Tax Implications on purchase and sale of Immovable Property

Introduction

The purchase of immovable property is not just a strategic investment but also a transaction laden with tax implications under various provisions of the Income Tax Act, 1961. Beyond the cost of acquisition, person must navigate taxes such as Tax Deducted at Source (TDS), and Goods and Services Tax (GST), depending on the nature and value of the property.

Applicability of the Income Tax Act,1961

If a buyer purchases immovable property from a seller whose value exceeds Rs 50 lakh then buyer is liable to follow the provisions of Section 194-IA of the Income Tax Act, 1961.

Before moving towards Instructions of Section 194 IA let's understand some terms

1. Immovable Property: Immovable property includes both Residential Immovable property and Commercial immovable property except agricultural land.

2. Seller: Seller includes Resident Individual, Hindu Undivided Family (HUF) and Builders as well.

3. Buyer: Any person

Section 194-IA mandates that the Buyer deduct TDS at 1% of the property's sale value provided its value or consideration exceeds Rs 50 lakhs. However, if there is more than 1 seller or buyer then the consideration shall be calculated by aggregating the amount paid or payable by all the buyers to the seller or sellers.

If the PAN of the seller is not available or is inoperative", then Buyer shall deduct TDS at 20% of the property's sale value. If the payments are made in instalments, then TDS has to be deducted on each instalment paid.

Time Limit to pay TDS in respect of Immovable property

The TDS on the immovable property has to be paid using Form 26QB within 30 days from the end of the month in which TDS was deducted. After depositing TDS to the government, the buyer is required to furnish the TDS certificate in form 16B to the seller. This is available around 10-15 days after depositing the TDS.

Interest, Penalty & late fees for non-deducting or non-depositing TDS to Government

There are different types of penalties levied under section 194-IA which are as follows: -

Late filing Fee: If a person fails to file TDS return on time then penalty of Rs 200 per day under section 234E until the fee equals the TDS amount.

Interest for Delays

1.TDS not deducted on time: If a person fails to deduct TDS at time of payment then penalty of 1% per month from the date on which TDS supposed to deduct until the day on which TDS is actually deducted.

2. TDS not deposited on time: If person fails to deposit TDS within time then penalty of 1.5% per month or part of the month is levied from the date of deduction to the date of deposit.

For better understanding, it is presented in the following tabular form

Specified Financial Transaction Reporting (SFT Reporting) in case of purchase and sale of immovable property

If a person buys an immovable property for Rs 30 lakh or more, then it is the duty of the registrar to provide the details of the person who carried out these transactions to the Income Tax Department by filing Form SFT-012. Once this information reaches the Income Tax Department, it is shown in the 26AS, and the department waits until the treatment is done by the assessee in his ITR. If the department is not satisfied with the treatment by the assessee, then the department may issue a notice and ask for information regarding this transaction. Therefore, it is also advisable to consult a tax expert before entering into a transaction of purchasing or selling immovable property, so that no consequences have to be suffered in the future.

Tax implication in case of sale of Immovable Property

If a person sells immovable property and it result in Short Term Capital Gain (STCG) i.e. sold within 24 months, then it is taxable at the rate of slab rate.

If a person sells immovable property and it result in Long Term Capital Gain (LTCG) i.e. sold after 24 months, then assessee has two option for this which are as follows:

*However for sale of Land and Building after 23rd July 2024 taxpayer has either of the above options to opt (However, this option is restricted for purchase made on or before 22nd July, 2024) If the property is purchased on or after 23rd July 2024 and sold thereafter, then Option 2 is applicable.

Applicability of Goods & Service Tax (GST)

Not only Income Tax Act, 1961 are applicable when the immovable property is purchased, rather Goods and Services Tax (GST) also implicated with some exceptions.

Immovable property under construction intended for sale, is considered for supply of services under Goods and Services Tax (GST). On the other hand, if the immovable property is complete or we can say ready to sale then it is exempt from Goods and Services Tax (GST).

As per paragraph 5(b) of Schedule II of the CGST/IGST Act, supply of services is defined as the construction of a complex, building, civil structure, or a part of it, which is meant for sale wholly or in part. However, if full consideration is received after the issuance of the certificate of completion, it is not considered a supply of services and is exempt from GST.

Example: If a buyer purchases any immovable property which was under construction and buyer made any payment to the seller before the issuance of completion certificate from the competent authority then it is considered as supply of services under Goods and Services Tax (GST). On the other hand, if payment is made after the issuance of completion certificate then it is exempt from GST.

Rates of GST applicable

There are majorly two types of immovable properties on which different GST rates are applicable are: -

1. Residential Property: - It is any property used or meant to be used as a residence.

Further Residential properties sub categorised into two types of projects on which different types of GST rates are applicable.

a) Affordable apartment housing projects: - Affordable housing projects is defined as residential properties that has

Ø A carpet area of 60 square metres in metro cities and 90 square metres in non-metro cities, and

Ø Maximum amount of Rs. 45 lakhs for both cases

The Rate of GST applicable on affordable apartment housing projects are 1%

b) Non-Affordable apartment housing projects: - If any of the above conditions are not complied then such project is known as non- affordable apartment.

The Rate of GST applicable on non-affordable apartment housing projects are 5%

2. Commercial Property: It can be defined as any real estate property that is used or intended to be used for commercial purposes, including industrial, retail, office, and hospitality properties.

The Rate of GST applicable on commercial properties is 12%.

Summary of GST Rates are as follows

Availability of Input Tax Credit (ITC) in case of Immovable Property

Section 17(5)(c) of CGST/IGST Act, 2017 deals with availability of Input Tax credit on work contract services for construction of immovable property.

Work contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

ITC is blocked on input service relating to construction activity like office building, factory, building etc.

ITC on work contract services of immovable property is available only in the following three situations-:

• When the value of works contract service is not capitalized or we can say it is debited to Profit of loss A/c. Whether the value of work contract service is capitalized or not are depends on Accounting Standard 10 and Ind AS 16 as the case may be.
• When the works contract service is availed by a work contractor for being used in providing in furtherance of business of the work contract service.
• When the Work contract services are availed for construction of Plant and machinery*. In this case ITC is allowed to all recipients irrespective of their line of business.

*Plant and machinery means apparatus, equipment, and machinery fixed to earth by foundation or structural supports that are used for making outward supply of goods and/or services and includes such foundation or structural support.

* Above definition of plant and machinery excludes: -

• Land, building or other civil structures,
• Telecommunication towers and,
• Pipelines laid outside the factory premises.

Further as per Section 17(5)(d) of CGST/IGST Act, 2017, ITC is not allowed on goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. The Phrase "on his own account" means activities undertaken by the taxable person for self-use or for their own benefit rather than resale or as part of providing a taxable supply. In other words, "on his own account" means that construction of immovable property is carried for the taxpayer own business purpose such as office building, factory or warehoulse. Therefore, if above goods or services taken by taxable person for making same category of further taxable supply then ITC shall be allowed. Also if amount of expenditure is debited to profit or loss account then ITC shall be allowed.

* For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

As per latest S.C Judgement (Chief Commissioner of Central Goods and Services & Ors. v. M/s. Safari Retreats Private Limited & Ors,) if any commercial building is constructed for letting or renting out purpose, same shall be considered as Plant & Machinery accordingly ITC is not blocked.

Conclusion

The purchase of immovable property involves a substantial financial commitment, accompanied by complex tax considerations. Proper planning and awareness of tax provisions such as deductions, exemptions, and compliance requirements can help buyers and sellers optimize their financial outcomes. By understanding the tax implications, buyers can approach property transactions with confidence, ensuring compliance, financial efficiency and long-term benefits. Consulting with tax experts is highly recommended to navigate these complexities effectively and avoid pitfalls.