TAXATION OF REAL ESTATE

TRANSACTIONS
1

MANOJ PANDIT
ADVOCATE

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Income From House Property

2

Rental Income - Building or land appurtenant thereto -

Ownership
Sub-letting Income
Rental Income stock-in-trade
Compensation received in redevelopment project
Renting of Factory Premises
Renting of Vacant Land
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Interest Deduction Allowable

3

Tax Deduction
Self occupied
Let out Property
allowed on home loan
Property
Repayment
Interest
Principal Interest
Principal
Loan for Construction or Purchase
Completed within 3
Rs 2 Lac Rs 1.5 Lac No Limit Rs 1.5 Lac
years
Completed after 3
Rs 30000 Rs 1.5 Lac No Limit Rs 1.5 Lac
years
Loan for Repair, Renewal, Reconstruction
Completed within 3
Rs 30000
NIL No Limit
NIL
years
Completed after 3
Rs 30000
NIL No Limit
NIL
years
Lock in 5
Lock in 5
Reversal of Tax
NA
years
NA
years
Benefits
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Sec 35AD Incentives for Investment

4

Section 35AD Investment-linked tax incentive -

100% deduction (other than on land, goodwill and

financial instrument) incurred wholly and
exclusively, for the purposes of the specified
business during the previous year in which such
expenditure is incurred.

Housing - slum redevelopment or rehabilitation

(CG/SG)
Housing - affordable housing scheme (CG/SG) (150%)
Hospital - with > 100 beds for patients. (150%)
Warehousing - storage of sugar.
Hotel - two-star or above category as classified by CG.
Cold chain facility. (150%)

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43CA of the Income Tax 1961

5

43CA.Special provision for full value of consideration for

transfer of stock in trade

Where the consideration is less than the value adopted by

Stamp duty authority, the value for computing profits and

gains, the value adopted by Stamp duty authority shall be the
full value of the consideration.
Where the date of agreement fixing the value of

consideration and the date of registration of asset are not the

same, the value adopted by Stamp duty authority on the date
of the agreement may be taken.
The value adopted by Stamp duty authority on the date of the

agreement may be taken only in a case where the amount of

consideration or a part thereof has been received by any
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mode other than cash on or before the date of agreement.

50B of the Income Tax Act 1961

6

The term slump sale has been defined to mean a transfer of a

business undertaking or a business for a lump-sum consideration with
all its assets and liabilities, without values being assigned to
individual assets/liabilities.
Net Worth :Computation of Slump
Add
Sale Transactions
WDV of Depreciable assets
XXX
Sale Consideration
As per income tax *
XXXX
Other Assets at book value *
XXX
Less Net Worth
Less:
XXXX
Liabilities at book value
XXX
------*Revaluation
of assets should
STCG/LTCG
-----be ignored
of)
XXXX
Net
Amountpurposes
(net worth
computing the net worth
XXX
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P Management Consultants Pvt. Ltd.
-------

Sec 50C Full Value of Consideration

7

Transfer of a capital asset, being land or building or both, is

less than value adopted stamp valuation authority shall, be

deemed to be the full value of the consideration.
The Assessing Officer may refer the valuation of the capital

asset to a Valuation Officer and where any such reference is

made.
If valuation by the Valuation Officer exceeds the valuation by

the stamp valuation authority, the value so adopted or

assessedby such authority shall be taken as the full value of
the consideration.

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Exemptions Long Term Capital Gain

8
Long Term Capital Gain
Exemption

u/s 54

u/s 54B

u/s 54EC

u/s 54F

Who can claim exemption

Individual/HUF

Individual /HUF

Any person

Individual/HUF

Eligible assets sold

A residential
House property
(minimum holding
period 3 year)

Agriculture land
which has been
used for
agriculture

Any long-term capital

assets (minimum
holding period 3
years)

Any long term asset

(except residential house
property)

Assets to be acquired for

exemption

Residential house
property

Another agriculture
land
(urban or rural)

Bond of NHAI or
REC

Residential house
property

Time limit for acquiring the

new assets

Purchase : 1 year back or

2 year forward,
Construction: 3 year
forward

2 yrs forward

6 months forward

Purchase :1 year back or

2 year forward,
Construction
3 year forward

Exemption Amount

Investment in the new

assets or capital gain,
which ever is lower

Investment in
the agriculture land
or capital gain,
which ever is lower

Investment in the new

assets or capital gain,
which ever is lower
(Max. Rs. 50
Lac in Fin. Yr.)

Investment in the new

assets / Net
Sale consideration
X capital gain

Whether "Capital gain

deposit account scheme
"applicable

Yes

Yes

not applicable

Yes

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Section 56(2)(vii) of Income Tax 1961

9

56(2)(vii) applies when an individual or HUF in any

pervious year, receives from any persons on or

after 01.10.2009,
Property Received

Amount Liable To Tax

Without consideration,
the stamp duty value >
Rs. 50000.

The stamp duty value of

such property; movable
property

For consideration, which

is less than the stamp
duty value by > Rs
50,000

Difference the stamp duty

value and the
consideration

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Sec 80IA & 80IB

10

Sec 80IA: 100% profits of infrastructure

facility(Highway project including housing or other

integral activities) for 10 consecutive years out of 15
initial years.
Sec 80IB: 100% profits from the approved project of

an undertaking developing and building housing

project facility. (The conditions of 1 acre plot is not
applicable for reconstruction or redevelopment of
existing buildings notified by the board under scheme
framed by CG/SG)
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Set off Provisions

11

Incom
e

Salar
y

Incom
e
from
HP

Nonspecu
lative
Busin
ess

Specu LTCG
lative
Busin
ess

STCG

Race
horses
Incom
e

Other
Source
s

HP
Loss

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

LTCL

No

No

No

No

Yes

No

No

No

STCL

No

No

No

No

Yes

Yes

No

No

Yes denotes loss can be adjusted with respective income.

No denotes loss cannot be adjusted with respective income.
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Sec 194IA TDS on Property Purchase

12

Sale of
immovable
property

>/=50
lakhs
no

yes

TDS
u/s
194IA

Buyer to
Deduct
TDS @ 1 %

NO
TDS

With effect from 1stJune, 2013 TDS @ 1% by the

buyer at the time of making payment.

TDS u/s. 194 IA to be paid within a period of seven
days from the end of the month in which the
deduction is made.
PAN of seller as well as buyer should be mandatorily
furnished in an online Form 26QB.
TDS certificate to be issued in Form 16B.
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Sec 194IA TDS Illustration

13

Mr. A
Seller

Deposit
Rs
60000
before
7.6.201
6

Mr. B
buyer

Mr. B will deduct Rs

60,000 i.e. 1% of
60,00,000 and pay the
balance 59,40,000 to Mr. A
Provide TDS
Certificate

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Form
16B

To be
furnishe
d online
in Form
26QB

Sale Consideration >

50 Lac e.g. 60 Lac
Date 25.05.2016

Taxation of REIT
14

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Structure of REIT
15

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Conditions of REIT
16

All assets should be situated in India

REIT Assets to include:

land and any permanently attached improvements to it

(whether leasehold or freehold) including buildings, sheds,
garages, fences, fittings, fixtures, warehouses, car parks,
etc
Transferable Development Rights (TDRs)
any other assets incidental to the ownership of real estate
assets Not forming a part of REITs
hospitals
hotels, with project cost of more than Rs 200 crores each in
any place in India and of any star rating. 3-star or higher
category classified hotels located outside cities with
population of more than 1 million
common infrastructure for industrial parks, Special
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P Management Consultants
Pvt.(SEZs),
Ltd.
Zones
tourism facilities and agriculture

Conditions of REIT
17

Convention centers, with project cost of more than Rs 300

crores each
Agricultural land or vacant land
Units of another REIT
Mortgages not eligible to be REIT Assets
At least 80% of value of the REIT Assets to be invested in
completed and rent generating properties. Specific conditions
for investing balance funds
REIT shall invest in at least two projects and investment in one
project should not exceed 60% of the value of assets owned
by REIT
REIT Assets could be held directly by the REIT or via SPVs
REIT to hold not less than 50% equity and controlling interest
in SPVs
SPV to hold 80% equity in REIT Assets
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Multi-layer SPV structure may not be permitted and multiple

Unit Holder
18
A unit holder can be:

any person excluding the Trustee, Principle Valuer or another REIT

foreign investors are also permitted to invest in a REIT, subject to
permissions from the Reserve Bank of India (RBI) and Government of India
minimum unit size and trading lot size of REIT is Rs 1 Lac. However, the
minimum subscription amount per investor (upon public offer) is Rs 2 Lac
all unit holders to have equal voting right
experience requirement - at least 5 years of experience in real estate
industry (per sponsor)
where sponsor is a developer, he must have at least two completed projects

Lock-in period:

three years from the date of listing for 25% of the total units of the REIT
one year in the case of units exceeding 25%
collectively hold minimum 15% of the outstanding units of REIT, throughout
the life of the REIT

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Who can be Sponsor

19

Responsible for setting up the REIT. Person swapping their shares of SPV for

units of REIT are also regarded as Sponsors

REIT can have maximum three sponsors, each holding at least 5% of the

units of the REIT, post-listing

Net worth requirement - at least Rs 100 crores collectively for all sponsors,

and individually each sponsor to have net worth of at least Rs 20 crores

Appointing Manager of the REIT
Given a fiduciary responsibility of ensuring proper utlisation of subscription

amount, ensuring that all material contracts entered into on behalf of REIT
are legal, valid, binding and enforceable and overseeing activities of
Manager and obtaining quarterly compliance certificates
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Who can be Principal Valuer

20

Need to be a registered valuer as per Section 247 of the

Companies Act, 2013

Should have experience of at least five years in valuation of real

estate
Must be engaged to provide a valuation of assets for every

purchase or sale of asset by REIT

Responsible for ensuring impartial, true and fair valuation of

assets of REIT
Cannot accept valuation linked remuneration
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Taxation
21

Nature of income

Taxation for REIT

Taxation for unit

holders/ sponsor

Interest from SPV

Exempt

Taxable as interest
income
Withholding tax to be
deducted by REIT on
distribution (Nonresident 5%, Others
10%)

Dividend

Exempt

Exempt

Capital gains earned

by REITs on sale of
share of SPV

At the rates
applicable to capital
gains

Exempt

Capital gains earned

by unit holders on
sale of REIT units

Not applicable

For unit holders (other

than Sponsor) - longterm exempt - shortterm 15%

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Taxation
22

Nature of income

Taxation for
REIT

Taxation for unit holders/

sponsor

Capital gains earned Not applicable

by Sponsor on sale of
REIT units

For sponsors (for units

acquired on account of swap
of shares of SPV for REIT
units) - long-term 20% (if
units are held for more than
24 months) - Short-term
30%; (cost of SPV shares and
period of holding of SPV
shares to be considered)

Other income

Maximum marginal rate

Maximum
marginal rate

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Taxation Issues
23
Tax efficiency can be critical to the success of REITs . While the basic framework for

one-level taxation has been laid down by the Finance (No. 2) Act, 2014 and
supplemented by the Finance Bill, 2015 certain challenges persist in structuring a
REIT. It is critical that the government considers further amendments to the Income
tax Act to provide a tax efficient and stable regime for REITs in India. Some of the
key challenges in the current taxation regime at various levels of the REIT structure
are elaborated below:
Provisions are made to exempt the transfer of shares of the SPV by the sponsor in

exchange of REIT units and not direct transfer of the property to the REIT. Holding
property can be beneficial as it saves on SPV level distribution taxes, however the
lack of exemption to sponsors is likely to deter direct holding of properties by REITs .
The exchange of shares of the SPV for units of REIT would happen at the market

value and could result in profit in the hands of the Sponsor, which could entail tax
liability in the hands of the Sponsor under the provisions of Minimum Alternate Tax
(MAT). Since exchange of shares for REIT units is merely to set-up the REIT and is
not per se a commercial transaction, the Government may consider exempting the
same from MAT.
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Taxation Issues
24
In a case where the SPV is primarily funded by share capital, normal

corporate taxes would be applicable at the SPV level and any distribution
of profits by the SPV would entail distribution taxes. Exemption from
distribution taxes should be provided to the SPV to the extent it distributes
dividends to the REIT.
Requirement of holding the REIT units for more than 24 months to qualify

as long-term capital asset may act as a disincentive for investors to invest

in the REIT vis--vis listed equity shares where the period of holding to
qualify as long term capital asset is more than 12 months. Parity is
required to make it lucrative for investors to invest in units of a REIT.
The REIT should be made a complete pass-through vehicle as against the

current provisions which allows pass-through only with respect to interest

income from SPV and rental income which is taxed in the hands of the
investors directly while capital gains and other income is taxed at a REIT
level and exempt in the hands of the investors.
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Other Challenges
25
The property market is highly localised and the transactions are affected by local

taxes. At present the property taxes in India are on higher side. This could be
detrimental to the performance of the Indian REITs (I-REITs ) directly impacting
its yield and thus its attractiveness to the investor.
Moreover, stamp duty in India is also on higher side and is a subject matter of

states. The rates and procedures are also not standardized. As a result, many a
time, the property transactions are not registered and property is transferred
through power of attorney. This creates ambiguity over the title of the property.
Due to the aforementioned reason, the assets available for the I-REITs initially

could be limited. Moreover, the high stamp duty structure will also affect the
capital gains of the IREITs assets.
The I-REITs are similar in principle to mutual funds except the underlying security

(at least 90 per cent) would be in the form of physical property. To offer a level
playing field with the existing MFs, the tax structure of the REITs also needs to
be made similar as applicable to mutual funds.
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REITs Vs. Investment Avenues

26
In India the investors can invest in real estate through individual

property, listed stock of real estate developers, private equity funds

and through real estate mutual funds. Though real estate mutual
funds were introduced by the SEBI in 2008, there are not many active
real estate mutual funds.
Investment in individual real estate property offer benefits such as tax

advantage, leverage and control over the property.

Nevertheless, while considering individual real estate one has to

consider factors such as unique nature of property, high transaction

costs, and restricted market knowledge (which is often local and
restricted).
Control over the property comes with a cost of drain on time to

manage properties. Moreover, for commercial real estate, as major

transactions are executed in private domain, detailed knowledge of
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rent rolls, maintenance expenses and other critical data is not widely

REITs Vs. Investment Avenues

27

Furthermore, these assets are illiquid and smallest possible

purchase unit is likely to be above the means of many investors

and this also results in concentration risk.
Another avenue to take exposure of real estate as an asset class

is through traded equity stock of real estate developers. This is

relatively efficient way of taking exposure of real estate than
investing directly in properties; however, this is much more riskier.
The stock in a concern is highly correlated to market risk (as

compared to individual property) and this also exposes the

investors to business and project risk of a single real estate
developer.
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Benefits
28

In India, in the absence of a regulator for the real estate

sector, introduction of REITs is a welcome move that will help

bring in:

Liquidity

Transparency

Better governance

Organised platform for retail investment

An ecosystem, which is professionally managed and

protects investors

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InvITs
29

Infrastructure Investment Trusts (InvITs) make direct

investment in infrastructure facilities which are yielding

income e.g. Toll Road, Railways, Inland waterways, Airport,
Urban public transport. InvITs will allow infrastructure
developers to monetize specific assets, helping them use
proceeds for completing projects of theirs stalled for want of
funds.
Structure of InvITs is quite similar to REITs . The main

difference is InvITs make investment into infrastructure

facilities whereas REITs make investment in commercial real
estate properties.

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Thank you
30

MANOJ PANDIT
Advocate

M & P Management Consultants Pvt. Ltd.

A-305, Durian Estate,
Goregaon Mulund Link Road,
Goregaon East
Mumbai 400063
India
Mail: mandpca@gmail.com
Cell: 9820491848
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