What are the tax benefits that you will have to forego if you have invested in Noida Extension?
Visbikrant Minocha, a software engineer, bought an apartment for R20 lakh n Noida Extension for which he took a home loan (80% of the full amount) from a leading bank.
The Supreme Court ruling quashing the land acquisition by the UP government in Shahberi village came as a shock and by then he had already utilised 30% of the loan (R4.8 lakh).
Following the developments at Noida Extension, he will now have to repay the utilised loan amount and face the risk of interest and penal charges for foreclosure of loan. If he thinks he can repay the loan after getting a refund on his apartment from the builder, he might have to wait for it. This means that Minocha may have to incur a running interest/penal cost till he repays the loan.
Due to the above loan foreclosure, Minocha may lose tax benefits on the accumulated interest cost of R50,400 (ie interest at the rate of 10.5% on R4.8 lakh loan money he has availed of to date) which would have otherwise been available from the year of possession.
“However, this loss can be avoided if the builder and the banker provide an option to the individual to opt for another property through a transfer of loan by a tri-partite agreement,“ points out Poorva Prakash, director, Deloitte Haskins & Sells.
There would not be any other adverse tax consequence on account of foreclosure of the loan because Minocha would not have claimed a tax deduction/ exemption on pre-EMI paid on loan taken for a property under construction.
Says Sumit Seth, partner, Seth & Seth chartered accountants, “Where property is acquired or constructed with borrowed capital, the interest payable on the Continued on page 03 WEIGHING THEIR OPTIONS: WHAT WILL THE BUYERS DO? Kshitij Kacker I bought an apartment in Mahagun MyWoods in Noida Extension last November. This was a 3BHK apartment. I do not wish to pull out from the project as the builder has assured me that the high-rise project is safe. Also, I may not get a similar apartment at the same price. I will wait and watch Sachin Bharadwaj I booked a 3BHK apartment in Amarapali Centurian Park last year.
These are low-rise apartments. I have already paid up 10% of the amount as initial payment. Since banks have now stopped disbursing loans and further payments, how am I to service my loan? How will I finance my apartment? Ashish Sinha I booked two flats in Mahagun Mywoods for R22.5 lakh each and have paid up nearly R45 lakh for both the apartments. Following the Supreme Court's ruling quashing the land acquisition by the state government, I have two options to withdraw or shift to another project by the same builder cut out and keep takefive Apartments under construction Should you invest? It makes sense to invest in an under-construction property by a credible and reputed developer but make sure the land title of the plot is clear The disadvantage: One's money is locked in a non-performing asset. If one invests in an under construction property, there may also be delivery delays or sometimes even defaults Before buying: Check the developer's credibility and market standing. The location is an important factor. Choose a location that holds future appreciation potential The finance option: While going for a home loan from a bank, choose a construction linked payment plan which is structured on a project-toproject basis If in doubt: For the home buy, do not hesitate to take the help of a qualified attorney experienced in handling real estate-related issues. By doing so you can be assured of a hassle free purchase.
capital borrowed for the period prior to previous year in which the property has been acquired or constructed, is allowed as deduction in computing `income from house property'. The said deduction is allowable in five equal yearly installments commencing with the year in which the construction of the property is completed. In the case of foreclosure of loan on account of cancellation of allotment, the assessee will stand to lose this deduction and be unable to get any tax benefit in respect of the interest already paid.“
“It may also be difficult to get a refund on service tax,
It is important to note that there may be significant tax consequences in case the buyer made an investment in Noida Extension out of the proceeds from the sale of a residential property he had owned previously. In that case, he would have claimed capital gains exemption for reinvesting the sale proceeds in the Noida Extension property. This exemption is available on the condition that the new property either be constructed within three years or be purchased within two years from the date of sale of the other property.
In the given scenario, it is quite likely that such an individual will be unable to invest in a new property within the stipulated time prescribed under the tax laws. This could be due to several reasons, such as delay in refund by the builder. It could also be due to non-availability of suitable options with the buyer for making a new investment. In case the individual is unable to immediately make a fresh investment, say, within two to three years, then it would result in reversal of the capital tax exemption on expiry of the prescribed time limit. The benefit claimed on account of capital gains exemption, too, will be taxed as income in the hands of the individual. To avoid this adverse tax consequence, the buyer needs to purchase a new property within the stipulated time available under the tax law.
In this regard, builders and bankers should be forthcoming in providing solutions to the buyer to mitigate this burden. This can be done if the bankers and builder agree to offer a transfer of loan option to a new project of the builder. Alternatively, the builder can offer the buyer an option to invest in a new housing project that would be completed within the same time span as the existing Noida Extension project, adds Prakash.
Also, an apartment that was sold a year ago, for say, R2000 per sq ft, may have witnessed an appreciation since its launch. If the prevailing market price is, for instance, R3000 per sq ft and the developer agrees to buy it back at this price, then the gain of R1000 per sq ft shall be taxable as short-term capital gains tax (since the holding period was less than three years).
If the buyback price is equivalent to the booking price (implying that there is no monetary gain made by the buyer), which is likely to be the case, then there will be no tax implications. However, if the buyback price is more than the booking price then the gain shall be taxable.
According to Neeraj Bansal, director, KPMG, the tax implication will depend on whether the homebuyer opts for refund of the money paid with interest or opts for transfer to another project.
In the first scenario, the interest earned shall be taxable, whereas in the latter, capital gains tax (short or long term, depending upon the time period since booking) will be computed considering the buyback price offered by the developers. If the buyback price is equivalent to the booking price (implying that there is no monetary gain in the hands of buyer) then there will be no tax implication. However, if the buyback price is more than the booking price then the gain shall be taxable. The implications would depend on contractual terms and whether the activity is being carried out as business activity or not.
