One per cent tax deducted at source (TDS) proposed by Finance Minister on proposed on properties sold over Rs 50 lakhs after 1st June 2013

One per cent tax deducted at source (TDS) proposed by Finance Minister on proposed on properties sold over Rs 50 lakhs after 1st June 2013

Finance minister P Chidambaram has proposed to levy 1 per cent tax deducted at source, or TDS, on properties sold for over Rs 50 lakh. Anybody selling a home for Rs 50 lakh will have to pay Rs 50,000 to the government as TDS.

This will increase the price of residential properties. Shares of India's largest real estate company DLF plunged 6.25 per cent to close at Rs 259 and the benchmark index for real estate sector, BSE Realty Index, plummeted 3.93 per cent to close at 1931.

Analysts fear property transactions in national capital region, Delhi (NCR), and Mumbai may see a further fall, hitting the already struggling sales. The levy of 1 per cent TDS on property value exceeding Rs 50 lakh will curb movement of black money within the real estate sector.

To avoid TDS, property transactions may see a spurt till May 31, 2013 as the new tax law is only effective from June 1, 2013. The service tax abatement on flats with carpet area of 2,000 square feet or more, or value of Rs 1 crore or more, has been reduced to 70 per cent from 75 per cent. This means real estate developers who were paying 12.5 per cent service tax on 25 per cent of the value will now have to pay for 30 per cent of the value.

The effective service tax rate for real estate companies will increase by 62 basis points to 3.7 per cent of the property value. The real estate companies may choose to pass on this extra tax burden to customers.

Analysts say demand for super-premium properties may also get impacted after the government proposed a 10 per cent surcharge on individuals who earn yearly income of more than Rs 1 crore.

A proposal to double surcharge to 10 per cent for companies whose taxable income exceeds Rs 10 crore will hit real estate developers. The tax surcharge is seen as negative for real estate companies, the effective corporate tax rate will increase by 154 basis points to 33.99 per cent from 32.44 per cent. More details here