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Till now all these investors only factored in a capital gains tax and a one percent TDS for properties above Rs 50 lakh that was only recently introduced in this year’s Budget.
The government is now going to go after speculators and all those investors that like to buy properties to only hold on till a significant price appreciation takes place. All these investors may now feel the need to exit all of those properties before the developer gives possession and that could add more pressure to an already subdued real estate market.
According to the revised Direct Tax Code (DTC), “A person could own 10 houses and may not be liable to tax if the same are not rented out. In such a scenario precious house property stock would be under utilised along with a net revenue loss to the government. To plug this loophole it is proposed that rental value is to be taken as the higher of contractual rent or 6 percent per annum of ratable value fixed by the local authority. Vacancy allowance would be allowed."
Till now all these investors only factored in a capital gains tax and a one percent TDS for properties above Rs 50 lakh that was only recently introduced in this year’s Budget. To understand this it is important to understand the current law and the implications of the new ruling.
Rahul Garg, executive director and leader -Direct Tax, PwC says, “In relation to the individuals who own multiple houses there is already a provision currently which provides that if you own more than one house which is not let out, then it is deemed that those houses are let out and that is based on the annual value of such houses and there is a taxation on that. It is only in relation to the stock-in-trade of the houses where you are not taxed because it is in nature of a stock-in-trade trade and not a house property income.”
So how exactly does this concern us?
“For HNIs or people like us, if we were to purchase multiple houses, it is currently provided that even those multiple houses which are not let out would be liable to pay capital gains tax on their annual let out value as if one had let out and he/she will get the deduction of interest in municipal taxes etc on those”
Below is the edited transcript of Garg’s interview to Prime Property.
Q: Can you explain what the ramifications will be of the proposed provision, what all should the property buyers keep in mind?
A: If people have multiple houses which they own, then it is important that either the house is let-out and rent is offered for tax and if it is not let out and remains vacant, then they need to be careful that even a vacant house could result in the taxation in their hand based on the rateable value if they have not contracted to let it out. So, the best thing is to use the house as productive asset, produce the income out of it and pay taxes.
Q: There is absolutely no ambiguity on how much tax all of these investors would have to pay for all the vacant properties?
A: The issue is that when one does not rent it out it begets a question how much rent should be considered for your taxable income and here the proposal very clearly provides that it would be six percent per annum of the municipal ratable value fixed by the local authority. So, there is no ambiguity as to how much rent you would end up paying taxes, if you don’t let it out you would end up paying taxes on that value. If you let it out and if you let it out at higher value then that would be the rate which would be considered for computation of your income.
Q: Won't investors look to avoid this by buying properties in other peoples names, let’s say their daughters name or wife's name?
A: Those are the kind of things people would continue to do, but in relation to house property even in the current law, there is a sort of an anti-avoidance provision which prescribes that the house property income would be taxable in the hands of the beneficial owner. So, what happens is if you buy property in the name of your daughter but you are putting the money from your income etc then just writing her name does not entitle you to bifurcate or divert the income and those are the kind of things people in practice at times overlook but it is important to be careful that we don’t end up (not sure) simply doing the agreements in a manner that gets hit by the anti-avoidance within the house property income the way it is worded today.
Q: So, there are anti tax avoidance measures already in place, but what if property buyer still tries to do that by let's say setting up several SPVs or private limited companies to buy different properties, then what happens?
A: What happens is exemption from the house property income for your self occupation is available only for individuals. It is not available for the SPVs which are private limited companies. When one buys a house, the interest of the finance cost is much larger than the rent that one can get and therefore typically, the house property income from those properties in the hands of those companies would be a negative rather than a positive. It is just that when one sells the shares of those companies and realise the accrued gain in the appreciation there is an issue of capital gains. So, one would typically find of the financed property being no so much of an issue atleast in the initial period during the tenure of the loan.
Q: The proposed provision in the revised DTC Bill says vacancy allowance would be allowed, what exactly does that mean and do you expect any change from whatever is the current law?
A: The amount of vacancy allowance to be allowed was also in the current law. If it is let out only for few months one could claim the vacancy allowance.
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