If you are among the many home buyers looking for a property to purchase right now, there is a recent RBI directive that you should be aware of, that will impact your cash flows management.
As per one of the latest notifications by the RBI to banks, stamp duty, registration charges and taxes such as VAT and Service Tax are to be excluded from property value when considering how much of a loan to give the consumer.
Let’s see what this means:
What is Stamp Duty?
Stamp Duty is nothing but a tax levied on documents. Different levels of stamp duty are payable on different forms of documentation. If a document is stamped, it is considered legalized and can be used in the future as having evidentiary value in Court.
In Maharashtra, stamp duty is 5% of property value.
Registration charges are 1%. Also consider VAT and Service Tax.
On what properties is service tax applicable? What is the rate of service tax?
A builder or developer is also now liable to pay service tax if any payments are made by buyers, before the completion certificate is given. This cost is also passed on to buyers.
If payments are made after the completion certificate is given, then no service tax is payable. Hence if a property is under construction and you as a buyer pay a booking amount, this is considered payment towards sale consideration before completion certificate is given, and hence you will be liable to pay service tax at the rate of 10.30% of 25% of the sale value i.e. 2.575% of sale value.
What is the rationale behind the RBI notification?
In December 2010, the RBI indicated to commercials banks that they should not lend more than 80% of property value in case of properties worth more than Rs. 20 lakh, and not more than 90% for properties worth less than Rs. 20 lakhs. This was put in place to keep a check on what the RBI thought was excessive lending to the real estate sector.
On Feb 3rd this year, this notification came about because it was seen that in order to artificially inflate the property value so as to give bigger loans, stamp duty, registration and other charges were included as property value, which technically they are not. Adding these charges overstated property values, enabling banks to give bigger loans. Hence, this notification came about.
How does the RBI notification impact you?
Earlier, when you applied for a home loan, certain amounts were included in the property value on your loan application, these included stamp duty, registration charges, VAT and other government taxes. Now, this is all excluded. This means that you have to pay stamp duty, registration charges, VAT and in the case of under construction properties service tax too, out of your own pocket.
So while earlier a bank would give you up to 80% of your applied amount as a loan, depending on your home loan eligibility, now you will get about 70 to 75% as a loan, and will have to put up 25 to 30% of the total value as down-payment, stamp duty, registration and other charges.
So here, your cash flow management can become key.
(Read our article on How to Build Wealth with a Loan)
How do banks decide how much loan to give you?
A bank decides your home loan eligibility based on quite a few factors. They will consider your age, whether you are salaried or a business person, how much your monthly income post tax is, your monthly expenses, your family, your spouse’s income if any, and most importantly your existing liabilities.
The idea is to assess your surplus monthly income to see how much of a home loan you can service without stretching yourself. They want to know basically whether or not you are a safe borrower for them.
Let’s see how this impacts you with an example.
Suppose our favourite fictional character Mr. Shah wants to buy a house.
He has identified an under-construction property worth Rs. 50 lakhs.
|Property Value: || Rs. 50 lakhs |
|Stamp Duty @ 5%: || Rs. 2.50 lakhs |
|Registration Charge @ 1%: || Rs. 0.5 lakhs |
|VAT @ 1%: || Rs. 0.5 lakhs |
|Service Tax @ 2.575%: || Rs. 128,750 |
The total value to be paid will be Rs. 54,78,750.
Before the RBI notification, a bank would give Mr. Shah up to 80% of this value as a home loan, and Mr. Shah would put up 20% of the value on his own. This means Mr. Shah has to put up Rs. 10,85,750 as down-payment.
After the RBI notification, all these charges are excluded from loan amount.
The loan will be only up to 80% of the property value, excluding stamp duty, registration charges, VAT, service tax and other charges.
So the bank will offer Rs. 40 lakhs as a loan.
The remaining Rs. 14,78,750 will have to be paid by Mr. Shah.
It looks like this change is here to stay. The only way for you as a buyer to move, if you definitely want to buy a property, is forward. From a financial planning point of view, be sure to have your down-payment ready, taking into consideration the additional charges. You can build up your mutual fund portfolio to plan for your down payment, if it is a few years down the line.
Remember, since you are now taking a home loan for a smaller amount, your EMIs will also be lower, so think of that as a silver lining to your future cash flows.
Also keep in mind the cardinal rule when taking on a major liability: have adequate term insurance. This way in case of any unfortunate event, the loan will not devolve on to your dependents.