Tax Implications for Property Sellers and Buyers

While it could be capital gains for a person who sells his property and an investment for the buyer, the both parties must know about the taxes that are levied on the sale of the property. The taxes are borne both by the buyer and the seller. Let us look at what are the taxes involved in a property sale and how can you claim tax exemptions.

Capital Gains Tax

This tax is to be paid by the seller on the capital gains acquired through the sale of a property. If the residence is sold within the three years of acquiring it, taxes are applicable as per the Income Tax slab rates of the individual.

In case the property is sold after three years, the tax would be levied at the rate of 20% as this would be treated as long-term capital gains. With indexation, the seller can enjoy further tax exemption as inflation is considered during the holding period of the property.

TDS while buying the property

If the buyer purchases a house worth 50 Lakhs or above, TDS of 1% is deductible as tax from the amount payable to the seller. This amount should be deposited to the Income Tax Department, and failing to comply will result in interest and penalty on the buyer. The seller can claim the refund of the TDS if he is incurring the loss on the sale of the property. However, you need to provide details of investment of capital gains in your tax return.

Tips on Saving Tax

•    If a couple takes a joint loan in equal proportion, there are higher chances of getting a full tax exemption for the principal and the interest.
•    When the seller invests his gains in buying a new property or house in India within two years from the sale date, it is exempted from the tax deduction. If you are not buying a house immediately, then the amount can be kept at Capital Gains Account Scheme to claim tax benefits.
•    The seller can deduct the money spent on improvement and cost of acquiring it such as legal fees, brokerage, and stamp duty.
•    As per the current law, if the seller invests the entire capital gain in a technology-driven start up, he/she will be allowed to get full tax exemption.
•    An under-construction property might cost you less but it comes with limited tax benefits while the ready-to-move-in house offers plenty of tax benefits.

Keeping in mind the above points will help you deal with the property sale and make the right decision in your investments.