In India, it is widely said that marriage and home are made in heaven. This is just due the fact that with the financing, luck also is an important factor. Here we leave the luck part to the astrologers and focus on the financing aspect. Transacting in residential property, whether you are selling it or buying a new one, there are lot of things that need to be taken care for. Normally it happens that we dispose off the old property and buy a new one. During such events there are lots of hidden and unexpected costs that one should be ready to meet.
Let’s discuss charges and expenses of buying or selling a house:
- Capital gain tax on selling property: When you sell a property, you should be aware of the tax implications. Selling a property involves Capital Gain Tax. If a property is bought and sold in within 3 years, the gain will be Short-term capital gain. This will be includes as normal income in your gross total income of that year. If the holding period exceeds 3 years, the gain is termed as Long-term capital gain. The tax rate is flat 20% with benefit of indexation. Also you can invest the gain amount in specially issued capital gain bonds subject to a limit of Rs 50 lakh per year. But investing in bond will have a lock-in period of 3 years. Also if you buy a house within two years or construct a house within three years of selling the previous house you can save this long-term capital gain. But, it is misconception that they can save long term capital gain, by investing in a land. Consult your tax planner for more information. The idea is if you are selling a property to finance a new one, you should be aware that these will be the cost that will go towards taxation.
- Transaction Cost: Whether you buy a new property or sell an older one, the transaction costs are normally heavy. Sometimes the opposite party also insists that you pay for all the transaction cost. These cost involved are stamp duty, appraisal fees, reality valuator’s fees, laboratory fees for checking the construction quality, fees to the lawyer’s etc.
- Statutory Dues: Lot of charges which are collected by the authorities is also required to be financed. These include regularization charges, land usage conversion charges, transfer charges, development charges, map charges or documentation verification charges.
- Middleman’s commission: Normally as per the prevailing trend, for residential property the rate is 2% of the transaction. But this can be negotiated also, and specially when you are buying and selling the property from the same broker. Do not go by the market terms and conditions. Although it is advisable to fix the middleman’s remuneration before the transaction so that he is positively involved.
- Charges associated with the previous property: You must have seen that a vegetable seller sprinkles water on vegetables he is selling after every 5-10 minutes. Basically in order to sell you have to provide a decent quality property also. If it a residential flat or a house you need to get it painted and repaired. This activity will get you better rates and the proceeds can be used to buy the new property. Also sometime the buyer may insist that you improve or modify a certain part of the property. That will involve cost and if not planned properly will lead to cash crunch.
- Foreclosure Charges: If the previous property is on loan, you need to close the loan before you transfer the property. This foreclosure charges can be in range of 1% to 4% of the balance principal amount of the loan. This amount is to be arranged before as the loan company will issue a no-lien certificate only when you have cleared all dues.
- Home Insurance: This is something very important. When you are buying a new property to shift, you also need to get the Home Insurance done. The cost will depend on the size, location, value of household articles and the cost of the property.
- Mortgage Cover: If the new property is bought on a loan, one should also get an additional life insurance cover. Lot of times the loaner insists that with the loan you a take an insurance policy and the premiums will also be added to the loan amount. Beware of such acts and prefer a Term Insurance instead of the normal mortgage cover as in term insurance your cover remains same throughout the loan repayment period, where as in mortgage insurance the cover get reduced as you repay the loan through your EMIs.
- New Loan: The new loan will be on new prevailing interest rates. There may be chances that your older loan may be on less interest and now the expenses would be more. Also, all loan companies charge a flat fee for processing and the documentation. Also some companies insist you to pay an advanced EMI. One should be ready with these expenses.
- Parking and other expenses: If the new property is a flat, you need to pay a lumpsum for life or annual parking fees for parking your vehicles. The fees are decided by the building maintenance and are based on the category of the parking whether you opt for a covered or an uncovered parking. Also you need to shell out more if you are taking a servants room or accommodation.
- Utilities: When you are shifting to a new residence, you may also be required to take new utility connections like, electricity, telephone, cooking gas etc. if you combine them, there will lot of money that you will have to arrange as all these utilities providers will charge security deposit for the new connections.
- Moving Expenses: Finally you have completed all formalities and ready to shift to your new home, but you should be ready with expenses pertaining to new furniture, curtains, electronic goods etc. It is human tendency that we will not stop ourselves to spend when we are doing something auspicious. But these small expenses make a larger sum and burn holes in the household budgets.
Acquiring a property is a very important thing like marriages. And same as it happens in marriages one may be required to pay for something which is unexpected or hidden. Remember acquiring a property is also a celebration time. Check for all the above mentioned points before you transact. After all no one would like spoil the party just because he ran short of cash or was not anticipating the hidden surprises.
This article is written by guest author Madhupam Krishna. A Post Graduate in Finance, currently he heads sales function for Rajasthan for Principal PNB Mutual Fund. This article also got published in Business Bhaskar.Disclaimer: This post represents the opinion of its author only, and does not in any way reflect the opinions of the author’s employer, The Financial Literates or the other authors who write content for this Website.