Selling property can be taxing
But is it really as great an investment as it is made out to be? Maybe not, if we take into account the various taxes that need to be paid.
Let us take the example of an individual who bought a house for Rs 35 lakh around two years back and has been able to sell it for Rs 50 lakh, even in these difficult times.
In an ideal world, where no income tax needs to be paid, his gain would have been Rs 15 lakh (Rs 50 lakh - Rs 35 lakh).
But we don’t live in an ideal world. In the one we live in, the individual would have to pay tax on the capital gain of Rs 15 lakh, unless he feels it is fine if the tax man comes knocking on his door.
As per the tax laws, if one sells a property within 36 months of buying it, the resultant capital gain (the difference between the sale price and the purchase price, which is Rs 15 lakh in this case) is added to his income for that year, and taxed as per the tax bracket he is in.
We assume that the individual we are talking about comes under the highest tax bracket of 33.99%. The tax to be paid on the capital gain of Rs 15 lakh then works out to Rs 5.1 lakh, which leaves Rs 9.9 lakh (Rs 15 lakh - Rs 5.1 lakh) in his hands.
But even this Rs 9.9 lakh may not be his.
Let us say the house was bought with a 15-year home loan. Two years back, some banks were desperate to give out loans and borrowers could even negotiate a 100% home loan. So let’s say our man got the entire Rs 35 lakh as a loan from some bank. Assuming he has paid interest over the last two years at an average 11%, his equated monthly instalment (EMI) works out to Rs 39,780.
Under Sec 80C of the Income Tax Act, the principal portion of the home loan can be claimed as a tax deduction. But, the Act also says that if a property is sold before five years from the end of the financial year the flat was bought in, the tax deductions claimed would have to be reversed. Since the flat was bought only two years back, the repayment of principal he has claimed as a tax benefit for two years has to be reversed.
As per the Act, the aggregate amount of deductions so allowed in respect of the previous year or the years preceding such previous year shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year.
Sounds complicated? Well, at an interest rate of 11%, the individual would have repaid principal of around Rs 2,05,600 over the last two years on the Rs 35 lakh loan taken by him and claimed that as deduction. This would be reversed and added to the income for the current year. So, on Rs 2.06 lakh, an income tax of around Rs 70,000 (33.99% of Rs 2.06 lakh), would have to be paid. This brings down the gain to Rs 9.2 lakh (Rs 9.9 lakh - Rs 70,000).
The killjoys don’t end there.
As we all know, home loans come with a price. In the 24 months since the loan was taken, an interest of around Rs 7.49 lakh would have been paid, which whittles down the gain to Rs 1.71 lakh (Rs 9.2 lakh - Rs 7.49 lakh).
At the same time the interest paid can be claimed as a deduction from income. A maximum of Rs 1.5 lakh can be claimed as a deduction in a given year. So over two years, a deduction of Rs 3 lakh would have been claimed, even though the interest paid on the loan is around Rs 7.49 lakh. Since the individual we are considering is in the top tax bracket of 33.99%. This would mean a saving of Rs 1.02 lakh ( 33.99% of Rs 3 lakh).
This needs to be added to the gain of Rs 1.71 lakh. So the gain now increases to Rs 2.73 lakh.
And there is at least one more deduction left.
At the point of selling the house, the home loan outstanding will have to be repaid. For this, the bank will levy a prepayment charge on the principal outstanding. At a prepayment charge of 2% on a principal outstanding of Rs 32.94 lakh (Rs 35 lakh - Rs 2.06 lakh), the prepayment charge works out to Rs 66,000.
That leaves him with Rs 2.07 lakh (Rs 2.73 lakh - Rs 66,000) — nearly a seventh of the gain he would have thought he had made.
k_vivek@dnaindia.net
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