Should i hold or sell my under construction flat?

I recently had a case (as on May 2017) where I am getting possession of a 3BHK flat at Bangalore within a month or two. Well, normally anyone should be really happy their flat is getting ready to move in, however I was a bit confused as I do not plan to stay there myself.

When I booked the flat in April 2013, I had plans to move in there. However, while it was constructing since all these years, things changed and I got a better deal which I leveraged and now that's what I call my home

While acquiring that I tried to sell this one, however could not sell it then as it was still constructing. Anyways … Now I am getting the possession and have two options: either I register and sell it now, Or I keep it on rent for next three years and sell it later (by the way, now the holding period is reduced to 2 years ) I was pretty much convinced that I should be selling that after holding period to avoid short term gains, and the key reason for that was I believed the moment I take possession the nature of property changes from "Right to acquire the property" to "actual property". And this would typically reset the counter for tax calculation.

However, when I posted this in a forum  Asan Ideas for Wealth a gentlemen suggested to have a private chat on the topic to discuss. I agreed and we had a call instead, got following arguments against what I believed

• Even though the nature of capital changes, its actually same. As otherwise, how else would you calculate the acquisition cost of the property itself. You always have to account for the transactions that are done for acquiring the right.
• The moment the flat is allotted, builder cannot legally transfer the same to anyone else as you have the right. Unless of course you forfeit the terms of agreement or cancel yourself. And this is the same right for which banks give loans, as this is legally yours and though they can't mortgage right but they eventually would be able to mortgage the property.
• There have been court rulings on this topic, and the view has been "Right to acquire the property" to "actual property" cannot be treated differently for purpose of taxation. You can do some reading by searching on cost of acquisition of under construction flats.

So, what does all this means to me. Booking amount was paid in April 2013 during pre-launch and the allotment of flat with flat number to me was done around Jan 2014. Hence, considering the second date (during first date I did not had flat number) I have completed three years of holding in Jan 2017, which means If I sell now I would make capital gains and not short term gains.

Hence, I decided to sell that (by the way I am yet to sell this, in case you are interested it's at Republic of Whitefield by Divyasree Builders)

To calculate the cost of acquisition, i should proceed as: Calculate the Indexed value of all the installments paid to the builder and add to that following 

• Cost of taking loan on the property
• Interest paid till that for the home loan on this property (note, since this was under construction i could have not claimed anything so far)
• Any other cost that can be directlly associated with the acquisition of property

Read more in cost of acquisition of house.

Now, once I would have sold the flat, I can either pay tax on capital gains or try to save them. Saving them would mean any of the following

• By investing in another property, which I would not do in any case
• Buy RECI or NHAI bonds. You can buy a max of 50 lakhs of these bonds and hold them for three years @ 5.25% annually. Though your principal gets tax free, you still have to pay tax on the interest you get from them.
• If you can arrange capital losses, you can set them against capital gains

This summarizes all we discussed. Hope this would be of some help. Post your thoughts or questions in case I have not covered certain aspects of the problem.

By the way, all this confusion was because our tax laws does not clearly indicate what should happen. 

Invest or prepay when you have smart home loan?

One of my friend and colleague asked me whether my post on Invest or prepay home loan makes sense for the smart home loans as well. While writing that earlier post, I had this in mind but decided to keep this topic for another blog post, however did not expect this question coming so soon.

Let's first see what are smart home loans, not many would be aware of that. 

• Smart home loans are nothing more than a home loan given to you as an overdraft account with a defined withdrawal power, which is same as the amount of home loan sanctioned based on your re-payment capability, CIBIL score and property evaluations. 
• Max Gain from SBI is the most popular such product in the market. Citi bank has Home Credit, HSBC has Smart home and some other banks also have similar product with different interest rates. 

What are the benefits of smart home loan products?

It allows you to deposit any amount of money in your home loan account. This is different from pre-paying your home loan, it just sits in there and reduces the principal amount for your home loan by that amount and thereby reducing your overall interest liability. 

More on the smart home loans and its features in some other post. Let's come back to our original topic Invest or prepay when you have smart home loan. Answer to this question is little tricky because 

• The kind of liquidity provided to the sum deposited in smart home loan is completely unbeatable, as it's next to cash
• From return perspective, you can consider this sum earning the same interest as your home loan interest, which is actually tax free for you. 

Now, considering these facts, here is my recommendation 

• There are not lot many products in the market that could beat this combination. As some would have interest rate issues and others would have liquidity problems. 
• Hence, you should put your following funds into the smart home loan account: 
• emergency fund and medical fund 
• any money that you have allocated for short to medium term goals (0-5 years) 
• Anything that is allocated for beyond this period should be moved to equity mutual funds as you still have better returns there for that horizon. 

Feel free to post your thoughts and opinions on this topic. 

Cost of acquisition of house

Sale of house is one of the major tax events for any individual. I have covered the tax implications for the sale of house here

Now, another important thing to consider is the cost of acquisition itself for the house. House is not a commodity for which you pay via your credit card, it's typically done over a period and involves huge sum of money which is mostly coming from home loans. 

Cost of Acquisition (COA) is defined as any capital expense incurred at the time of acquiring the capital asset. Hence, it includes all the expenses incurred to complete the acquistion of the asset. 

Apart from the money paid for the house as agreed with the seller, following can be added to this sum for calculating cost of acquisition of the house while computing capital gains

• Expenses done towards registration and stamp duty can be added to the cost of acquisition of the house
• 1% TDS paid to the government on behalf of seller is definitely part of the cost of acquisition and must not be overlooked 
• Expenses incurred on repairs and renovation can be added to the cost of acquisition of the house 
• The interest paid on the home loan taken for the purchase of this house can also be added to the cost of the house. Refer this link for more info
• Brokerage paid to broker is also one of the expense for the purchase of house and can be added to the cost of acquisition

There could be more expenses associated with the purchase and hence you need to make sure you record and add all of them correctly while arriving at the cost of acquisition of the property. 

Tax on sale of house

Selling a house is one of the important tax events that you should consider before committing to the sale. All the profits that you make from the sale are taxable.

Following scenarios will help you understand the quantum of the tax implications you have based on when you sell.

Case	Scenario 1: Sales within less than 3 years of purchase	Scenario 2: Sales after more than 3 years but less than 5 years of purchase	Scenario 3: Sale after more than 5 years of purchase
Example	You bought a house for 50 lakhs and sold the house by 2nd year for around 60 lakhs. You made the profit of 10 lakhs	You bought a house for 50 lakhs and sold the house by 4th year for around 70 lakhs. You made the profit of 20 lakhs	You bought a house for 50 lakhs and sold the house by 6th year for around 80 lakhs. You made the profit of 30 lakhs
Tax Treatment	This whole sum of 10 is treated as a short-term capital gain in your hands and gets added to your income for the year of sale (for joint owners it's added to their respective incomes in the ratio of their ownerships). And hence, its taxed as per your tax slabs	This whole sum of 20 lakhs is treated as long term capital gain and taxed at the rate of 20% after indexation. However, note that there is a catch if you are selling in this window of 3-5 years from purchase, the tax benefits which were claimed earlier will have to be reversed. The tax deduction claimed for the principal repayment, stamp duty and registration under Sec 80C are reversed and the amount becomes taxable in the year of sale. Only the deduction of the interest payment under Section 24B is left untouched	This whole sum of 30 lakhs is treated as long term capital gain and taxed at the rate of 20% after indexation. In this case you have no reversal of the tax benefits that you have claimed till date
Ways to avoid Tax	There is no way you can avoid paying tax on that. You can only set-off the gains against the short-term losses from the same year on the sale of other assets.	If you use the entire gain from the transaction to buy another house within two years or construct another house within three years. In case the entire capital gains are not invested, the balance is charged to long-term capital gains tax. Note that the entire tax exemption will still be reversed in this scenario.	It's all same as scenario two except that there is no reversal of tax exemptions claimed by you.

In each case, you can also minimize the profits that is liable for tax by making sure you have calculated your cost of acquisition of the house correctly.

In case you don't want to invest the capital gain proceeds in another house, but still want to save tax then you have the following options

• Claim exemption under Section 54 (EC), and in this case you should be investing for 3 years in bonds of NHAI and RECL within 6 months of sale of house. The max limit to save via this way is 50 lakhs. 
• You may also set-off capital gains against any long term capital losses from the sale of other assets. And these could be from the same financial year, or the ones you have been accumulating from last 8 years.

So, you would have realized now, you should be keeping your house for at-least 5 years before deciding to sell it, if you are looking at it from tax efficiency perspective. 

Invest or prepay home loan?

I took my first home loan around 2011 to buy a flat in Bangalore, I kept the loan amount to around 30 lakhs and rest of the money i pulled up from my PPF accounts, liquidated our FDs and borrowed from my dad and dad-in-law. 

The strategy that I followed during that time, was to immediately start pre-paying the money that I borrowed from Dad and Dad-in-law and once that was over I continued paying my home loan. Now, it was the time when I dad was retiring from his Bank job and we felt need to 3BHK as i wanted my parents to stay with me. 

It was a easy choice, we just wanted to move in a 3BHK, however the question was to rent or to buy? Well, this lot of people have this on top of their minds, however i will keep this topic for another blog post. But for now, would say we decided to buy a house. 

And, that's when I realized I wasn't doing right paying off my home loan which was at rate of 9%. Why? The reason is simple, I wanted to buy a property again and I had no money to give my contribution as only 80% could be funded by banks or financial institutions. 

This is when I made decision not to pre-pay loans, for 

• This is the cheapest form of money that you can borrow in India today. All personal loans, credit cards, car loans etc. are much more than what home loan provides. 
• You have the benefits on interest payments and principal can be shown in 80C, which no other type of loan has
• You should build your own corpus that you can use to pre-pay anyday you want. But you can use it for any emergencies you may need. I am talking about emergency funds and the equity fund investments here (refer buckets of money), which can give you over 12% tax free return over years and far better than paying off your 9% home loan. 

Well, luckily I bought that 3BHK and could arranged the funds, thanks to my dad as I could again borrow from him having paid back my earlier borrowings. And as well timely sale of my 2BHK which gave me comfortable position to move into a flat that is my present Home now.

So, I would anyday suggest to start investing the money than pre-pay loan. However, if you are not really comfortable with the qunatum of loan that you had to take, would suggest to clear off part of it but don't put all your money to pre-pay it.

Hope, that makes sense to you as well.

PS: In case you have picked up a smart home loan product, then the dynamics of that is a bit different there and hence I have covered this separately in Invest or prepay when you have smart home loan.