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Category Archives: Tax Planning

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Real estate & Stamp Duty Value: An income tax perspective

If you are planning to sell or buy a property, this article tells the role of stamp duty value (SDV) in tax planning for both seller and buyer. Knowing the SDV beforehand and planning the transaction amount is important for following two main reasons:

  • Sellers point of view — The actual market value/transaction value (TV) in many colonies is lower than the government fixed SDV. e.g. In Friend’s colony, a premium locality in Delhi, SDV has been significantly higher than TV for some time. In certain cases, this notional difference is taxable in the hands of seller as capital gains. e.g.

A sold his flat to P for 100 lakhs. Indexed cost of acquisition was 60 lakhs. SDV on appropriate date was 150 lakhs. Under the normal circumstance capital gains = 100 less 60 = 40 Lakhs. However, since SDV is higher than TV, sale price of 100 lakhs will be replaced by the SDV value of 150. Now seller will have to pay tax on capital gains of 150 less 60 = 90 lakhs which is much higher compared to the capital gains of 40 lakhs as computed above [Section 50 C under capital gains]

Thus, there is a double whammy — Firstly, in the current depressed real estate market cycle, the seller is getting a poor price for his property. Secondly, he is getting taxed higher on notional value that the seller didn’t receive

Buyer’s point of view — As there is a cash outflow for the buyer, it is generally assumed that there are no adverse tax implications in the hands of buyer. However, that is far from reality. In case buyer pays less than the property SDV to buy the property, the difference is taxable in his hands under the head “Income from other source”

What’s worse is that the tax rate for buyer would be much higher if he falls in the 10 lakhs plus net income bracket compared to the reduced 20% [plus indexation benefit] applicable on seller [assuming the capital asset is long-term in nature. For immovable properties if the period of holding is more than two years, gains are considered as long-term]

In the same example as above, P, the buyer will have to pay tax on SDV less TV i.e.150 -100 = 50 lakhs [Section 56 (2) (x) under income from other sources].

Some technical points

  • Since there were many deals where TV was less than SDV, tax law makers recently amended to incorporate a tolerance band of 5%. If the SDV is not more than 105% of sale value, both the above sections (capital gains and income from other sources) will not be applicable
  • The above sections are applicable only in case of a capital asset. Thus, if the seller is holding the property as stock in trade (e.g. DLF), then section 50 C will not be applicable. There is a separate section dealing with them. Similarly, if the buyer receives it as stock in trade then section 56 (2) (x) will not be applicable
  • Relevant date for SDV — generally, SDV on date of registration is considered for the purposes of calculation in above clauses. However, in case there is an agreement to sell before the actual date and the same is evinced by an account paying cheque / draft or electronically cleared payment, SDV on the agreement date can also be considered
  • There is also a provision, where the aggrieved parties can request the income tax office to refer his property to a valuation officer. In a case where the valuation officer reduces the market price same will be considered (Upto a minimum of actual transaction price declared) instead of SDV
  • If you look closely, the difference between SDV and TV is getting taxed twice. Once in the hands of seller as deemed capital gains and again in the hands of buyer as deemed income from other sources. Apparently, the original intention was to discourage doing transactions below a fair price (SDV in this case). Hence, the double taxation

Hence, whether you are a buyer or seller, it is recommended to keep the transaction value above the stamp duty value.

Disclaimer: Please refer to your tax consultant / wealth advisor before any action. No action will hold for any losses due to any action taken based on this article. This is updated till 31st March ’19.

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3 years ago Tax Planning

Tax Saving Fund — Axis Vs Reliance

Winters are here in Delhi. My favourite time of the year. Armed with a small coffee mug and my tool kit I am down to doing my favourite thing. Investment Analysis..

A good place to start is my own portfolio. It has a ripple affect as most of our clients are invested in the same funds. So, I decided to review and benchmark the tax saving fund in my portfolio (ELSS) where I invest on a monthly basis.

For these automated and disciplined monthly investments, we recommend investing in mid & small cap equity.

Hence, using Morningstar AdvisorWorkStation (AWS), I pulled out a list of ELSS funds where the portfolios are invested in mid & small cap equity. To my disappointment, there was only 1 fund in the segment — BOI Axa Tax saver fund. Due to lack of options I started drilling on the only fund but it faltered at the first gate for us due to low Assets under Management (AUM) of just over 110 crores.

Filter results for mid & small cap ELSS

Then I quickly moved on to use AWS again to filter ELSS funds based on other dimensions e.g. Sectoral break-up (allocation to cyclical sectors versus defensive sectors), Investment strategy (growth Versus value) etc.

Within the sectoral break-up dimension, I applied the next internal filter of more than 60% in cyclical sectors. The resulting results were then arranged in a descending order of 10 year performance. On the top was Reliance Tax saver fund. It also had the highest return in 10 year SIP category. As it’s sectoral allocation and other parameters (like fund size, number of instruments etc.) were meeting our filters, we decided to shortlist it as a contender for the next round which could lead it to being included into our recommended list for tax-saving funds .

Curious beings that we humans are, I immediately wanted to compare it’s performance with the ELSS fund I am personally invested in — Axis Long Term Equity Fund. Currently, we mostly use Financial Express (FE) analytical tool for performance analytics. It’s more visual.

I was pressed to see that Axis was under-performing in the last one year (as on 4th Dec 2017). Not the one to give up easily, I went on to compare their longer-term performances and to my relief, Axis was doing better!

This brings me to another point that in the long-run, fund selection has minimal impact on your returns. If i was to take a shot — 2 to 3% plus or minus!

What is important is that you have the overall portfolio construction right, avoid ‘reinventing the wheel’ mistakes and safeguard your portfolio from your behavioural pitfalls. Hopefully, I will be discussing these in other posts.

Back to Axis Vs Reliance.

Now i needed to investigate the Axis’s under-performance in the last year for academic purposes. Clearly, there was a sudden spike in Reliance performance in the last 2 months. We raised the query with the Reliance team . Also, I decided to review the individual sectors these funds are bullish on. I also wanted to check if there had been a major change in the sectoral strategy of the funds.

It threw up following questions which we have forwarded to the Axis team:

  1. Do we have any instrument level rules for maximum allowed exposure? Top 5 & 10 instruments account for almost 35% & 55% of the portfolio respectively. That’s a lot of concentration risk. Ideally, for us, no more than 25% & 35% of the fund portfolio should be invested in top 5 & top 10 instruments respectively. As Indian markets develop further, these ratios should be further brought down. Reliance was slightly better with respect to concentration risk management here??

2. Rationale and accuracy behind the Sectoral break-up of the axis fund — We saw that banking and financial services sector together accounted for about 40% of the Axis fund portfolio. Also, although the portfolio was invested heavily in cyclical sectors (73%) there was negligible allocation (~4%) to the Industrial sector, which we believe is an important part of the cyclical sector basket. See below.

Axis Tax saving funds sectoral break-up

Currently, between the two, Reliance has a better portfolio for us — simply because it seems it is managing the sectoral diversification slightly better.

However, we will not rush into any action immediately. It is prudent to wait for Axis & Reliance to reply, think through other related impacts and evaluate tax lock in periods.

I will update our final take in the comments section in next few days (or may be weeks! Patience is probably our’s firm’s greatest asset).

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