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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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