How taxes and fees add 7-12% to your property purchase cost

Think you’ve nailed your property budget? Think you’ve accounted for every expense in buying your dream home? Think again—overhead costs like taxes and government fees could add a hefty 7-12% to your final bill.

The biggest cost is that of stamp duty, a tax levied by state governments on the sale of property. Currently, the highest stamp duty is levied by Meghalaya government at 9.9% of the property value, followed by Kerala and Madhya Pradesh at 8% and 7.5%, respectively.

Among the major cities, Hyderabad has the highest stamp duty of 7%. In Gurgaon too, male buyers have to pay 7% in stamp duty, whereas the rate is 5% for female owners and 6% in joint ownership. Mumbai and male buyers in Delhi pay 6%. Female buyers in Delhi enjoy a lower stamp duty of 4%.

The registration fee, another mandatory government charge, varies across states and ranges from ₹15,000 to 3% of the property value.

In addition to the fixed charges of stamp duty and registration fees, buyers often incur various miscellaneous costs. While not mandatory, these expenses arise from administrative processes and paperwork typically required during the property purchase.

Also read: So you’re looking to buy a new home. Should you think like SRK or Warren Buffett?

Mint breaks down the overhead costs involved in property purchase and lists out government taxes in five major metro cities–Delhi, Gurgaon, Bangalore, Mumbai and Hyderabad (see grfx).

Overhead costs

A prospective buyer can expect to pay broadly under five heads–stamp duty, registration fee, brokerage, lawyer’s fee to vet the property papers, and notary fee.

As part of government fee, in some cities, apart from the stamp duty, additional charges in the form of transfer duty or metro cess is also levied. For instance, Mumbai charges 1% of the property value as metro cess. Bangalore has a 10% cess.

“This cess is levied on the stamp duty rate. For example, on a property priced ₹50 lakh, the buyer has to pay 5% or ₹2.5 lakh in stamp duty and ₹25,000 cess on the stamp duty,” said Vivek Rathi, National Director- Research, Knight Frank India. “This cess is applicable on both ready-to-move and under-construction properties,” he added.

In addition to the cess in Bangalore, there is also a 2% and 3% surcharge levied for properties above ₹35 lakh in urban and rural areas, respectively.

Next up are the voluntary but necessary costs in the form of brokerage, which is typically 1% of the property value, a lawyer for property verification, and a document writer that prepares the sale deed.

Also read: The home you want to buy already has a loan on it. What should you do?

Take for instance Gurgaon-based Karan Sehgal, who during a recent purchase of a condo shelled out nearly ₹80,000 just on administrative processes.

“I paid ₹50,000 to a lawyer to vet the chain of papers and another ₹15,000 to prepare a sale deed and arrange stamp duty. At the time of registration, apart from the ₹15,000 registration fee, an additional ₹10,000 had to be paid to the person leading the registration at the office of the registrar. This is not a government fee and rather a personal service which all homebuyers have to bear,” Sehgal said.

Legal fees can vary depending on the complexity of the transaction and all homebuyers should expect to spend at least ₹5,000 just on property verification. Buyers who take a loan have to pay a legal fee, which also includes valuation charges, to the bank as well, so they should not hire an expensive lawyer at the outset for property verification to avoid paying heavily twice.

These costs, however, are saved in an under-construction property as the property is directly bought from a developer. However, under-construction properties entail a steep 5% GST (Goods and Services Tax).

“GST is paid at the time of getting the occupancy certificate. In a newly built apartment or independent house, the developer should have paid GST on all unsold units at the time of obtaining occupancy certificate, hence they would include the amount also in the property cost and quote the price to the buyer,” said Purna Chandra Reddy Gundala, managing director, Canny Life Spaces, a Hyderabad-based construction company.

“For the same reason, GST is not levied on resale properties as there is no occupancy certificate to be obtained,” he added.

The GST on under-construction properties can easily push the total overhead costs to 9-10% or more of the property value. In Mumbai, Rachit Chhokera paid 11% in government fee and taxes during a recent purchase. “The duties and taxes are significant enough to be thought upon while making a purchase as it impacts the overall decision making,” he said.

What the loan covers

These costs should be thoughtfully considered by the buyers while budgeting for a property purchase as these have to be paid out of pocket. A home loan doesn’t fund any costs associated with home ownership.

“Banks typically finance 75-90% of the property’s value. However, it doesn’t cover the mandatory stamp duty and registration charges as well as the costs associated with property title verification, legal advice and documentation,” said Abhishikta Munjal, chief risk officer, IIFL Home Finance, adding that proper planning for these expenses ensures that buyers are not caught off-guard during the purchase process.

Also read: How millennials can use these financial hacks to buy their first home

However, the saving grace is that when an owner sells a property, they can add all such expenses borne at the time of purchase to the acquisition cost to calculate capital gains.

“Both, the government fees of stamp duty and registration and the other charges of brokerage, legal fee, society transfer fees etc, can be added to the cost of acquisition,” said Gautam Nayak, partner, CNK & Associates LLP.

Doing so can help in reducing the capital gains liability at the time of property sale. For example: you buy an apartment for ₹1 crore and pay ₹10 lakh in overhead costs. After five years, you sell the apartment for ₹1.5 crore. To calculate capital gains, take the cost of acquisition as ₹1.1 crore after adding the extra costs, which will save you ₹1.25 lakh in capital gains tax.