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Property purchase taxes in India

, October 16, 2013, 5 Comments

Examining property purchase taxes in India and the points to be considered by buyer while buying a property.

The real estate industry is one of the most heavily taxed industries in the country. Property Purchase Taxes in India, both those paid directly by the home buyer while buying a property as well as those paid by the developer during construction constitute nearly 35% to 45% of the cost of the property.

Stamp Duty
In order to give legal status to the property purchase transaction, one has to pay stamp duty on the “Sale Agreement”. Under section 3 of The Indian Stamp, Stamp Duty is payable on instruments by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. The instruments (“Sale agreement”) which are not properly stamped are not admissible as evidence in court of law.
Generally, Stamp Duty is to be paid on or before the date of registration of the Agreement. Delay in payment of Stamp Duty would attract penalty @ 2% per month subject to maximum of 200% of the proper stamp duty amount.
The rate of Stamp Duty varies from state to state. In Maharashtra, Stamp Duty is payable @ 5% on the “Agreement Value” or the Stamp Duty Ready Reckoner rate, whichever is higher.

Registration
Registration is the process of recording the contents of a document with a Registering Officer. The documents are registered for the purpose of conservation of evidence, assurance of title, publicity of documents and prevention of fraud.
Under Section 41(1) of the Maharashtra Ownership Flats Act, 1963, the agreement in respect of flats to be sold by the owner/promoter/developer to the flat purchaser requires compulsorily to be registered under the Registration Act. If not registered, it cannot be produced as evidence in a court of law.
The Registration fee varies for state to state and in Maharashtra it is 1 % of the “Agreement Value” but subject to a maximum limit of Rs. 30,000/-.

VAT
Some states also levy VAT on under construction property. Currently, in Maharashtra, VAT @ 1% of the “Agreement Value” is payable at the time of registration of the “Sale Agreement”.
However, VAT is not payable in case of purchase of a property from the developer, after the construction is completed and completion certificate is received.
There has been lot of criticism and controversies regarding the decision of the state government to levy VAT on under construction property. The main argument against levy of VAT is that construction of property cannot be considered as goods (on which VAT is payable) and that stamp duty is already payable on property transactions then why VAT.

Service Tax
Service tax is another controversial tax levied by the Central Government on under construction property. The current rate of service tax is 12%. Education cess and secondary and higher education cess is calculated on top of the service tax rate which takes the effective service tax rate to 12.36%.

The calculation of service tax is quite complex. The cost of the property includes the cost of land and cost of construction. Service tax is payable only on construction component and not on the value of land. Since in most cases, it is difficult to ascertain cost of land and construction cost separately, government has come up with the abatement scheme. Under this, abatement (relief) is given for 75% of the value of the property and service tax is levied only on the balance 25%. This effectively brings the service tax rate down to 3.09% (12.36% * 25%). However, this abatement is not available in case of Preferred Location Charges, Floor Rise Charges, Internal and external development charge (like infrastructure development charges), club house charge etc in which case service at flat rate 12.36% is payable.

It is to be noted that, in budget 2013, it has been proposed to reduce this abatement from 75% to 70% in case of flats having a carpet area of more than 2000 sq ft or where the property value is 1 crore or above. Hence in such cases, service tax of 3.71% would be levied.

Service tax is payable as and when the installment payments towards purchase of property are made to the developer.
Like VAT, service tax is not payable in case property is purchased from the developer, after the construction is completed and completion certificate is received.

Property purchase Taxes in India MarketExpress

As it can be seen from above, a home buyer has to pay nearly 10% of the value of the property as taxes to government. Apart from above, there are indirect taxes like Excise, VAT, Service tax etc. on the materials and other inputs and services used in construction, which constitutes anywhere between 25% to 35% of the cost of the property. Though these taxes are paid by the developer, they are built into the cost and ultimately passed on to the property buyer.

Thus it can be concluded there is dire need to rationalize the property purchase taxes in India, particularly on purchase of residential properties so as to make housing more affordable for common men.






  • chinta

    An excellent article. I am a newbie to Indian real estate but believe this article as a starting point to understand Indian Property market

  • CAPrakashSajnani

    Excellent article

  • shalini B

    hey, 
    i purchased a commercial shop in pune in 2014. registration and all other legal formalities were completed, however the builder did not give possession and noo , and now he is telling that we need to pay more service tax.we already paid him the ser tax @ 3.9. do v pay him pl reply at varishalini@gmail.com

  • KenaJ

    Hi,

    Thank you . This article is super useful. Can you please suggest if the above percentage is true for 2015.
    5% of agreement Value, 1% of agreement value, and VAT 1 % of Agreement value. . 

    Also I am purchasing a new property.

  • KenaJ

    I am purchasing under construction property. Do I have to pay VAT as per new regulations.