Taxes to be Paid While Purchasing the Property

Bangalore : In India, real estate industry is one of the most heavily taxed industries. When you purchase a property in addition to amount paid to the seller, you are also responsible for paying various taxes to the local government authorities of every city while registration and developer of the property should be paid during construction which comprises about 35 percent to 45 percent of the cost of the property.

You probably know the common taxes such as property tax, service tax and so on, but the fact is, there are many other taxes to be paid while purchasing a property. Read on for some of the taxes and estimate the taxes you will have to pay while purchasing.

Registration costs: Registration is the process of recording the documents with a registering officer or competent land Cadastre and it is the last stage of the agreement between the seller and buyer of the property. The document is the final agreement which is signed between the two parties and then, the buyer will be the legal owner of the property. The content of the documents is registered to prevent the fraud transactions, for the purpose of protection of evidence, title assurance and publicity of documents.

In India, documents relating to transfer, sale or lease the property should be compulsory registered under section 17 of the Indian Registration Act, 1908. If not registered, there will be no proof of transaction. The registration fee varies from state to state.

Stamp Duty: Stamp Duty is a tax which is identical to Income tax and sales taxes collected by the government; it is the tax payable on legal instrument/document specified by edict or liability in full and on time under the Stamp Act of the state where the property is situated this gives legal status to the property purchase transaction. The sale agreement which is not appropriately stamped is not acceptable as confirmation in the court of law.

Usually, this stamp duty should be paid on or before registration and delay in payment would attain penalty. The stamp duty charges may be fixed or vary due to property value and services of the property. This is a tax paid on every transaction, such as exchange of documents and execution of instruments. The purchaser of the property is liable to pay stamp duty to the government authorities. The rate of duty caries from state to state and property to property based on cost and municipal laws.

Service Tax: Service tax is another controversial tax charged by the central Government, which is applicable for under construction property. If you are purchasing a property from real estate developer/builder who structured a building project before offering possession such as apartment, flat, villa, multistory apartment and so on, then you will be legally responsible to pay service tax on the property price.

If you are purchasing a ready to move property, then you are not liable to pay service tax. This tax is only charged on total services offered by the developer and thus cannot be taxed on land costs. It is applicable to the entire services, except the services mentioned in the negative list. Service tax of 12.36 percent is charged on 25 percent of the total purchase cost of under construction property. Under composition scheme Service tax stands at 3.71 percent of the property price. As it is charged by Central Government it is applicable to all states.

VAT (Value Added Tax): VAT (Value Added Tax) is an indirect tax, which is liable to pay on under construction property. The builders or developers will pass on this additional tax on buyers of property. This tax is payable at the time of registration of a property agreement. When you buy a property from another person then transfer duty is payable and when you buy a property from builder then VAT is payable on property purchases.

In India, this is applicable only in few states. In the year 2005, by substituting the General Sales Tax the VAT system was adopted by some states in India. Every state will follow their own process on collection of VAT from the dealer. The rate of VAT in Karnataka is 5 percent on total cost of the property but recently, Haryana court has announced 4 percent of VAT on builders and developers of residential projects. Under composition scheme, VAT stands at 3 percent of the property price.

TDS (Tax Deduction at Source): A new section 194 (A) has been included in the Income Tax Act, 1961 by the Finance Act, 2013. It is one of the modes of taxes, which deduct some percentage of amounts during transaction by a person.  This provision is similar to “pay as you earn”.

As per this section, any individual being a purchaser responsible for paying to a seller by way of consideration for transfer of an immovable property, excluding agricultural land, shall at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of cheque or draft or any other mode, whichever is earlier, required to deduct an amount equal to 1 percent of such sum as income-tax thereon specially when the value of the immovable property surpasses or equivalent to Rs 50 Lakh. The TDS (Tax Deduction at Source) must be submitted in the name of seller of the property.

newly launched real estate project in bangalore