Your ownership or title of a house is not acknowledged unless you have registered the property in your name. For conducting such registration process the State Government charges a fee called registration charge under the Registration Act, 1908 and to certify the validity of the registered property papers of the residential property, the Government levies a duty called Stamp Duty under the Indian Stamp Act, 1899.
These two expenses have to be borne by the parties to a real estate transaction for they are mandatory under the law and not complying with the provisions of the respective Indian laws can attract penalties upon the owner of the property. They are calculated as percentages on the sale value of the residential property. There are some provisions of the Income Tax Act, 1961 that involve taxation on the sale of the property and of which the parties to a property sale transaction need to be aware.
Stamp duty and registration fees are levied by the State Governments and Income Tax is levied by the Union Government. This article seeks to give you tips on how to save on stamp duty, registration fees and income tax to overall save the gains you have made on the property sale.
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Can you give me a few tips on how to save on stamp duty and registration charges?
Stamp duty and registration charges are levied by state governments and as such, these levies are subject to laws made by the states even though they are provided for by Central legislation. With stamp duty rate varying between 4% to 8% on property value and registration charges being 1% of the saleable value of the property, these charges have a significant impact on the money you need to pay to purchase and register the property in your name! However, there are ways to save money on these levies despite mandatorily bearing the liability of paying them:
- Many states provide rebates and discounts on stamp duty for registering properties in a female homebuyer’s name. This is found in States like Punjab, Orissa, Delhi, etc. Thus, if you are a woman homebuyer who has purchased the property in such a state, you can avail of the benefit of such rebate or discounted stamp duty rates on registration of property. Also, if you are a male homebuyer you can get the property registered in a woman’s name who is your close kin to save on stamp duty.
- In comes the magic section 80C under the Income Tax Act, 1961! If you are a homebuyer who has paid the expenses towards stamp duty and registration charges, you can claim deduction under Section 80C of the Income Tax Act subject to a maximum quantum of Rs. 150,000. However, this can be availed only when you have paid the amounts.
- The Government provides for minimum prices or base prices below which buyer and seller cannot transact on property. These prices are called circle rates or guidance values and are almost always below the market value of the property. If the buyer and seller agree on the guidance value of the property, the buyer can reduce stamp duty and registration fees to be paid and the seller can save on capital gains tax by reducing the quantum of his or her liability. This is very much legal.
How to use your home loan to save taxes?
As a homebuyer, you have availed a home loan to finance your purchase of residential property, and you have interest payments and payments towards the principal amount to be made to repay the loan amount.
- But, did you know that you can save on tax by using your home loan!
- In comes Section 24 of the Income Tax Act, 1961. Under this provision, a homebuyer can claim a standard deduction of a maximum of Rs 2 lakh on the home loan interest if the property is self-occupied which means that the homebuyer and/or his or her family resides in the house. The interest paid on a housing loan taken for a rental property can also be claimed as a deduction under section 24(b) under the new tax regime proposed in the Budget of 2020.
- Then there is Section 80C of the Income Tax Act, 1961. Under this provision of the Income Tax Act, 1961, deduction towards payment made towards the principal amount of the loan can be availed subject to a maximum deduction of Rs. 150,000.
- Thus, these are the ways a homebuyer can use the home loan to reduce his or her tax liability.
What is a tax exemption certificate?
Many a time, the quantum of Tax Deducted at Source (TDS) for Non-Resident Indians (NRI) is more than the real tax liability of an NRI calculated at the end of the financial year. This is particularly true for the capital gains realized by an NRI on the sale of a property because a buyer of property from an NRI deducts TDS at the rate of 20% if the property was held for more than two years (Long term capital gains) and the 30% if the property was held for less than 2 years (Short term capital gains).
- Then the NRI has to seek a refund of the excess tax money paid from the Income Tax Department if the tax liability of the NRI is lower than the TDS money deducted.
- This process of seeking a refund is cumbersome as it takes a lot of time and may cause a financial loss to the NRI.
- To simplify this, the Income Tax Act has provided for a certificate for NRIs (Tax Exemption Certificate) that may authorize the one who deducts the tax to deduct such tax at a lower or NIL rate.
- For an NRI who usually has lower tax liability than the TDS deducted, a Tax Exemption Certificate is beneficial for it will reduce the TDS deducted on NRIs capital gains and may be sought for a particular kind of income which in this case is “Income from Capital Gains”.
- This will save NRIs from the bureaucratic rigours of applying and waiting for the refund of the excess tax money paid from the Income Tax Department.
Taxes, fees and charges are unavoidable expenses that are borne by homebuyers and sellers to be paid to the Government. However, the quantum of these expenses can be reduced by some awareness of tax provisions and local laws and some smart tax planning. Stamp Duty charges and Registration Charges that are levied by the state government and the stamp duty is charged at a rate of 4-8% on the property value while registration charges are charged at 1% of the saleable value of the property.
You can significantly reduce financial outflow related to tax and lower the amounts you pay for purchasing and registering property in your name or another person’s name whois close to you. Just make sure that the methods you use to save on tax money are called tax saving and not tax-evading i.e. legal and not illegal!