Are you planning to buy a property, read this!
The Union Budget 2013-14 announced by the finance minister, might have brought cheers for many individuals in the middle-class segment. The budget provided for an additional tax incentive of Rs 1 lakh on interest paid on their first home loan of upto Rs 25 lac, by the first time buyers of property (not costing over Rs 40 Lac); as well as providing tax incentive of Rs 2,000 for individuals having annual income of upto Rs 5 Lac, were basically targeted towards lower income group.
On the other hand, some announcements in the budget proposal such as imposing additional surcharge and additional duty and taxes, sounded disheartening for individuals in the high income segment. One among these was 1% deduction of tax at source (TDS) on the value of transfer of immovable properties (excluding agricultural land), where the consideration is above Rs 50 lac. The central government has noted that transactions in immovable properties are usually undervalued and underreported and around 50% of the transactions do not carry the PAN of the parties concerned. The government has taken this step in order to improve the reporting of such transactions and the taxation of capital gains.
Though this move by the central government may help report high-value property transactions and boost its tax kitty for FY 2013-14; it also creates a new series of burden for the property buyers. As it has ever been the case, the seller of the property may look to pass even this burden to the buyer, by quoting an additional price on their high value transaction. Such sellers may basically include the real estate developers, who are already passing on the burden of VAT and Service Tax to the buyers of their new constructed properties. However this new proposal will be applicable for new as well as resale property transactions.
In any case it will be the buyers, who will be liable to deduct 1% TDS while making the payment to the seller. To top it up, it will also be the buyer's duty to file the TDS to the income tax department. Not to forget, in metros and some Tier 1 cities, the current price of even a basic 1BHK flat can easily cost you above Rs 50 Lac. So if you plan to buy a property (of Rs 50 lac and above) in metros, then even you will need to deduct 1% tax and file it to the department, so that it reaches the government. You will have to pay only 99% of the value to the seller and the balance 1% to the central government.
The question that pops here is, are all the buyers capable enough to do this transaction on their purchase? While buying property, buyers already face the pain of going through various paper works required, such as agreement, registration, stamp duty, applicable VAT and Service Tax etc. And now for deduction of tax on behalf of the central government, one needs a TAN (Temporary Account Number). So you as a buyer can purchase a high value immovable property, only if you get your TAN, and getting your TAN may take at least 15 to 20 days. Till then you may be unable to finalise your high value property deal.
In our opinion, imposing 1% TDS is not the best mode to bring in transparency of reporting of high value transactions. The central government should have ideally put emphasis on bringing in the much needed regulator in the real sector. The real estate sector is attaining maximum cases where the value of property in the agreement is undervalued by the parties, in order to save on stamp duty and registration charges, apart from getting some unrecorded cash in their locker. The sector is already seller dominated, as in maximum cases the buyer in order to get his dream home has to oblige to illicit demand put by the seller and the real estate developer.
Property sellers and real estate developers will deliberately pass on the additional tax to the buyer. For this they may quote an additional 1% on their property price and ask the buyer to deduct 1% and pay the balance 99% to them. This exercise will also lead to an upward push in the property prices and additional burden on the pockets of buyers who are already finding the inflated property prices beyond their reach.
Also all buyers may not possess the skills of getting their TAN and deducting the TDS. For this they might have to incur additional charges of employing the services of a professional Chartered Accountant, who can help them in getting TAN, deducting TDS and filing the same. By proposing to impose 1% TDS on high consideration transactions, the government has basically pinched the pockets of home buyers Instead of getting the high value transactions to record.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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