TomorrowMakers ™

Financial Planning

Real estate bill, 2016

09 November 2016
The Real Estate (Regulation and Development) Act came into effect on1st May 2016. Let's look at how that impacts home buyers.
 

The enactment of The Real Estate (Regulation and Development) Act with effect from 1st May 2016 is a very positive development for home and property buyers in the country. The biggest feature of the Act is the establishment of a Real Estate Regulatory Authority that will regulate real estate projects in the country and protect the interest of property buyers. The salient features of the Act include:

  1. All developers will have to register new projects fulfilling the requirements laid down in the law with the Regulatory Authority.
  2. Developers will have to declare that they have unencumbered title to the land and the estimated time period of completion of the project in advance.
  3. 70% of the advance paid by the buyer will have to be set aside in a separate bank account, which can then be used for that specific project only.   
  4. Any violation of the terms by the developer will result in cancellation of the project’s registration and may result in transfer of the project to another authority.
  5. Developers can sell units on the basis of carpet area only. No longer will the buyer have to work out the carpet area based on the super-built up area and other figures.
  6. Developers can obtain advance in excess of 10% of the sale value only after finalizing a written agreement with the buyer.
  7. Modification of the flat’s plan will require the buyer’s assent. Modifying the common area will require consent of 2/3rd of all the buyers.
  8. Any structural defect or other deficiency in service identified within the first five years will have to be rectified for free.
  9. Importantly, in case of default, both parties will now pay interest at the same rate. The developer cannot charge a higher rate from the buyer.

2016 has turned out to be a good year for property buyers with the introduction of Section 80EE for first time home buyers. Under this section, a first-time buyer will enjoy an additional deduction of Rs. 50,000 on interest paid on the home loan provided the following conditions are fulfilled:

  1. Sale value does not exceed Rs. 50 lakhs.
  2. Home loan amount does not exceed Rs. 35 lakhs, and
  3. The loan is sanctioned between 1st April 2016 and 31st March 2017.

Of course, existing tax benefits for buyers shall continue. So, a home buyer can claim the following deductions:

  • On principal repaid— up to Rs. 1.5 lakhs under Section 80C.
  • On interest paid— up to Rs. 2 lakhs under Section 24(b), and.
  • Additional deduction up to Rs. 50,000 for first time home buyers. 

Further, the buyer must deduct 1% TDS on the sale value if the price of the property is in excess of Rs. 50 lakhs. This amount must be deducted with the government or else both parties may face action from the tax authorities.

It is not enough to focus on the tax implications of purchase of property. One must consider the tax impact of sale of the property as well.

Firstly, selling a property within five years of its purchase will result in reversion of all Section 80C deductions claimed in the past years. So, if you claim deduction of Rs. 50,000 u/s 80C for four years and sell the home in the fifth year, then the Rs. 2 lakhs deductions claimed will be added to your taxable income of the fifth year.

Apart from this, you will have to pay short-term or long-term capital gains tax on the difference between the sale value and the property’s cost.

Gains from a sale done within three years of the purchase will be added to your taxable income and taxed at the applicable slab and tax rate.

In case of a sale after three years, the gains will be tax at 20% in case of Indexation or 10% in case Indexation is not utilized. However, one can avoid paying long-term capital gains by choosing one of the following options:

  1. Buying a home within two years of the sale of the property. One can also avoid the tax liability if the home was purchased within one year prior to the sale of the property. Or, one must construct a home within three years of the sale of the property.

When choosing this option, you can deposit the capital gains in a Capital Gains Account and use it to buy or construct the home within the mandated period.

  1. Or, one can invest in long-term bonds of NHAI or REC within six months of the sale of the property. The amount so invested will be exempt from capital gains tax.

The new law combined with the additional deduction is a positive development that should encourage first-time buyers to consider shifting from a rented home to their own home at the earliest.

 
 
 

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