Tax Implications for Immovable Property Transactions – Insights for Buyers and Sellers

Table of Contents

1. Yash and Mr Gautam’s Perspective (Buyer Perspective)
2. Vaibhav’s Perspective (Seller Perspective)
3. Can Mr Vaibhav save taxes on such capital gains?
4. What if the property is not sold but gifted by Mr Vaibhav for free?
5. Would GST apply to the transfer of immovable property?
6. Can Mr Vaibhav claim ITC on inputs used for construction?
7. Conclusion

Have you ever pondered upon the impact of TDS, GST, and Income-tax on the transfer of immovable property? Let’s dive into the application of each of these taxes when someone sells or buys a property. Understanding these tax implications is crucial for anyone involved in real estate transactions, whether as a buyer, seller or an investor.

Let’s simplify things by using an example to understand how these rules apply while using different perspectives.

Consider a scenario where Mr Yash and Mr Gautam jointly acquired a flat in a building in India from Mr Vaibhav, a resident Indian, for a sum of Rs. 80 lakhs in equal proportion on 31.01.2023, with the property’s stamp duty value being Rs. 48 lakhs.

1. Yash and Mr Gautam’s Perspective (Buyer Perspective)

1.1 TDS on Transfer of Immovable Property

Immovable property is defined in Income Tax Act, 1961 as any land (other than rural agricultural land) or any building or a part of the building. As per Section 194IA of the said Act, where any person being transferee (buyer) gives consideration for the transfer of any immovable property to any resident transferor (seller), the buyer shall deduct tax at source (TDS) at the rate of 1% of the total consideration or stamp duty value of such property, whichever is higher, at the time of credit or payment, whichever is earlier.

However, no such TDS is to be deducted where both the total amount of consideration and the stamp duty value of such property are less than Rs. 50,00,000.

Here in the given example, the individual share in total consideration is Rs. 40 lakhs which is less than Rs. 50 lakhs, but the total consideration of both buyers exceeds the specified limit of Rs. 50 Lakhs, hence the buyers i.e. Mr Yash and Mr Gautam are liable to deduct tax at the rate of 1% which stands at Rs. 80,000 (80,00,000*1%, since 80 lakhs is higher than 48 lakhs).

Note: Even if the property is situated outside India, these provisions apply as long as the seller is a resident in India.

Further, in case Mr Vaibhav (seller) does not provide his Permanent Account Number (PAN) for TDS purposes, the rate of deduction shall be 20% as specified under section 206AA of the Income-tax Act, 1961.

2. Vaibhav’s Perspective (Seller Perspective)

2.1 Scenario 1: Mr Vaibhav is in the business of dealing in these properties

If the property transferred by the seller is stock-in-trade for him, then the same would be taxable under the head “Profits and Gains from Business or Profession”, and the provisions of Section 43CA of the Income-tax Act, 1961 would be applicable.

Section 43CA of the Act provides that where the sale consideration on transfer of an asset (other than capital asset) is less than the Stamp Duty Value (hereinafter referred to as SDV), then such SDV would be deemed to be the full value of consideration.

In the above example, if Mr Vaibhav is engaged in the business of buying and selling properties and sells the flat for Rs. 30 lakhs instead of 80 lakhs, which is lower than the SDV of Rs. 48 lakhs, then such SDV i.e. Rs. 48 Lakhs will be treated as the selling price for computing tax and the income will be taxed under the head “Profits and Gains from Business or Profession”.

For the buyers, Mr Yash and Mr Gautam, section 56(2)(x) would apply, according to which if any immovable property is received for a consideration less than the stamp duty value by an amount exceeding Rs. 50,000, the difference between the actual sale consideration and SDV would be taxable as “Income from Other Sources”.

Note: If the SDV does not exceed 110% of the actual sale consideration, then the actual sale consideration shall be considered for the purpose of calculation of tax. For instance, if the actual consideration is Rs. 44 lakhs and SDV is 48 Lakhs, then the value to be considered for the purpose of computing tax shall be Rs. 44 Lakhs even though the SDV is higher, since the SDV is Rs. 48 Lakhs which does not exceed 110% i.e. Rs. 48.40 Lakhs (110% of Rs. 44 Lakhs).

2.2 Scenario 2: Mr Vaibhav is not in the business of dealing in these properties

If the property is held as a capital asset and not as stock-in-trade, then Section 50C would apply which deals with capital gain on sale of land and building held as a capital asset, triggering a similar calculation as above, however the income would be taxable under the head of “Capital Gains”.

For instance, in the given example, the property was acquired by Mr Vaibhav (seller) on 1.4.2010 for Rs. 20 lakhs, then such cost of acquisition shall be indexed as per the Cost Inflation Index (CII) as notified by the government if the asset is a long-term capital asset (that is, the asset is held by the transferor/seller for more than 12 months).

Here, for Mr Vaibhav, the indexed cost of acquisition would be approximately Rs. 39,64,000 (Rs. 20 lakhs*331/167, 311 being CII of FY 2022-23 and 167 CII of FY 2010-11), and the sale consideration is Rs. 80 lakhs, hence the capital gain subject to tax is Rs. 40,36,000 (Rs. 80 lakhs – Rs. 39.64 lakhs) at a special tax rate of 20%. Any expense incurred for transfer of such asset shall also be allowed as a deduction.

3. Can Mr Vaibhav save taxes on such capital gains?

Option 1: As per section 54of Income-tax Act, 1961, if an individual or HUF transfers a long-term residential property and utilizes such amount either for the purchase of another residential property within 1 year before or within 2 years after the date of transfer or construction of another residential house property within 3 years after the date of transfer, then the amount of invested capital gain shall be exempted from tax subject to a limit of Rs. 10 Crores.

For instance, if the total value of consideration received is Rs. 80 lakhs and Rs. 40 lakhs are reinvested to buy a residential house property, then the whole Rs. 40 Lakhs will be exempted from tax and reduced from capital gain on this transaction.

Option 2: If the above option are not available, Mr Vaibhav can invest the amount into specified bonds with a lock-in period of 5 years as per section 54EC of the said Act, within 6 months from the date of transfer, subject to a maximum of Rs. 50,00,000.

In both of the above options to avail the capital gain tax exemption, the funds should be parked in Capital Gain Account Scheme (CAGS) before the due date of filing of return of income and must be utilised within the prescribed time limit.

4. What if the property is not sold but gifted by Mr Vaibhav for free?

For Mr Vaibhav, transfer by way of gift won’t be taxable, but as for recipients, Section 56(2)(x) would be applicable in such a situation and the stamp duty value of such property would be considered as income from other sources for Mr Yash & Mr Gautam.

5. Would GST apply to transfer of immovable property?

As per para (5b) read with Schedule II of CGST Act, 2017, construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly where any part of consideration is received before issuance of completion certificate by competent authority is supply of service.

This means that if Mr Vaibhav is a real estate developer and sells the flat to Mr Yash and Mr Gautam before obtaining completion certificate of the project, then GST would be applicable on such transaction as the same will be considered as supply of service. The rate of GST shall be

• 1% on prescribed affordable housing projects;
• 5% on others

Whereas, if the flat is sold after obtaining completion certificate, no such GST would be applicable. Also, if Mr Vaibhav is a re-seller of such property, no GST would be charged.

6. Can Mr Vaibhav claim ITC on inputs used for construction?

Mr Vaibhav wouldn’t be eligible for input tax credit on his purchases and he faces an additional requirement:

• He must procure 80% of his inputs and input services from registered entities. If falls short, then he has to pay GST on RCM basis to the extent short of 80% of the inward supplies from registered suppliers.For example, suppose Vaibhav has total purchases of inputs and input services of Rs. 100 lakhs; out of which Rs. 70 lakhs is from entities registered under GST.

	Amount in Rs.
Total inputs and input services purchased	100 lakhs
From registered entities (actual)	70 lakhs
80% of total (100 lakhs*80%)	80 lakhs
Shortfall (80 lakhs – 70 lakhs actual)	10 lakhs
GST on RCM basis @ 18% (10 lakhs*18%)	1.8 lakhs

Thus, Mr Vaibhav has to pay Rs. 1.8 lakhs as GST on RCM basis due to shortfallin requirement of 80% of total inputs and inputs services from registered entities.

• Additionally, he’s obligated to pay tax under reverse charge mechanism (RCM) for specific inputs, such as grant of development rights and long-term lease of land.
• Further, if he purchases cement from an unregistered person, then he shall pay tax on RCM @ 28% on all such inward supplies.

The above provisions are applicable only when Mr Vaibhav is constructing the property. If he purchases the constructed property after issuance of completion certificate or first occupation, whichever is earlier, no GST would be applicable on such transaction as per Schedule 3.

7. Conclusion

In a nutshell, the transfer of immovable property involves intricate tax considerations. Buyers are required to follow TDS regulations, deducting 1% on the higher value between consideration or stamp duty value under Section 194IA. Taxation for sellers varies depending on whether the property is treated as stock in trade or a capital asset. Exemptions under sections 54, 54F, and 54EC provide relief, subject to specific conditions. A comprehensive understanding of these provisions is crucial for making informed decisions, optimizing tax positions, and ensuring compliance with applicable tax laws.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

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