Income Tax on Rental Property


Property is considered a capital asset under the income tax laws in India, it is important consider implications of Income Tax on Sale of Property

Besides the many angles of tax laws there are also many deductions and exemptions that you should take into account while buying and selling property.

While there are many items that fall under the term capital asset, we are going to restrict ourselves to the tax laws and exemptions related Income Tax on Sale of residential housing property (flats and bungalows)

Tax Rate on Sale

Immovable property (Residential flats/houses) is taxed as per two categories –

a. Short Term capital gain and
b. Long term capital gain.

The profit earned on any property that is sold before 2 years of its registration comes under the ambit of short term capital gain and is taxed as per the tax slab of the individual.

Eg. You purchased a house for say, Rs 70 lakhs and sold it for say, 90 Lakhs before completion of two years of allotment (or registration), you are liable to pay tax on 20 lakhs as per your tax slab. There is no indexing and no other benefit entitled.

In case you sell the property after 2 years of its holding, then the profit earned comes under long term capital gain the taxation is flat 20% AFTER taking indexing as per prevailing circle rate into account.
Eg. If, in the same case as above, suppose after 2 years, the indexing for that area makes the worth of the property as Rs 80 Lakhs then you have to pay 20% on 10 lakhs. Similarly, if the indexing is Rs 90 Lakhs then the tax liability is nil.

In both the cases (long term as well as short term) you can add the registration, maintenance and upkeep costs in is initial value.

Besides this, you can save on paying tax (only on long term capital gain) by investing the profit amount in either buying another ready property within two years or under construction within given period (one year during which you must book, and completion of three years thereof) or depositing it in govt security like RBI bonds, NHAI bonds, etc for a period of 5 years after which you can use the amount for any purpose you desire. The interest earned from these bonds is however taxable.

Other Aspects About Income Tax on Sale of Property

  • You cannot accept cash for sale of property. If you take cash of Rs. 20,000/- or more as an advance or sale consideration, then you are liable to a penalty equal to cash accepted Sale of immovable property of value above Rs.30 LAKHS is considered a High Value Transaction and Registrar reports it to Income-tax Department. The same is shown in Form No. 26AS of taxpayer. Income-tax then verifies return of income that whether adequate capital gains have been disclosed or not in ITR.
  • If any person sells immovable property for Rs.50 lakhs or more, then he will receive sale consideration after deduction of TDS@1%. The buyer is required deduct TDS and then pay the balance amount of seller. The seller can claim TDS while filing his return of income.
  • When the date of agreement and registry are different- In case the date of Agreement giving the value of consideration and date of Registry are different than full value of consideration for transfer of such asset shall be the Stamp Duty Value on the date of Agreement in case the amount of consideration or part thereof has been received through a banking channel. This is a very important factor in case the date of registration falls after 2 years but the agreement and token consideration has been received in bank before 2 years in which case it will fall under the ambit of short term capital gain!
  • As per the latest rulings the date for which the period of 2 years is calculated is from the date of allotment of accommodation and not the date of registration.

Disclaimer: The above content may not be taken as fully professional advice for which it is recommended to contact a qualified taxation expert.

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