Dalal Street Investment Journal

Tax Implications Of Residential Property Transactions

The purchase, sale and contracting of work with respect to residential property as carried out by resident and non-resident individuals are taxable according to specific provisions in the Income Tax Act, 1961.

Key Points:

If any immoveable property, whether used for commercial or residential purpose, in respect of which depreciation is not claimed, is sold, it will generate income under the head – Income from Capital Gains.

NRIs having only one source of income have the option of filing their returns either in respect of the source of income and paying tax at a rate as applicable to a non-resident or of filing the returns in India in accordance with the normal provisions of the Income Tax Act, 1961.

Any individual responsible for paying any sum to any resident for carrying out any work in pursuance of a contract shall deduct at source the amount indicated in Chapter XVII of the Income Tax Act, 1961, except when the sum is credited or paid exclusively for the personal purposes of such an individual or HUF.

Q: I am a retired person and earn income from interest, pension dividend etc., which are classified under the head ‘Other Sources’. I have carried out repairs and renovation of my house and have spent nearly `150000 on the same. I was informed that as I have made payments exceeding `30000 to the contractors for the repairs and renovation work, I ought to have deducted tax at source, and having failed to do so, the amount of expenditure of the repairs and renovation would be added to my income and I would be liable to pay tax thereon. Is this true? Please advise.

- B. D. Asawale

A: The provisions of tax deduction at source are contained in Chapter XVII of the Income Tax Act, 1961. Any person responsible for paying any sum to any resident (say a contractor) for carrying out any work in pursuance of a contract shall, at the time of credit of such amount to the said contractor or at the time of payment to the said contractor, deduct an amount equal to one per cent of the amount so credited/paid where such a contractor is an individual or an HUF, or 2 per cent of the amount so credited/paid where the contractor is a person other than an individual or an HUF.

However, no individual or HUF shall be liable to deduct income tax on such a sum credited or paid to such contractor where it is credited or paid exclusively for the personal purposes of such an individual or HUF in accordance with the provisions of Section 194C(4). Thus, you will be spared of the consequences stated in the question.

Q: What are the tax implications for an NRI selling property in India? What are the tax implications if the same person buys another house outside India?

- Manish Goel

A: You have not mentioned whether the property sold is commercial or residential property. Nonetheless, if any immoveable property, whether used for commercial or residential purpose, in respect of which depreciation is not claimed, is sold, it will generate income under the head ‘Income from Capital Gains’. If the NRI has only one source of income, he/she has the option of filing his/her returns either in respect of the source of income and paying tax at a rate as applicable to a non-resident or of filing the returns in India in accordance with the normal provisions of the Income Tax Act, 1961. If the NRI chooses to file the returns as per the normal provisions of the Income Tax Act, 1961, he/she will be entitled to claim exemption under any of the following sections:

Section 54 (where the long term capital gains in respect of the residential property sold are invested in another residential property within the prescribed time limit and subject to the conditions contained therein);

Section 54EC (where the long term capital gains are invested in specified bonds within six months of the date of transfer); or

Section 54F (where the net consideration on the sale of commercial property, in respect of which no depreciation has been claimed, is invested in a new residential property, provided that the individual does not have any other residential property in his/her name).