What Are The Tax Implications For Homeownership In India?

By LODHA

Owning a home is a significant milestone for individuals and families in India. It not only provides security and stability but also comes with various financial implications, including taxes. Understanding the tax aspects associated with homeownership is crucial for prospective homebuyers and existing homeowners alike. If you want to take your investments to the next level, it is important to know the tax implications at every stage of the home-buying journey in India, including buying, selling and obtaining a home loan.

Tax When Buying A House

a. Stamp Duty and Registration Charges

When purchasing a property, homebuyers first need to consider the stamp duty and registration charges, which can vary from state to state. Stamp duty is a tax levied on the property's value, while registration charges are applicable for registering the property in the buyer's name. Both stamp duty and registration charges are eligible for tax deductions under Section 80C of the Income Tax Act, subject to a maximum limit of Rs. 1.5 lakh.

b. Goods and Services Tax (GST):

For under-construction properties, homebuyers need to pay Goods and Services Tax (GST) on the property's purchase price. The GST rates vary based on the construction stage and the property's value. However, the GST paid on the purchase of an under-construction property is not eligible for any tax deductions. For instance, The Goods and Services Tax Council had
previously announced a reduction in the tax on under-construction houses to 5% (without input tax credit) from 12% earlier. Affordable housing GST is of 1% while the non-affordable housing GST rate is of 5%.

Selling A Home

a. Capital Gains Tax On Property

When selling a property, homeowners are subject to capital gains tax. Capital gains are classified into two categories: short-term capital gains (STCG) and long-term capital gains (LTCG). If the property is held for less than two years before selling, any profit will be treated as short-term capital gains and taxed as per the individual's applicable income tax slab rate. On the other hand, if the property is held for more than two years, the profit is considered long-term capital gains. LTCG on the property is taxed at a flat rate of 20% after indexation benefits.

b. Indexation Benefits

To account for inflation, the government provides indexation benefits for long-term capital gains. Indexation adjusts the property's purchase price based on the cost inflation index (CII) published by the Central Board of Direct Taxes (CBDT). This adjustment helps in reducing the taxable capital gains and, consequently, the tax liability.

c. Exemptions

Homeowners can claim exemptions under Section 54 and Section 54F of the Income Tax Act. Section 54 provides exemptions on long-term capital gains if the proceeds from selling a residential property are reinvested in purchasing another residential property. Section 54F offers similar exemptions when the sale proceeds are invested in a new residential property other than the one owned by the taxpayer. These exemptions help reduce the tax burden significantly.

Home Loan Benefit In Income Tax

a. Deduction on Home Loan Interest 

Homeowners can claim deductions on the interest paid on a home loan under Section 24(b) of the Income Tax Act. The maximum deduction allowed is Rs. 2 lahks per annum for self-occupied properties. In the case of rented properties, homeowners can claim the entire interest paid as a deduction without any limit.

b. Deduction on Home Loan Principal

Under Section 80C of the Income Tax Act, homeowners can claim deductions on the principal amount repaid towards the home loan. This includes the principal component of Equated Monthly Installments (EMIs) and any prepayments made during the financial year. The maximum deduction allowed under this section is Rs. 1.5 lakh per annum.

Homeownership in India comes with several tax implications, from the initial purchase to the eventual sale of the property. Understanding these tax implications is essential for homeowners to maximize their savings and minimize their tax liabilities. It is advisable to consult with a tax professional or financial advisor to gain a comprehensive understanding of the tax laws and make informed decisions throughout the home-buying journey. By leveraging the available tax benefits and exemptions, homeowners can make the most of their investment while enjoying the pride and security that comes with owning a home.