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October 31, 2020

10 things to check if you are Buying Property

by CA Shivam Jaiswal in Income Tax

10 things to check if you are Buying Property

It is no secret that when it comes to investment, Indians have a soft spot for real estate and they will mostly invest in house rather than in a commercial property. Real estate is an emotional purchase item. Most people want to stay in their own homes, even if it is small. They feel a sense of security living in their own home. There is also a huge pressure from family members to procure a home. A single piece of land or an apartment will often comprise about 70% to 80% of the investor’s portfolio, meaning, that much of his entire savings has gone into acquiring that property.

Hence, it is crucial that one should have a proper check done before buying any property as a huge chunk of one’s savings is involved in real estate. Given below are 10 things you should check if you are buying any property.

1. Verify title deed

As a first step, the buyer should undertake due diligence, to ascertain the existence of the title with the seller, the nature of the title and its marketability and the ability of the seller to convey clear and marketable title, free from encumbrance. Documents, for a period of 30 years, if not more (and where documents are not available, for minimum period of 12 years), must be examined and the seller may be called upon to provide the following documents / information:

  • Title deed of the property: This is a type of document that typically outlines the chain of ownership of the respective property. It provides full right to the owner to claim the absolute ownership over the property. While buying the property, check if it belongs to the respective seller. Check the deed thoroughly, and if have no knowledge about it you can seek help of a property agent. If the title of the property isn’t in the name of the seller, then legally the property shouldn’t be purchased unless the consent from the real owner.
  • Government order for grant, succession certificate, sale deed, gift deed, will, partition deed, etc., evidencing the transfer of title over the years, culminating in the vesting of property with the seller.
  • Nature of title: Leasehold, freehold, or development right.
  • In case of the seller claiming development rights to the property, the development agreement and power of attorney, executed by the owners in favour of the seller.
  • All title documents being duly stamped and registered at the office of the jurisdictional sub-registrar of assurances.
  • Information on pending or past litigation.
  • Availability of original title documents with the seller.

2. Approvals from Local Body

Every developer at the start of the construction has to get the approval from local planning authorities. The developer has to submit the required documents for the sanctioned plan approval. So, when you hunt for a residential apartment, do check if the developer agrees to present the sanctioned plan, if not then the construction is termed as illegal. It is important to make sure that the entire layout has been approved by the development corporation and the local body of the city. 

For purchase of apartment or land with constructed building, the buyer should scrutinise the building plan / layout plan sanctioned by the local municipal authorities, along with approvals issued by government, statutory and regulatory authorities, for providing infrastructure facilities, water, sewage, electricity, environmental clearance, fire safety approval, etc.

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3. TDS applicability

  • TDS stands for ‘Tax Deducted at Source’. It was introduced to collect tax at the source from where an individual’s income is generated. From 1 June 2013, when a buyer buys immovable property (i.e. a building or part of a building or any land other than agricultural land) costing more than Rs 50 lakhs, he has to deduct tax at source (TDS) when he pays the seller under Section 194-IA of the Income Tax Act.
  • The buyer has to deduct TDS at 1% of the total sale consideration. The rate is 0.75% for transaction carried out from 14th May 2020 to 31st March 2021.
  • No TDS is required to be deducted if sale consideration is less than Rs 50 lakhs. If the payment is made by instalments, then TDS has to be deducted on each instalment paid.
  • The buyer of any immovable property need not obtain a TAN (Tax Deduction Account Number) for making payment of the TDS on immovable property. Buyer can make the payment using your PAN.
  • For the purpose of making payment of TDS on immovable property, the buyer has to obtain the PAN of the seller, else TDS is deducted at 20%. PAN of the buyer is also mandatory. TDS is deducted at the time of payment (including instalment payments) or at the time of giving credit to the seller, whichever is earlier.
  • The TDS on immovable property has to be paid using Form 26QB within 30 days from the end of the month in which TDS was deducted.
  • After depositing TDS to the government, the buyer is required to furnish the TDS certificate in form 16B to the seller. This is available around 10-15 days after depositing the TDS.

4. Verify the Sale Deed/Agreement

  • A Sale Deed is the core legal document that acts as proof of sale and transfer of ownership of the property from the seller to the buyer.
  • A Sale Deed has to be mandatorily registered. It is important that before the Sale Deed is executed one should execute the sale agreement and should check for compliance of various terms and conditions as agreed upon between the buyer and the seller.
  • Before executing the Sale Deed, the buyer should check whether the property has a clear title. He/she should also confirm if the property is subject to any encumbrance charges.
  • A seller should settle all the statutory payments such as property tax, cess, water charges, society charges, electricity charges, maintenance charges etc., (subject to the agreement) before executing the Sale Deed.

5. Compliance under the Real Estate (Regulation and Development) Act, 2016 (RERA)

  • The RERA mandates that developers should register their projects with the authority constituted under the Act.
  • A buyer, intending to buy a property in a project coming under the ambit of the RERA is advised to verify whether property has been registered with the authority.
  • Information available on the official web portal of RERA for each state also provides details of any cases / complaints filed against the developer of the project and default by developer, if any and thus, provides useful insight into the credibility of the developer and the project and helps the buyer make an informed choice.
  • Buyers should take note of the fact that the law mandates all real estate brokers also be registered with the state RERA, in order to operate legally. Hire a property broker, only after asking for his RERA registration.

6. Know all home loan tax benefits

  • Taking a home loan can help you save tax as per the provisions of the Income Tax Act, 1961. While a housing loan can help you get a house for yourself, it can also turn out to an expensive affair. But the various tax benefits that come with such a loan help you save money every year.
  • If your property is a self-occupied one, you can claim a maximum deduction of Rs.2 lakh. If you let your property out on rent, you can claim any amount you’ve actually paid as interest. There is no limit.
  • If the property is given on rent, you can claim any amount actually spent as interest, whether it is completed or not.
  • For both self-occupied and let-out properties, you can claim up to Rs.1.5 lakh every year as a deduction.
  • You also need to complete the construction of the property and only then claim the deduction.
  • To claim this deduction, you should not sell your house within 5 years after possessing it. If you sell your house within 5 years after possession, any deduction claimed will be reversed in the year in which you sell it. This amount will also be added to your income for the year of sale.
  • If you are a co-borrower and co-owner, you can each claim up to Rs.1.5 lakh as principal deduction. You can also claim the stamp duties and registration fees paid for your property under this section.

Can you claim both HRA and Home Loan Interest Deduction in Income Tax?

7. Encumbrance Certificate

  • It is also important to verify that the land is free from all legal dues. An encumbrance refers to any charge created on any asset, more often used in the context of real estate.
  • An Encumbrance Certificate or EC is a certificate of assurance that the property in question is free from any legal or monetary liability such as a mortgage or an uncleared loan.
  • It is a document issues by the sub-registrar to check if there is any encumbrance on the property like mortgage, charges, etc.
  • The sub-registrar issues the certificate with complete details about the legal dues pertaining to the property. It is important for the property buyer to check whether the property is under mortgage or loan.
  • Searches at the jurisdictional sub-registrar office or the official web portal of the Ministry of Corporate Affairs (if the seller is a company) will reveal information of any registered encumbrance on the property.
  • By way of caution, the purchaser may also issue public notice in newspapers, prior to completing the transaction, calling for claims from interested third parties, if any.

8. Latest tax receipts paid

  • Receipts for property tax bills ensure that taxes for the property are paid up-to-date to the government/municipality.
  • In some jurisdictions, it is mandatory for property taxes to be paid up to date so a buyer could get a Khata issued in his name.
  • It is therefore important for the buyer to make enquiries with the government/municipal authorities to ensure that all the dues are cleared by the seller.
  • The buyer should ask the seller for the latest original tax paid receipts and bills and check the details of the owner’s name, the tax payer’s name, and the date of payment on the receipt.
  • If the owner does not have the tax receipt, the buyer can contact the municipal body along with the survey number of the property to confirm the ownership of the land.
  • The buyer should also ensure that other bills such as the water bill, electricity bill etc. are paid up-to-date.

9. Verify all the required NOC’s

  • If you are buying a flat in a Co-operative Housing Society it is vital to get NOCs or No Dues Certificates from the society. These documents certify that the seller has abided by all the society rules and is not liable to pay any dues. You also need to procure letters from the society stating the year of construction of the building, the built-up area, and the number of floors and lifts. The NOC also signifies that the society has no objection to transfer the Share Certificate to the buyer.
  • It is vital to check if the flat is mortgaged against a loan. If there is any loan on the flat check its debt status. In order to ensure that all the pending dues have been paid back to the bank, ask the seller to get a No Dues Certificate from the concerned bank. This certificate assures that the bank has received all the dues from the seller and there are no more dues related to the flat and you can buy it without any worry.
  • Don’t make any payment towards the resale flat before checking the No Objection Certificates (NOCs) from the competent authorities. NOCs are given out by different establishments such as gas, water board, electricity, safety, sanitation, etc. A seller can’t legally sell a property without providing NOCs to the buyer. Hence, if the seller is not able to provide you NOCs for the flat, it will be wise not to buy it.

10. Know Tax Benefits for Jointly Owned Property

  • One of the important things to note is that if the property is held jointly, individuals can receive additional tax benefits for the same cost.
  • As per provisions of the Income Tax Act, 1961, it is possible to claim a deduction for the interest paid on the housing loan under the head “Income from house property”. In case the house property is self-occupied, an individual can claim a deduction of interest paid on housing loan, up to Rs 2 lakh per FY. However, in case the house property is jointly held, then both the house property owners will be able to claim a deduction for interest up to Rs 2 lakh each per FY.
  • Holding property in joint names will provide a tax benefit to individuals who receive rental income as well. Firstly, the rental income will be divided between the owners. In case one of the co-owners falls in the lower tax slab rate, they can avail the benefit of a lower tax rate on a part of the rental income received. Secondly, the loss from house property for each individual is capped at Rs 2 lakh per FY for set-off against other heads of income of the same FY. Any loss in excess of Rs 2 lakhs will be carried forward to future years Accordingly, all the owners will be able to set off a loss of Rs 2 lakh individually against other heads of incomes.
  • Capital gains derived from the sale of house property are taxable. As per section 54 of the Act, if an individual purchase another residential house property within stipulated timelines, the amount invested in the new house can be reduced from the taxable capital gains. Section 54 explicitly states that the amount invested in one residential house property (two properties in certain cases as introduced by Budget 2019) can be reduced from the capital gains. In case the house property is jointly held, then the capital gains will be calculated for each owner separately and each co-owner can gain the benefit of this provision and restrict the taxable capital gain.
  • As per section 54EC of the Income Tax Act, if individuals invest in specified bonds, they can claim a deduction up to Rs 50 lakh on the capital gains derived from the sale of house property. Considering the real estate prices in India, especially in metro cities, deduction of Rs 50 lakh may not be sufficient to cover the capital gains and individuals will have to pay the tax on capital gains earned in excess of Rs 50 lakh. However, if the property is jointly held, each co-owner can invest separately in specified bonds and separately get a deduction of Rs 50 lakh each on the investment so made.

In India, buying a home is one of the top priorities for people. Property investments are highly capital intensive, and any mistakes made during the process can cause a great deal of trouble to the buyer. This makes it imperative for a buyer to exercise due caution while examining the property documents. With proper legal advice, scrutiny of documents and verification of relevant information pertaining to the property, the buyer can ensure that the investment brings peace of mind and a sense of security.

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