. 50 lakh in terms of market value. The rationale behind this is that the deals involving properties that are low in cost will not come under the tax net.

  • Buyer

It is the responsibility of the buyer to make sure that the procedure vis-à-vis TDS is completed before the transaction is completed. One more basic condition that buyers must fulfil is to deposit the amount of the tax deducted from the seller with the government. This is an important step in the process as a whole, as in the absence of proper tax deduction, the buyer could invite penalties from income tax authorities.

For such scenarios, using PAN is the smartest thing to do as it helps avoid a lot of unnecessary situations; the individual buyer does not need to take a TAN for executing a single transaction.

  • Details

There are many other details for a home buyer to consider while buying a house. TDS has to be deposited with the government within a period of 7 days from the end of the month in which the TDS was deducted. The buyer can use this time to make sure that they finish the transaction process thoroughly. Be careful while making online transactions.

Thus, considering all these factors, one can clearly conclude that skipping tax will prove detrimental to home buyers. A smart home buyer will play the right card at the right time and seal a good home buying deal that is devoid of any impediments or legal glitches.

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