Understanding Option Chain

Delay Property Registration to Save Tax

delay property registration
delay property registration

Do you know if you Delay Property Registration then you can also Save Tax :). At first instance it sounds very confusing and contradictory but it is true. Recently one of my client Ms. Rashmi was planning to register resale property in Ahmedabad. I asked her whether she can wait till April’15 for property registration and she told me that it is feasible. I suggested her to Delay Property Registration till April’15 and she can save tax by doing so. Any property registration during last quarter of Financial Year i.e. from Jan to Mar should be done after due diligence. Reason being we are towards the fag end of financial year. To postpone property registration to next Financial Year may help to save some tax. This saving may or may not be in near future. You might be wondering either i am thinking aloud or what is the logic to Delay Property Registration. How it is linked to saving tax?. Lets understand

Long Term Capital Gain Tax

As i shared in one of my post Capital Gain Tax – Long Term Capital Gain that every Financial Year, Cost Inflation Index value is declared by Govt of India for taxation purpose. Cost inflation index value for FY 2014-15 is 1024. This value has great importance at the time of sale of property, if Long Term Capital Gain Tax is applicable. Reason being at the time of sale, indexed cost of acquisition is calculated as per following formula

                         Purchase Price of a Capital Asset  X  Cost Inflation Index Value of FY of Sale

Indexed Cost = __________________________________________________________

                                               Cost Inflation Index Value of FY of Purchase

Now if you buy property during FY 2014-15 then your Cost Inflation Index Value of Acquisition / Purchase will be 1024. 

Cost Inflation index depend on the inflation trend and figs. It increases with inflation and when inflation cool down, Cost Inflation Index drop. From last couple of years, inflation was on rising trend and this trend continued till H1 of Financial year 2014-15. As a result cost inflation index was also increasing and peaked for Financial Year 2014-15 at 1024. Under current conditions inflation is on declining slope due to global factors like collapse in price of crude oil and low demand. The cost inflation index for FY 2015-16 will be much lower compared to cost inflation index of FY 2014-15. This is the main reason why i am suggesting to delay property registration to take advantage of low cost inflation index of next FY because of low inflation. It will help to increase the indexed cost of property at the time of sale of property therefore lower Long Term Capital Gain Tax.

Lets understand with 2 different examples the financial impact if you delay property registration to next Financial Year 2015-16.

(a) Example A: If you register property in current FY 2014-15

Purchase Price of a Capital Asset = Rs 50,00,000

FY of Purchase: 2014-15

Cost Inflation Index Value of FY of Purchase = 1024

FY of Sale: 2018-19

Cost Inflation Index Value of FY of Sale = 1500 (Hypothetical Assumption)

                            50,00,000  X  1500

Indexed Cost = ________________  = Rs 73,24,218   

                                        1024

Sale Price: Rs 1,00,00,000

Long Term Capital Gain = Rs 1,00,00,000 – Rs 73,24,218 = Rs 26,75,782

Long Term Capital Gain Tax = Rs 5,35,156

(b) Example B: If you delay property registration to FY 2015-16

Purchase Price of a Capital Asset = Rs 50,00,000

FY of Purchase: 2015-16 (Delay Property Registration to FY 2015-16)

Cost Inflation Index Value of FY of Purchase = 902 (Hypothetical Assumption based on Inflation)

FY of Sale: 2018-19

Cost Inflation Index Value of FY of Sale = 1500 (Hypothetical Assumption)

                            50,00,000  X  1500

Indexed Cost = ________________  = Rs 83,14,855   

                                        902

Sale Price: Rs 1,00,00,000

Long Term Capital Gain = Rs 1,00,00,000 – Rs 83,14,855 = Rs 16,85,145

Long Term Capital Gain Tax = Rs 3,37,029

From above 2 examples, you observed that if you delay property registration by 2 months then you can save Long Term Capital Gain Tax of Rs 1,98,127. Though its an hypothetical example and actual savings may vary depending on actual cost inflation index declared for FY 2015-16 and FY 2018-19. One thing is for sure that cost inflation index of FY 2015-16 will be less than cost inflation index of FY 2014-15. Irrespective of absolute savings in Long Term Capital Gain Tax, to delay property registration makes perfect sense specially when inflation is declining.

From Long Term Capital Gain Tax perspective, another logical conclusion of this post is that it is financially beneficial to buy property when inflation is LOW and sell when Inflation is HIGH

Delay Property Registration to save tax u/s 80C

The tax deduction limit u/s 80C was increased to 1.5 lakh in FY 2014-15 budget. Most of the employees have to submit proof of investment u/s 80C to their respective employers by the month of Dec or Jan. In short, all the investment planning for tax savings purpose is completed by mid-January. Not many people are aware that stamp duty and registration charges paid for property registration can be claimed u/s 80C which i shared in my post Home Loan Tax Benefit Deductions. If you register property during last quarter of FY then in all probability, you will not be able to claim tax deduction on stamp duty and registration charges u/s 80C. This tax dedcution can be claimed only for FY in which the stamp duty and registration charges are paid. It makes more sense to delay property registration so that you can plan tax dedcution u/s 80C for next FY to take advantage of stamp duty and registration charges.

Word of Caution:

To delay property registration is not financially beneficial in all the cases. It require proper cost benefit analysis. This option should be exercised only if there is no other financial implication to delay property registration. It is also not advisable to delay property registration under following 2 scenarios

(a) Under Construction Property: For under construction property, the date of allotment is considered as date of property acquisition i.e. Cost Inflation Index Value of FY of allotment will be considered. In this case, it is not at all advisable to delay property registration as it will not help to save tax.

If you are planning to book under construction property then you can delay the same by couple of months to take advantage of cost inflation index of next financial year i.e. book in month of April.

(b) Inflation is dropping: This strategy to delay property registration to take advantage of low cost inflation index works only when the inflation is dropping. In case, inflation is increasing then reverse strategy is beneficial as the cost inflation index of next FY will be high if the inflation is on rise.

As i mentioned that financial benefit to delay property registration vary from case to case basis. It is advisable to do 360 degree financial impact analysis before taking any call in this regard. Again i would like to caution that one shoe doesn’t fit all.

Hope you liked the post. You can post your queries, comments and suggestions through following comments section.

Copyright © Nitin Bhatia. All Rights Reserved.

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vishal
vishal
9 years ago

Well i do not agree with the above analysis. Though the inflation rate is dropping, it is still an inflation and not deflation. Hence the cost inflation index for FY 2015-16 shall be more than FY 2014-15, though the quantum of increase shall be less than the quantum of increase of CII from FY 13-14 to FY 2014-15. To that extent, I believe the above article is misleading.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  vishal

1. Inflation is infact negative only. please check following link
http://economictimes.indiatimes.com/news/economy/indicators/wpi-inflation-in-negative-heres-why-analysts-are-still-worried/articleshow/46261135.cms

2. The base year of cost inflation index is 1981-82 therefore Cost Inflation Index is relative index

3. Recently govt of india has changed the base year for GDP to 2011-12 which will impact inflation and same adjustment will be visible in inflation data therefore cost inflation index of 2015-16 will be adjusted accordingly. Please check following link

http://www.moneycontrol.com/news/economy/base-year-revision-impact-fy14-gdp-at-69-fy13-at-51_1288236.html

4. Last but not the least, as i mentioned in my post that CII is hypothetical assumption only based on current economic scenario and based on recent developments as i highlighted in point 1 and point 3.

Ajay Patil
Ajay Patil
9 years ago

I am planning bu under construction flat this week. All things have been finalized. and i have paid token. I was planning to do registration in march 15 after further paying 10% of agreement amount until i read this blog.

I am in mumbai central suburb (Dombivli) Agreement value is 5400000 for 2bhk flat. and flat has been alloted under my name by builder. (1stQuestion: i have only received the receipt of token and no allotment letter(if there is any i dont know. is there any?)).

possesion expected date is dec 2016.

I read this article thrice actually but still cant seems to know whether it will be beneficial to me to delay registration from march 15th to april 15th.

Can you please elaborate. (sorry. i am a slow learning mouse in this huge real estate jungle)

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Ajay Patil

1. Normally Allotment letter is issued at the time of making 10% payment after booking amount is paid.
2. In your case it will not beneficial as i mentioned the same in my post that for under construction property. It can be beneficial if date of allotment can be postponed to next FY which you discuss with builder.

Sumit Chintawar
Sumit Chintawar
8 years ago

Dear Nitin,

I don’t know if I am asking a question on the right post but it it related.

We have identified a underconstruction 3BHK property in Pune and the negotiated property value is 65Lacs. Builder says that possession will be given by May 2016. I am planning to take a loan of approx. 55lacs for 20 yrs.

1. I want to know if there is a way out to save 1% VAT and 3.67% service Tax if I am ready to do late registration and wait till builder receives completion certificate. In such a scenario…..can Bank provide loan w/o doing registration? Does builder agree for such cases.

Or is there any other way out to save the tax (VAT/Service Tax)?

2. My Carpet Area is 1000 sq.ft and Saleable area is 1300 sq. ft (30% loading). To save tax; builders will be doing registration on builtup area approx 1100 sq.ft. Is it legal? Will there be any problem for me in area during resale?

3. I checked on EMI calcualtor; my interest component for next few years will be in the range
of 5 lacs :(( and tax benefit i can show is only 2 lacs. But i have seen that there is no limit for
tax bebefit component if we show that flat is NOT self occupied. I may get a rent of 12000 in that area. I also have one more house in Pune in my name but for this i have never taken loan (it was a cash buy). How can I make use of this situation to save more tax?

4. Will I get any future tax benefit if I register the property in My Wife’s name OR joint name? Can I get a loan in that case and claim also tax benefit? She is housewife.

Thanks a appreciate your help earliest possible as we want to finalize the property in this week!!

Raam
Raam
8 years ago

Hello Nitin,

I am planning to registration of my flat (booked in Sep 2015). Is it advisable to delay it to Apr 2016 (FY16-17) for savings on LTCG? Do you think inflation index will become low next year? Pls advise

Thanks
Raam

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Raam

You may delay possession for obvious reasons. Cost inflation index will not be less than current year but will help to reduce LTCG.

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