Dream House-Taxation, Legal and Financial Aspects
Owning a house in India is the dream come true moment and many Indian families still don’t possess their own house. People work day and night to fulfill their dream of owning a house. There are various issues associated with the purchase of real estate property- one needs to manage taxes; one needs to arrange for finances and legal aspects. High inflation, slowdown of the global economy, and rising interest rates across the globe by the central bank’s have added pressure to the pockets of people. In such times it is very crucial to take care of various things while deciding on a dream home.
Introduction
There are multiple enactments dealing with real estate like- the Insolvency and Bankruptcy Code 2016, Income Tax Act 1961, Central Goods and Service Tax Act 2017, Prohibition of Benami Property Transaction Act 1988, Real Estate (Regulation and Development) Act 2016 and various other state laws. Historically, it is observed that real estate developers often engage in unfair practices and try to defraud home buyers. In such cases, the home buyer needs to be aware of the rights available to them under the various laws.
Part A: Taxation Aspects
Acquisition of house property attracts various taxes such as Stamp duty fees, Goods and Services Tax, and state taxes. Further, obligations mandated by the Income Tax Act serves as an enhancement for the people.
1. Stamp Duty Fees
Indian Stamps Act 1899 empowers the parliament to levy and collect the duty called Stamp duty on the execution of certain documents. Accordingly, stamp duty is charged and levied on the sale and purchase of immovable properties in India. Stamp duty is generally levied between 5-7% with variations in the applicable rate observed across the various states of India. It may be noted that there is a difference in the stamp duty fees for males and females in certain states of the country. The duty is levied on the value determined by the stamp valuation authorities.
2. Income Tax Act 1961
The Income Tax Act 1961 deals with various areas in relation to buying the house such as TDS, mode of payments. Further, it also provides certain benefits in relation to house property such as deduction u/s 80C. These are discussed as under:
a. Section 24(b)- Allowance of Interest on loan taken for acquisition of Self occupied House Property
Section 24(b) of the Income Tax Act, 1961 provides for deduction of interest on loans borrowed for the purpose of construction, acquisition, repairs, and reconstruction of house property. In the case of self-occupied house property maximum amount of allowed deduction is Rs 2 lakhs if the loan has been taken for the purpose of acquisition or construction of house property.
Note: Finance Act 2023 has made the new taxation regime i.e taxation u/s. 115BAC(1A) as the default regime. Where the assessee exercises this option of a new taxation regime, he/she would not be able to claim the benefit of interest on borrowed capital u/s. 24(b).
b. Deduction u/s. 54 and 54F of the Income Tax Act
In some cases, Individuals or HUFs transfer their existing residential house property or other long-term capital assets, and out of the proceeds of the said transfer they acquire another residential house property. Sections 54 and 54F of the Income Tax Act 1961 provide the deduction in respect of these cases.
- Section 54: Deduction is available if the individual or HUF has transferred any residential house property (long term) and out of the said proceeds new residential house property is acquired or constructed.
- Section 54F: Deduction is available if the Individual or HUF transfers any long-term capital assets (other than house property) and out of the proceeds they have acquired residential house property.
- Note: Finance Act 2023 has amended sections 54 and 54F and has capped the maximum deduction to Rs. 10 crores. That is if the amount invested by the assessee exceeds Rs 10 crores, he/she can claim a deduction of Rs 10 crores and balanced investment will not be considered for deduction under these sections.
c. Section 56(2)(x)
If any person has acquired the house property (immovable property) and the consideration paid for the acquisition is less than the value as declared by the stamp duty authorities, then the difference between such consideration and stamp value is treated as the income of the person under the head “Income from other sources”.
Note: This will be applicable only if such difference exceeds higher of Rs 50,000 or 10% of the consideration.
Example: Mr. X has acquired the house property and the consideration fixed was Rs 35 lakhs. However, the value as adopted by stamp valuation authorities was Rs. 40 lakhs. In such a case, Rs. 5 lakhs will be treated as the income of Mr. X under the head “Income from Other Sources”, as the difference between stamp duty value and consideration exceeds 10% of the consideration.
It may be noted section also provide certain exemption of the above provision such as transferor is relative, or it is in relation to marriage. Therefore, any person buying the house needs to ensure that there is no difference between the agreed consideration and the stamp duty value, the difference is within the allowed limit, or the transaction is exempted from the scope of section 56(2)(x).
d. Deduction u/s. 80C of the Act
Section 80C of the Act provides certain deductions from the total income of the assessee. Clause (xviii) provides for the deduction for certain amounts paid for construction or acquisition of residential house property:
- Repayment of loan borrowed for purpose of construction or acquisition of house property.
- Stamp duty, registration fees or other expenses incurred in connection with transfer of property.
- Amount paid under self-finance scheme or others scheme.
- Amount paid to company or cooperative society of which he is member towards the cost of acquisition of house.
e. TDS u/s. 194 IA
Section 194 IA of the Income Tax Act imposes the liability on the transferee (buyer) to deduct the tax @ 1% from the consideration paid to the resident transferor where such consideration exceeds Rs 50 lakhs.
Note: If the property is acquired from non-resident, TDS will be governed by section 195 of the Act.
f. Furnishing Statement of Financial Transaction
Section 285BA, read with rule 114E of the Income Tax Act imposes an obligation on certain people to report specified financial transactions. Accordingly, the Inspector General or Registrar or Sub Registrar shall report the transaction about sale or purchase of immovable property where the consideration exceeds Rs 30 lakhs or value as determined by stamp valuation authority referred to in section 50C exceeds Rs. 30 lakhs.
3. Goods and Services Tax (GST)
Scope of GST on residential and other real estate projects is governed by Clause 5(b) of Schedule II of the Central Goods and Services Tax Act 2017. It states that construction of any building, complex or civil structure intended for sale wholly or partly, shall be treated as supply of services and accordingly liable for GST.
Note: Where entire consideration is paid after earlier of first occupation or issuance of completion certificate, the transaction will not be regarded as supply and will be out of scope of GST as per Schedule III.
It implies that the acquisition of under-construction property will be liable to GST, however, the sale and purchase of a second-hand property will be out of the view of GST as per Schedule III of the Act.
Below are the rates applicable for the supply of residential housing projects:
- a. In case of Affordable house projects: 1% without ITC.
- b. In case of non-affordable house projects: 5% without ITC.
(Note: Rates given are after deducting the cost of land. 1/3rd of the cost of the project is treated as the cost of land).
Meaning of Affordable Housing Project:
- a. The Carpet area is less than 60 sqm for metro cities and less than 90 sqm for non-metro cities.
- b. Consideration does not exceed 45 lakhs.
Part B: Financial Aspects
A. Finance Facility
Majority of individuals in India acquire homes out of finance facilities from banks or financial institutions. Generally, it is observed that part of the consideration is paid by the individual himself and the balance is financed by banks in the form of credit facilities.
When a person wishes to take a loan, there are several factors to be kept in mind like Credit Score, Repayment schedule, and the Cost of the Loan. The majority of the loans carried floating rate of interest and rate is linked to Repo rate. In the recent years repo rate has been increased by the central bank from 4% to 6.5%. Increase in repo rate significantly impacts the borrower. An example (Table 1) clarifies the impact of change in repo rate. Mr. A has acquired the Property worth 50 lakhs. 20 lakh was self-financed and the remaining 30 lakhs was taken as loan. The Rate of interest was fixed at Repo + 3% and the Tenure was 20 years.
| Particulars | Repo Rate is 4% | Repo Rate is 6.5% |
|---|---|---|
| Net rate | 7% | 9.5% |
| Number of Installments (months) | 240 | 240 |
| Monthly payment | Rs 23,258/- per month | Rs 27,963/- per month |
In the above example, the increase in the Repo rate by 250 basis points has increased the EMI by Rs 4,707/- which is 20% of the original EMI.
Note: If the repo rate is increased by 50 basis points, EMI rate would be increased by Rs 908/- which is 3.91% of the original EMI.
Therefore, the individual should clearly evaluate the amount of loan to be taken as the small changes in repo would impact the payments significantly. This thing would become more important in the global situations of economic slowdown where central banks across the globe are turning to rate hikes.
SARFAESI Act, 2002
It may be also noted that borrowings i.e home loan is governed by the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. Section 13 provides the detailed procedure for the enforcement of security interest in case the borrower defaults many installments of the borrowings. Individuals should ensure that all the repayments are made as per the agreed schedule, failing which the bank or financial institution may resort to the provision of the SARFAESI Act.
B. Credit Linked Subsidy Scheme - PM Awas Yojna
Indian government from time to time has introduced various schemes to promote the housing and infrastructure in India. In 2015 the government came up with the “PM Aawas Yojna” also referred to as “Housing for All Mission”. Under the said scheme the government has come up with the Credit Linked Subsidy Scheme to expand the flow of credit for the acquisition of houses. Any person willing to acquire the house should consider the schemes announced by the central or state government. Such schemes can significantly affect the cost of the property and can benefit the person in other ways.
Part C: Legal Aspects
There are various laws that govern the acquisition of house property like Real Estate (Regulation and Development) Act 2016, Insolvency and Bankruptcy Code 2016, Prohibition of Benami Transaction Act 1988.
Real Estate (Regulation and Development) Act 2016
Indian Parliament in year 2016 enacted Real Estate (Regulation and Development) Act 2016 with an aim to protect the interest of home buyers and to boost the real estate sector in the country. It seeks to achieve transparency between real estate developers and the home buyer, adequate dissemination of the required information, fast-track resolution of disputes.
The act also provides the establishment of Real Estate Regulatory Authority for promotion and regulation of real estate business in India. Further it also provides establishment of Appellate Tribunal to hear the appeals arising from the decision of Real Estate Regulatory Authority and adjudicating authority.
Some of the important provisions which the allottee (Home Buyer) should keep in mind are as follows:
- The real estate developer will be responsible for rectification of any structural damages or defect in workmanship or provision of service brought to his notice within the period of 5 years from the handing over possession.
- The Promoter will be required to keep 70% of the amount received from allottees in the designated bank account and it should be utilized for that project only.
- The term carpet area was always subject to dispute. The act has defined the concept of carpet area.
- The Promoter shall make compulsory disclosure of certain information about the project on the website of RERA. This enables the transparency of the information.
- Provision of compensation by the promoter in case the allottee has suffered any loss on the basis of any incorrect or false statement furnished by the promoter in the advertisement or the prospectus.
- Ceiling on the advance that the promoter can take before entering into any agreement for sale. The limit is 10% of the consideration.
- Promoter will be required to take the approvals of the allottees in case he proposes any changes in the sanctioned layout or plans of the project (Section 14).
- Section 15 of the Act deals with the obligation of the promoter in case he proposes any transfer of rights and liabilities in respect of real estate project.
- Obligation of the promoter to compensate the allottees in case he fails to deliver the possession of the project in accordance with agreement to sale or any loss caused to allottees due to defective title or any failure of the promoter to discharge the obligations under the Act or regulations (Section 18).
Every person who wishes to acquire any real estate property directly from the Real estate developer should be aware of the rights available to him and should take appropriate action in case any default is made by the promoter.
It may be noted that section 2(d) of the Act defines the meaning of Allottee and states that it includes the person who has acquired the property by way of sale or transfer. Thus, allottees include the person who has acquired the property through a secondary sale in the real estate project. But it does not include the person to whom any property is given for rent.
Insolvency and Bankruptcy Code 2016
Remedy for home buyers under the Insolvency and Bankruptcy Code was defined by the Apex Court in the case of “Pioneer Urban vs Union of India (WP (civil) no 43 of 2019)” and it was held by the apex court that the remedies available to homebuyer under the RERA and IBC are concurrent to each other. It is open for the allottees to claim the remedy under any of the laws.
It may be noted that section 5(8) of the IBC defines the financial creditor and clause (f) includes within its scope any amount raised under any commercial transaction having commercial effect of borrowings. A Further explanation to clause (f) states that any amount raised from allottees under the real estate project will have the commercial effect of borrowing and accordingly will be classified as a financial liability. Therefore, in exercise of the above provision allottees being the financial creditor may apply to NCLT for the initiation of Corporate Insolvency Resolution Process in case the real estate developer commits any default.
Prohibition of Benami Property Transaction Act, 1988
The Prohibition of Benami Transaction Act 1988 defines certain transactions to be benami that is without a name and therefore this transaction could be declared as void.
Section 2(9)(A) defines the benami transaction and includes the transaction where property is held by a person and consideration is provided by another person and the property is held for the benefit of that another person who has provided the consideration.
For Example: A residential house property is held in the name of Mr. A, however, the consideration for the same is provided by Mr. B, also the property is held for the benefit of Mr. B only. In such a case, the transaction will be declared as Benami Transaction u/s. 2(9)(A) of the Act.
However, there are certain exclusions to this:
- In the case of an individual, the property is held in the name of the spouse or the children of the individual and the consideration is provided out of known sources.
- Where property is held in the name of Brothers or sisters or lineal ascendant or decedent of the individual and their name is, and name of the individual name appear as joint owners in the document.
Therefore, below are the conclusion of the above:
- Individual can acquire any property in the name of his/her spouse or the name of his/her children.
- If he wishes to acquire the property in the name of his brothers/sister or parents or lineal ascendant or decedent, in such case his name should also appear in the document as joint owner. The transaction would be classified as Benami Transaction if his/her name does not appear on the document as joint owner.
- The consideration for the acquisition of the property is paid out of known sources.
Conclusion
Indian Housing sector has huge potential for growth. With various schemes and initiatives announced by the government, many people are moving from rented accommodation to owned accommodation. In such a case, it is very essential for an individual to have knowledge of all taxation, financing and legal aspects in relation to real estate in order to make an informed decision and also to avoid any non compliances of laws.