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Section 50C- Understanding Stamp Duty On Property Sale
Buying a property is unquestionably one of a person's greatest life accomplishments. However, there are several tax compliance requirements associated with the buying and selling of real estate. Understanding Section 50C's requirements is crucial to ensuring that your property acquisition or sale doesn't become a complex legal problem with fines and costs. These rules help determine the exact value of the land or building and accurately calculate the tax. In this article, we will highlight the essentials of stamp duty on property sales.
Contents :-
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Understanding the Concept of Sale Consideration and Capital Gain
For tax purposes, the income tax law broadly divides incomes into five groups. The category "Capital gains" is one of them. Capital gains are the earnings from the sale of any capital asset that the seller has. Real estate is one type of asset that falls under the definition of capital asset. Therefore, the owner's gain from selling a structure or piece of land is subject to capital gains tax.
Taxable capital gain = Sale consideration - Cost of acquisition (indexed cost of acquisition for land or building held for more than 24 months).
Like with any other tax provision, participants in the transaction eventually devised some tax evasion strategies, including capital gain taxation on buildings and land. In an effort to lower the seller's tax burden, people began undervaluing their properties in the sale agreements and paying a large portion of the consideration in cash. This led to unexplained black money in society and losses for the government. By introducing Section 50C through the Finance Act of 2002, the government aimed to stop the widespread undervaluation of real estate and bring undeclared funds under the tax net.
What is Section 50C?
The structures covered by Section 50C are buildings, land, or both. To calculate the undervaluation of land or buildings in the sale agreement, Section 50C considers the value that the Stamp Valuation Authority (SVA) approved to pay stamp duty on property registration.
If the seller's claimed or real sale consideration for the sale of land, a building, or both is less than the value set by the Stamp Valuation Authority (SVA), the SVA's value will be considered the seller's actual sale consideration. Thus, capital gain would be the stamp valuation authority's valuation less the acquisition cost or index cost.
However, things changed as Section 50C was amended by Budget 2018, stating that no adjustments would be made if the difference between the stamp duty value and the sale consideration is less than five percent of the sale price. The purpose of this introduction is to reduce difficulties in the event of legitimate transactions within the real estate industry. The safe harbour rate—that is, the percentage of variance permitted between the property's stamp value and its actual sale consideration value—was raised by the Finance Ministry from 10% to 20%.
When is Section 50C Applicable?
Section 50C of the Income Tax Act is applicable when a transaction fulfills the following criteria:
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A transfer of land or building or both
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The building or land held as a capital asset
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Held as a long-term capital asset or short-term capital asset
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Can be depreciable or non-depreciable
What is Stamp Valuation Authority (SVA)?
The entity responsible for ascertaining the stamp duty value upon the registration of real estate is the Stamp Valuation Authority. Stamp duty is an imposed levy on property registration-related transactions. The computation of capital gains takes this valuation into account. For stamp duty on property registration, the Income Tax Act's Section 50C considers the valuation that the SVA adopted.
To impose stamp duty on property registration and to ascertain whether the land or building in the sale agreement is undervalued, Section 50C of the Income Tax Act takes into account the value adopted by the SVA. The SVA value less the cost/indexation is taken into account when determining the capital if the sales consideration received is less than the value that the SVA adopted.
Calculation of Capital Gain Under Section 50C of the Income Tax Act
The following table elucidates the computation of capital gain under Section 50C of the Income Tax Act:
Particulars | Amount |
|---|---|
Full value of sale consideration: (Sale value or stamp duty value, whichever is higher) | XXX |
Less:- Expenditure of the transfer | (XXX) |
Net Consideration | XXX |
Less: Acquisition cost | (XXX) |
Less: Cost of improvement | (XXX) |
Capital Gain or loss | XXX |
Sale consideration is considered Full Value of Consideration if the stamp duty value does not exceed 110% of consideration.
Calculation of Stamp Duty Under Section 50C of the Income Tax Act
You must use the stamp duty value that the Stamp Valuation Authority determines. It is possible, however, that the stamp duty value on the registration date and the stamp duty on the agreement date differ. Two scenarios could arise in such a situation:
Case 1: Determine the stamp duty amount as of the agreement's date
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Up until the agreement's date, all or part of the payment has been received
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Payment has been made by account payee cheque or draft (a prescribed electronic means)
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Case 2: Determine the stamp duty amount as of the registration date
In this context, we will discuss three different scenarios:
Selling Price Lower Than the Value Adopted by SVA
Although there may be several legitimate justifications between the parties for conducting a land or building sale for less than the SVA-adopted value, Section 50C only offers protection against fluctuations in property value brought on by a sizable lag between the various stages of the sale process.
Consider the litigation that has previously taken place in situations where demand and supply, among other economic considerations, have caused a discrepancy in the asset's value between the date of the agreement to sell and the actual sale. In these situations, using the amount that SVA accepted as sale consideration would subject taxpayers to undue hardship by requiring them to pay taxes for goods they will never receive.
The Finance Act of 2016 changed Section 50C to eliminate this legal problem. The value accepted by SVA as on the date of agreement can be considered as sale consideration if the date of the agreement fixing the sale consideration and the actual date of registration of the sale of land or building are different, according to the modification.
Seller Does Not Accept the Value Adopted by SVA
It is possible that the value that SVA has accepted does not always represent the Fair Market Value (FMV) or that the seller is dissatisfied with the value that SVA has accepted due to reasons that are known to him.
Even though stamp duty is often paid for by the buyer, since the amount he would have to pay in stamp duty would be small in comparison to the cost of the transaction, the buyer might not be too concerned about the value chosen by SVA. But for the seller, it matters greatly since it affects his income tax, which, depending on the value, may be significant. If the seller does not pay stamp duty, he may not contest or question.
Since the seller's income tax is at stake, he may challenge the SVA-adopted value and assert that it exceeds FMV under Section 50C in front of the income tax authority, unless the value has already been contested in court or before another authority.
In certain situations, the income tax officer must consult with the valuation officer, who will ascertain the market value. When assessing market worth, the valuation officer must request records or other documentation from the taxpayer, provide the taxpayer with a chance to be heard, and issue a written order outlining his valuation. Higher authorities may also question any value that the valuation officer determines.
Value Given by Valuation Officer is Higher Than the Value SVA
A valuation officer receives a reference to ascertain the market value, which safeguards the taxpayer from undue hardship. Such a reference to the valuation officer has no adverse effect on the taxpayer. Even in cases where the valuation officer is consulted, the value established by the officer or approved by SVA—whichever is less—will be used as the selling consideration when calculating capital gains.
For instance, if the valuation officer determines that the value is Rs 15,00,000 and the SVA adopts a value of Rs 12,00,000 compared to the Rs 8,00,000 that the seller claims to have received, then the sale consideration under Section 50C will be Rs 12,00,000. In the same instance, if the valuation officer determines that the worth is Rs 10,000,000, the sale consideration from a capital gains perspective will be Rs 10,00,000.
Frequently asked questions
Q
Does the acquisition cost of immovable property include stamp duty?
A
The stamp duty is included in the buying cost. The basic price that the buyer and seller agree to pay each other is not the only thing that makes up the acquisition cost. You agree to pay stamp duty, transfer fees, and registration fees when you sign a contract to buy real estate.
Q
What if the sale value of a property is less than the stamp duty value?
A
Section 50C of the Income Tax Act governs the value of consideration in cases when the agreed-upon sale consideration for immovable property is less than the property's adopted fair market value.
Q
What if the sale value of an immovable property is more than the stamp value?
A
The seller will be deemed to have received more money from the transaction if the Stamp Valuation Authority (SVA) accepts a cost that is greater than the amount the seller claims to have received from the sale of land, a building, or both.
Q
How much variation is permissible between the value of the sale and the SVA adopted value?
A
The income tax department permits a maximum of 10% variation or discrepancy between the actual sale value and the SVA accepted value. Stated differently, the discrepancy between the SVA accepted value and the actual sale value shouldn't be greater than 10%.
Prachi Jain
Chartered Accountant
Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.
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