Taxes constitute a significant share of the total cost of buying property in India. During a property transaction, some taxes are also borne by the seller. But ultimately the burden rests on the buyer since the seller usually factors tax implications into his price.
[related-post]
Largely, there are four types of taxes imposed while buying a property: stamp duty, registration fees, value added tax (VAT), and service tax. Let’s understand these charges in detail.
Stamp Duty
Stamp duty is levied on the sale agreement to make it legally binding for the parties involved in the property transaction i.e., buyers and the sellers. It is calculated on either the market value of the property or the value mentioned in the agreement whichever is higher. To ascertain the market value, the registration officer refers to the Ready Reckoner Rate (RR Rate). Without a stamp on the papers, i.e. sale agreement, the transaction is not legally acceptable as evidence in the court of law.
Stamp duty is paid at the time the property is transferred. The stamp duty charges vary across states. Some state like Delhi, Haryana and Rajasthan provide discounts on stamp duty if the buyer is a woman. The actual amount may vary between 3 per cent to 7 per cent depending on local rules. If stamp duty is not paid, a penalty as per the state’s laws may be invoked.
The stamp duty charge may vary depending on the factors like transaction of old property, location of the property, type of property i.e. residential or commercial, and whether the buyer is a male, female, or a partnership of both.
At present there are three ways to pay the stamp duty. One: through a registered vendor by purchasing non-judicial stamp paper and writing the agreement on it. Two: by writing the agreement on a plain paper and franking it at an authorized bank by depositing the required stamp duty. And three: through the online system, i.e. e-stamping over the digital platform provided by the Stock Holding Corporation of India Limited (SHCIL).
Registration Tax
The important documents and contents of the property transaction are required to be registered with the registrar’s office. Such documents are used as legal proof of the transaction, to avoid dispute, and to present evidence in the court of law if required. The registration charge varies across Indian states. It may range around 1 per cent in many states subject to an upper and lower ceiling as per the state’s laws. During the registration process, the buyer and seller have to appear at the registrar’s office along with requisite documents like ID proof and copy of stamp duty payment.
Value added tax (VAT)
Like stamp duty and registration tax, VAT is also dependent on local rules and regulations. It varies across states. Some states charge VAT on the composite value of the under-construction property whereas others charge on the basis of the cost of materials used for construction. VAT is given to the seller and it is his responsibility to deposit it with the government. VAT is only payable when you buy an under-construction property, not while buying a completed project.
Service Tax*
Service tax is levied by the central government on transaction of an under-construction property. It is levied on 25% of the total value of property while 75% is considered the value of land on which the property is built. It means the service tax payable would be 15% (current service tax) of that value, i.e., 25% of 15=3.75% on the total value of property. The buyer has to deposit the service tax to the developer whose responsibility it is to deposit the same with the government.
Keep In Mind
Stamp duty and registration charges are allowed as deductions under Sec 80(C), and hence you can claim tax deduction up to the amount of Rs 1.5 lakh. Imposing VAT is a state’s prerogative so always refer to the rules and regulations of the place where you are planning to buy property. Discuss the property price clearly with the seller and mention all the details related to the price breakup, taxes, and charges in the agreement at the time of buying a property.
* (Please note that recently there was a ruling by the honourable Delhi High Court that service tax would not be levied on the sale of under-construction property. The matter may still be sub judice. Please consult a legal expert for an update on the applicability of service tax.)
