Investment in Real estates is considered and preferred by many investors in view of the fact that the real estate transactions give a higher rate of return and the real estate investments are considered as an hedge against the Inflation. The past experience in the economy has also proved the same. Also, the real estate transactions were also used as a money laundering tool where, lot of unaccounted money were also passed as consideration which escaped taxation , resulting in revenue loss to the exchequer.
Time and again , the Governments have been introducing more stringent measures to curb undervaluation in the Real estate transactions and started introducing many controls like quoting of PAN in Real Estate Transactions, Tax Deduction at Source (TDS) on property transactions, etc.,
In addition to the above, the Finance Act, 2013 has proposed an amendment to Section 56 of the Income-tax ,1961 , which, as a result will bring all the undervalued real estate transactions into the tax ambit. As per the amendment,
(i) where an immovable property is received by an Individual (or) an Hindu undivided family (HUF) without consideration, the stamp duty value of which exceeds Rs. 50000/-, the stamp duty value of such property will be charged to tax in the hands of Individual (or) HUF as income from other sources.; or
(ii) where an immovable property is received by an Individual (or) an Hindu Undivided Family (HUF) for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50000/- , the stamp duty value of the property , in excess of the consideration, will be charged to tax in the hand of Individual (or) HUF as income from other sources.
This is the one side of the Sword.
Next, let us see the other side of the Sword.
Section 50 C of the Income-tax Act, 1961 deals with the Computation Capital Gains in case of property transactions. As per this section, where the value stated in the Instrument of transfer (i.e.,) Sale Deed , is less than the valuation adopted , assessed or assessable by the Stamp duty authorities , the valuation as adopted, assessed or assessable by the Stamp duty authority will be considered as “Sale Consideration” irrespective of the value of mentioned in the Sale Deed.
Let us try to understand the above two provisions with the following example :-
Mr. A , an Individual , sells his Property to Mr. B as per the following details :-
Sale Consideration for the Property (As per Sale Deed) Rs. 50,00,000 /-
Value of the Property for Stamp duty Purposes Rs. 75,00,000 /-
Cost of Purchase of Property by Mr. A Rs. 30,00,000 /-
In the above situation, the tax implications of the above transaction will be as follows :-
In the hands of Mr. A
Sale Consideration Rs. 75,00,000 /-
(The value adopted in Sale deed (ie.,) Rs. 50,00,000 is ignored)
Less :- Cost of Purchase Rs. 30,00,000 /-
Capital Gains Chargeable to tax Rs. 45,00,000 /-
Assuming the sale as a Long Term Capital Gain & without the indexation benefits, the tax payable by Mr. A will be Rs. 9,00,000/- (Rs. 45 Lakhs x 20%)
In the above case, the actual capital gain in the hands of A as per the Sale deed will be only Rs. 20,00,000/- (Rs. 50 Lakhs Less Rs. 30 Lakhs) whereas the capital gain charged to tax is Rs. 45,00,000 /-.
In the hands of Mr. B
For the same transaction, the tax implication in the hands of Mr. B Will be as follows :-
Value of the Property for Stamp Duty purposes Rs. 75,00,000 /-
Less :- Consideration Paid by Mr. B to Mr. A Rs. 50,00,000 /-
Income chargeable in the hands of Mr. B Rs. 25,00,000 /-
as “Income from Other Sources” =========
Assuming Mr. B is in Third Slab (30%) of Income, the tax payable by him on the above will be Rs. 7,50,000 /- (30% of Rs. 25 Lakhs)
The total tax payable to Government in the above transaction is as below :-
By Mr. A Rs. 9,00,000 /-
By Mr. B Rs. 7,50,000 /-
Total Rs. 16,50,000 /-
Don’t you think that this transaction is a double-edged sword , by taxing both the buyer and seller ?
Hence, kindly ensure the following precautions while entering into a property transaction :-
1) The transaction value of the Instrument should be equal to or more than the value adopted for payment of Stamp Duty.
2) Ensure to obtain both the Sale Deed & Purchase Deed copies of the property being transacted.
3) Ensure to obtain a documentary evidence for the Stamp Duty Value and the Computation of the Stamp duty value.
1) Where the assessee claims before the Assessing officer that the value adopted by the Registering Authority exceeds the Fair Market Value of the property as on the date of Transfer and unless such valuation is subject matter of litigation before any authority or the court , the Assessing officer may refer the matter of determination of Fair market value of the property to a Valuation Officer for determining the value of the property and such value as adopted by the Valuation officer will be taken as value for computation of Capital Gains. However, if the Valuation officer determines a value higher than the stamp duty value, the stamp duty value itself will be taken as Sale Consideration.
2) Properties received under Will or In heritance.
3) Properties received as gift from relatives.
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