Delay Property Registration to Save Tax

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.