Buying residential house up to Rs 2 crore? A new Income Tax Relief for you

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A new income tax relief has been announced for homebuyers by the government in 2020-21. The benefit is available to buyers if they purchase a residential real estate of value of up to Rs 2 crore (i.e. below Rs 2 Cr). Clearly, the move has been announced to boost the demand for residential properties.

What is this new tax relief for purchases up to Rs 2 crore?

As per the announcement, the acceptable differential between the circle rate and the agreement value in real estate sale/purchase, for the purpose of income tax has now been hiked to 20% from earlier 10%.

Do note that this limited-period benefit under the Section 42CA, is given only for residential properties. And this relief is available only till 30th June 2021. After that, the threshold will again revert back to 10% unless the government decides otherwise. Also, this is the second revision of the limit. The first was done in February 2020 when the differential was increased from 5% to 10%.

If you don’t know what is circle rate, then here is a brief explainer: Circle rates are the official area-wise prices set by state governments. These rates are considered by the Income-Tax department to decide purchase prices.

Let’s take a simple example to understand how this new income tax relief helps the homebuyers up to Rs 2 crore:

Suppose you buy a new residential flat/house for Rs 60 lakh. But as per the circle rate, the value of the house is Rs 70 lakh. So under the existing income tax rules, if the difference between the actual sale value and that of the circle rate-linked value exceeds by 10%, then the buyer will have to show the as ‘Income from other sources’ and pay tax on it accordingly as per buyer’s income tax slab rates.

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But you may ask why this tax the notional amount? Because in a way, the buyer is getting a sort of notional discount (worth 10% or more) and hence, it should be taxed. Don’t point fingers at me. It’s the rule and that’s how things are in India. 🙂

In our above-chosen example, it works like this. The difference between actual sale consideration (Rs 60 lakh) and circle rate value (Rs 70 lakh) is 16.7% per cent (calculated as Rs 10 lakh / Rs 60 lakh).

With the threshold limit hiked from 10% to 20%, now this 16.7% differential between circle rate value (stamp duty value) and agreement value will not be considered as ‘income from other sources’ and will not be taxed.

Looked at it another way, it means that:

  • Under the circle rate value of Rs 2 crore, the home buyers can buy a house of up to Rs 1.60 crore and avail this new tax benefit.
  • Under the circle rate value of Rs 1.90 crore, the home buyers can buy a house of up to Rs 1.52 crore and avail this new tax benefit.
  • Under the circle rate value of Rs 1.80 crore, the home buyers can buy a house of up to Rs 1.44 crore and avail this new tax benefit.
  • Under the circle rate value of Rs 1.70 crore, the home buyers can buy a house of up to Rs 1.36 crore and avail this new tax benefit.
  • Under the circle rate value of Rs 1.60 crore, the home buyers can buy a house of up to Rs 1.28 crore and avail this new tax benefit.
  • Under the circle rate value of Rs 1.50 crore, the home buyers can buy a house of up to Rs 1.20 crore and avail this new tax benefit.
  • Under the circle rate value of Rs 1.40 crore, the home buyers can buy a house of up to Rs 1.12 crore and avail this new tax benefit.
  • Under the circle rate value of Rs 1.30 crore, the home buyers can buy a house of up to Rs 1.04 crore and avail this new tax benefit.
  • Under the circle rate value of Rs 1.20 crore, the home buyers can buy a house of up to Rs 96 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 1.10 crore, the home buyers can buy a house of up to Rs 88 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 1.0 crore, the home buyers can buy a house of up to Rs 80 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 90 lakh, the home buyers can buy a house of up to Rs 72 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 80 lakh, the home buyers can buy a house of up to Rs 64 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 70 lakh, the home buyers can buy a house of up to Rs 56 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 60 lakh, the home buyers can buy a house of up to Rs 48 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 50 lakh, the home buyers can buy a house of up to Rs 40 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 40 lakh, the home buyers can buy a house of up to Rs 32 lakh and avail this new tax benefit.
  • Under the circle rate value of Rs 30 lakh, the home buyers can buy a house of up to Rs 24 lakh and avail this new tax benefit.
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The move is aimed at boosting the demand for first-time purchases of residential real estate. And I am no real estate expert but seemingly, it looks like a beneficial change for both buyers and developers. It will attract new homebuyers as it reduces the cost of acquisition and as a result, helps clear the inventory of unsold real estate for the developers. The property prices in many parts of India (2020-21) have remained subdued or have declined down slightly. And combined with the historically low home loan interest rates, there seems to be a trigger for buying property as loan rates fall.

Further readings:

If you have a home loan and seems like a burden, then you need to plan and rethink your personal finances. Home loan repayment can be optimized and be one of the components of your financial plan. So if you wish to take control of your finances, smartly repay loans and invest properly for your financial goals, then consider getting yourself a Goal-based Financial Plan. Stable Investor provides financial planning services. Please check this link for all the details and to contact for financial planning and investment advisory services.



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Dev Ashish
A SEBI Registered Advisor and founder of Stable Investor, Dev Ashish is helping people achieve their Financial Goals & Invest profitably.
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