Planning to buy a house? Do it within 7 months to gain from FM's largesse

Low property prices, cheap loan rates, and tax relief make this a good time to strike a deal

To boost real estate demand this festive season, the finance ministry on Thursday announced income-tax relief for home buyers and developers. Buyers can now purchase a home at a price that is up to 20 per cent below the circle rate without attracting tax penalties.

The issue: The circle rate is set by state governments. Stamp duty has to be paid on this price in real estate transactions. Due to the long slowdown in real estate, which got exacerbated by the pandemic-led economic downturn, prices in many parts of the country have dipped below circle rates. When a transaction takes place below the circle rate, the difference between the circle rate and the transaction value is treated as income in the hands of the buyer and gets taxed at his slab rate. Kapil Rana, founder and chairman, HostBooks says, “State governments have not amended circle rates. Owing to this, real-estate transactions have been suffering from high tax liability.”  

What this means for developers: Suresh Surana, founder, RSM India says, “From a tax point of view, in case of sale by an assessee of land or building or both that is stock-in-trade, the transaction is governed by Section 43CA of the Income-Tax Act, 1961.” When a developer sells below the circle rate, the government considers the sale as having taken place at the circle rate for calculating his profit and tax.  

Last year, the government had allowed developers to sell at rates up to 10 per cent lower than the circle rate without attracting additional tax. Now, the differential between the circle rate and the agreement value has been increased to 20 per cent. Gopal Bohra, partner, NA Shah Associates LLP, says, “Now, no addition will be made in the hands of the developer if the difference between stamp duty value and actual sale consideration is up to 20 per cent.”

With developers attracting a lower tax liability, they could pass on a part of the benefit they stand to make from this measure to homebuyers to attract them. In other words, they may cut prices to clear inventories faster.  

What this means for home buyers: According to Section 56(2)(x), if in a previous year you bought any immovable property for consideration from any other person on or after April 1, 2017, and if its stamp duty exceeds the consideration amount you paid, and such excess is more than the higher of Rs 50,000 or 110 per cent of the consideration amount, then such an amount is liable to be taxed under Section 56(2)(x) as ‘income from other sources’. Rana says, “Now, the percentage of 110 will be increased to 120 per cent.”

This relief is applicable only on the sale of residential units costing up to Rs 2 crore and till June 30, 2021. If you plan to buy a house costing below Rs 2 crore, expedite the purchase. Both property rates and home loan rates are at historic lows. In addition, the finance minister has given an additional tax relief. So, if you are scouting for a property, finalise the deal within the next seven months and benefit from this measure.