Residential Property And Tax Implications

Q.1) I am an individual and I have agreed to buy a residential property from another individual. Am I supposed to deduct tax at source while making payment for purchase consideration? If yes; at what rate and what will be the procedure I have to follow subsequently? - Vijay Shukla

Under section 194 IA of the Income Tax Act which is applicable with effect from 1st June, 2013, a person (being a transferee) responsible for paying to resident transferor, any sum by way of consideration for transfer of any immovable property (other than agricultural land) is liable to deduct tax at source. Tax is to be deducted at 1 per cent. However, no tax is deductible where the consideration paid or payable is less than Rs 50 lakh. Tax shall be deducted at the time of payment or at the time of giving credit to the transferor, whichever is earlier.

 The tax deducted must be paid within 7 days from the end of the month in which the deduction is made in form 26QB which is available online. However, it will not be necessary for you being a purchaser to obtain TAN under section 203A.

 If transferor is a non-resident, then no tax has to be deducted under section 194IA, but tax has to be deducted under section 195 of the Act which is a special provision for payment to non-resident.

Q.2) I am a salaried employee with an annual salary of more than Rs 1 crore. Out of my savings from salary income, if I invest in fixed deposit, mutual fund, etc. then the income arisen on that will be taxed in my hands at a higher rate i.e. 30 per cent. My wife is a housewife and has no taxable income at all. Can I gift some of my surplus funds to my wife who can then invest it? Further, income on that investment will be offered for taxation which will be at a lower rate, as her likely income is not going to exceed `10 lakh. Can I transfer funds in my wife’s name and earn income? - Sunil Kadwilkar

 Under the law, you can give gift to your wife. At the time of gift , there is no tax implication either in your hands or in the hands of your wife. However, there are some clubbing provisions in the Income Tax Act. Under section 64(1)(iv) of the Act, income which arise directly or indirectly to your spouse from the asset transferred directly or indirectly to spouse by you without any adequate consideration, then such income will be taxed in your hand For example, if you give gift of Rs 25 lakh to your wife and that Rs 25 lakh is invested in fixed deposit, then interest earned on that fixed deposit although belong to your wife legally, but for tax purpose the same will be considered as your income under section 64(1)(iv) of the Act.

Q.3) I bought a new flat after selling my old fl at (purchased five years back). I took a joint loan with my brother. But due to some constraint, I am only the co-owner and my brother is the owner of new fl at. So my question to you is whether I should get the tax exemption on property gained as I have invested the money received after selling the old fl at which was in my name as it is invested to buy this new fl at? And also can I get the yearly Tax exemption on principle and interest I pay in the coming years? - Unni Krishnan

 Under section 54 of the Income Tax Act Assessee must acquire another residential house out of the sale proceed of old house in his name. Even the courts have held that, if the Assessee has jointly purchased with his near relatives, then also he should be entitled for exemption under section 57 of the Act. In your case, you are neither owner nor co-owner and therefore the Assessing Offi cer may deny exemption under section 54 to you irrespective of the fact that you have invested the entire sale proceed in a new house. Merely co-borrower of loan will not make you owner of new house. Similarly you will not be entitled for any deduction under section 80C in respect of amount of repayment of loan as well as payment of interest under section 24 of the Act since you are not owner of the property.

Jayesh Dadia
B Com (Hons.), FCA