Tax- Holding period matters a lot in property transactions
January, 16th 2015
When an individual takes the benefit of the repayment of the capital on a housing loan then there is an additional condition that comes into play. This is the holding period of the property as a sale of the property before completion of the specific time period would ensure that there would have to be reversal of the earlier tax deduction and this could lead to a tax implication for the individual. The question for the individual is the manner in which the benefit can be claimed and what would be the implication for a person in terms of compliance with the necessary regulations.
Holding period implication
The time period for which a house property is held by an individual is a very crucial aspect as far as the tax angle is concerned. In terms of the capital gains working the property has to be held for a period of 3 years so that it would be classified as a long term capital asset and hence the gains if any would have a lower tax rate applicable to it. On the other hand when it comes to the question of claiming the repayment benefit for the housing loan on the property then it is essential that the property is held for a period of 5 years. This means that there is a longer time period that is present when the capital repayment is considered as a benefit under Section 80C of the Income Tax Act.
When it comes to the question of which of the two areas are important then it is likely that in most cases the capital gains impact would be significant. This is because the ticket size of the house property value is large and hence there would be a large gain that would have arisen in case this is sold and there is some capital gains that is generated on the sale. As against this the benefit that is taken on the section 80C would be significantly less in comparison. This would be because till all these years the benefit was restricted to Rs 1 lakh a year and in the current financial year this has been raised to Rs 1.5 lakh a year. It is likely that there would be some other head under which a part of the benefit would be covered and hence there would be a very small amount for which the housing loan repayment would have been used.
It is always important for the individual to ensure that they have planned for the implication of their move before they actually finalise on a particular step. This is important because in terms of the time period when this has to be sold then the three year limit is very crucial. Unless there is an emergency whereby there is no other option but to sell this before this time it should be ensured that the three year limit is not breached.
It will help in the process of saving a lot of tax. It also opens up the option for the individual to undertake some other steps that would help in saving of tax. Investments in bonds under Section 54EC is possible only if the gains are long term capital gains. Thus there could be some more options that open up in terms of the saving of tax and hence these would be important.
Also the individual should ensure that they have some idea of the time for which they would hold the existing property because if this would be sold before five years then they can plan their Section 80C investments in such a manner that the housing loan repayment benefit is not claimed.