Navigating Tax Implications of Under-Construction and Ready Homes

Understanding the tax implications of purchasing residential properties is crucial for buyers in India. When comparing under-construction and ready-to-move-in apartments, significant differences arise in terms of Goods and Services Tax (GST) and Tax Deducted at Source (TDS). These factors can influence the overall cost and tax benefits associated with each property type.

Purchasing an under-construction apartment can lead to additional costs due to GST. For instance, Surat-based buyer Amit Rastogi recently booked an under-construction flat for ₹ 85 lakh. The developer applied a GST rate of 5% on each installment, thus raising the eventual cost of the property. Since the transaction value exceeded ₹ 50 lakh, Amit was required to deduct 1% TDS from every payment and submit it using Form 26QB. Throughout the construction phase, Amit also paid pre-EMI interest, which does not qualify for immediate tax deduction. Instead, he can claim the total pre-construction interest in five equal annual installments after taking possession, subject to a cap of ₹ 2 lakh per year under the old tax regime.

Understanding GST and TDS in Property Purchases

Tax compliance is essential for homebuyers, especially regarding GST and TDS. Under-construction properties incur a GST at 5% (or 1% for affordable housing), which is charged by the developer and adds to the property’s acquisition cost. Conversely, ready-to-move-in homes become exempt from GST once a valid completion certificate is issued.

According to CA Priyal Goel Jain, Partner at Dinesh Aarjav and Associates Chartered Accountants, “For transactions exceeding ₹ 50 lakh, TDS at 1% must be deducted on each installment or lump-sum payment and deposited within 30 days using Form 26QB.” This compliance requirement is critical, as delays or failure to file can lead to penalties.

For under-construction properties, interest paid prior to possession accumulates and can be claimed as a deduction in five annual installments, commencing from the year of possession, though still subject to the ₹ 2 lakh ceiling. Jain emphasizes that even deferred pre-construction interest does not escape this cap, underscoring the importance of careful financial planning throughout the construction phase.

Tax Considerations for Ready-to-Move-In Properties

In a contrasting scenario, Pune-based buyer Neha Agarwal purchased a ready-to-move-in apartment for ₹ 1.2 crore. As this property has a completion certificate, no GST applies. Nevertheless, Neha is still required to deduct 1% TDS from the payment made to the seller due to the transaction value exceeding ₹ 50 lakh. This TDS must also be submitted using Form 26QB within the specified timeframe.

Neha can begin claiming deductions on her home loan interest from the year of purchase, with a limit of ₹ 2 lakh per year for self-occupied properties. Additionally, she can claim principal repayment deductions under Section 80C. Ensuring timely TDS deduction and tax filings is crucial to avoid compliance-related issues, according to Abhishek Soni, CEO and Co-Founder of Tax2win.

For ready-to-move-in properties, the interest deduction can be claimed in the same financial year as the purchase or possession. If the property value exceeds ₹ 50 lakh, the buyer remains responsible for deducting 1% TDS from payments, which must be deposited using Form 26QB. Following this, buyers should obtain Form 16B as proof of deduction to provide to the seller.

Implications of the New Tax Regime

The new tax regime introduces notable restrictions, especially concerning home loans. Under this framework, no deductions for home loan interest are available for self-occupied residential properties, regardless of whether they are under construction or ready for occupancy. Jain points out that the provision allowing pre-construction interest claims in five equal installments after possession is absent under the new regime, effectively removing the relief for deferred interest.

In conclusion, potential homebuyers must navigate various tax implications when considering property purchases. Understanding the differences in GST and TDS, as well as the specific deductions available under different tax regimes, can significantly impact the financial viability of their investments. By staying informed and compliant, buyers can optimize their tax benefits and avoid costly penalties.