HOW TO PAY TAX FOR IMMOVABLE PROPERTY

Introduction

Immovable property can serve as a recurring source of income, a rewarding investment and a valuable gift to your loved ones. It is essential for one to understand the various tax implications on the same to make the most out of his/her money without getting caught in a whirlpool of taxes.

What is Immovable Property?

The definition of immovable property in section 3 of the Transfer of Property Act, 1881, is not exhaustive. It states that immovable property does not include standing timber, growing crops and grass. However, the definition of immovable property in section 3(26) of the General Clauses Act, 1897, lays down that immovable property shall include land, benefits arising out of land and things attached to the earth, or permanently fastened to anything attached to the earth. It can be seen from both the definition that one is an inclusive definition and another is exclusive one. So, we can finally say by combining both the definitions that immovable property means 

• Land, 
• House,
• Trees attached to the ground,
• Benefits to arise out of land,
• Things attached to the earth or permanently fastened to anything which is attached to the earth.

Tax Defined

‘Tax’ in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date [and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA.

Every Property is not Taxable

First of all, it should be ascertained that the property which is intended to be sold should be capital asset in eyes of law. Capital asset means property of any kind held by a person but it excludes stock, rural agricultural land, Gold bonds, movable personal goods like cars, mobile, clothes, furniture, etc. Jewellery, paintings, drawings are capital asset. On sale of capital asset capital gains arises and tax is levied on such capital gain.

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Tax on Capital Gains (Sale of Immovable Property)

Capital gain or capital loss is the difference between cost of acquisition and cost of sale of a certain immovable property. Suppose Mr. X had acquired a property in 2010 for Rs. 1,00,000/- and he sold the property in 2019 for Rs. 9,00,000/-, then capital gains in this case is 9,00,000 – 1,00,000 = 8,00,000/-. Followings are the two kinds of capital gains and taxes levied on them

Short Term Capital Gain/Loss(STCG/STCL)

• If the land or other Immovable Property is held of 36 months (3 years) or less, the proceeds of sale of such asset would classify as STCG or STCL.
• Short Term Capital Gains are included in taxable income and taxed as per applicable income tax slab rates.

Long Term Capital Gain/Loss(LTCG/LTCL)

• If the land or other Immovable Property is held for over 36 months (3 years), the proceeds of sale of such asset would classify as LTCG or LTCL.
• Long Term Capital Gains are taxed at 20%.

Tax Applicable on Rent

Immovable Property such as home, land, and building make for an additional source of income for many. To understand the tax component with such income, it is primarily necessary to understand what transactions one could engage in, with reference to immovable property.

Renting of immovable property includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include  

(i) renting of immovable property by a religious body or to a religious body; or
(ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre;
Explanation—For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings. Renting of immovable property is a service and is subject to service tax. The table below will give a summary of the various components that are subject to service tax.

• TDS on Immovable Property

TDS or Tax Deducted at Source is the collection of tax by a party to a transaction on behalf of the government. The TDS deductor pays the tax collected to the government. TDS has to be deducted at 1% from resident Indian sellers if the transaction is more than Rs 50 lakh in value. For NRIs sellers, TDS has to be deducted regardless of sale value. The TDS rate is 30% for such sellers who are selling their property within 2 years of purchase and 20% in case of sales after 2 years. If you are renting a property TDS has to be deducted at 5% if the monthly rent exceeds Rs 50,000.

• TDS on Rent of Immovable Property

TDS on rent on immovable property such as flats, shops, land etc is required to be deducted in two types of circumstances.

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By Person Liable for Tax Audit 

As per section 194I, any person (except individual and HUF) who is liable for tax audit is required to deduct TDS on rent paid by him if the total amount of rent paid during the financial year exceeds Rs 1,80,000/-. Usually individuals/HUFs with income from business and profession above certain limits are liable for tax audit. Such TDS has to be deducted at the time of payment of rent. Hence, if the rent is paid monthly, TDS will be deducted monthly; if the rent is paid quarterly then TDS shall be deducted quarterly and so on. The limit of Rupees 1,80,000/- is applicable per taxpayer, i.e. TDS shall be deducted only if rental income of the taxpayer is more than 1,80,000/-. 

• By One Paying Rent of More Than 50,000/-

Under Section 194IB, any individual or entity paying more than Rs 50,000 per month in rent is required to deduct TDS at 5%. Such TDS only needs to be deducted once a year. For example, if you have an 11 month rent agreement, you can deduct the TDS amount for the whole year’s rent in the 11th month. Let’s assume that your rent is Rs 80,000 per month, which translates to 9,60,000 per year. This means that you have to deduct TDS of Rs 48,000 in the 11th month from the rent of Rs 80,000 payable for that month. The deductor also does not need a TAN (Tax Deduction Account Number).

• TDS on Transfer of Immovable Property

In case of transfer of immovable property, the buyer/transferee is responsible to deduct tax at source on the amount to be paid before making the payment to the transferor.  However, this provision shall not be applicable if the transaction value is less than Rs 50 Lakhs.

Hence, it can be noted that the provisions of this section is applicable only if following conditions are satisfied:

1. There has to be a transfer of immovable property
2. Such immovable property should be property other than agriculture land
3. Purchase consideration to be more than Rupees 50 lakh.

Conclusion

Though property is something that is one’s asset in the long run, you cannot enjoy it without giving something back to the government that helps to protect it. Giving taxes is always a great initiative and a duty of every citizen and it helps in the growth of the nation.