No Notional taxation if the difference in the stamp duty valuation & actual transaction value is not exceeding 20%


No Notional taxation if the difference in the stamp duty valuation & actual transaction value is not exceeding 20%

Finance Minister on 12th November, 2020 announced certain income tax Income Tax relief for Real-estate Developers and Home Buyers. Before elaborating the announcement, let us know the basic provision.

Basic Provision:

Stamp Duty Valuation or Ready Reckoner Valuation of the property is a benchmark price for taxation purpose & plays an important role in determining the tax liability. It now impacts not only the seller but also the buyers. Surprisingly, selling & purchasing the property below stamp duty valuation results in double taxation, in the hands of the seller & buyer both. For example, Mr. A has sold a property to Mr. B for Rs. 50 Lakh. The stamp duty value of the property was Rs. 75 Lakh. In such case, capital gain would be required to be calculated by taking Rs. 75 Lakh in the hands of Mr. A i.e., Income tax is applicable on an extra amount of Rs. 25 Lakh. Further, this Rs. 25 Lakh will also be taxable in the hands of Mr. B as “Income from Other Source” as it is presumed that Mr. B has earned the amount by purchasing the property below stamp duty valuation. One needs to be cautious while executing the transactions below the stamp duty valuations.

It may be noted that the Stamp duty valuation will not be relevant for buyers & sellers if the difference doesn’t exceed 10% of the actual sale consideration (5% till FY 2019-20). For example, a person has sold the property for Rs. 50 Lakh and the stamp duty valuation is say Rs. 54.50 Lakh. In such case, the seller will be liable to compute the capital gain by taking the actual sale consideration of Rs. 50 Lakh only & not Rs. 54.50 Lakh. However, if the stamp duty valuation of the property is Rs. 55,00,001/- then the capital gain would be required to be computed by taking Rs. 55,00,001 only and not Rs. 50 Lakh or Rs. 55 Lakh. In short, even if the stamp duty valuation marginally exceeds 10% standard, entire Rs. 5,00,001/- will form the part of the  capital gain. Law provides for taxation of not amount above 10% but of entire amount in such cases. Another interesting point which one must take care is that the variance up to 10% is permissible on actual sale consideration & not on stamp duty valuation. Taxpayers often get confused and assume it as 10% of the stamp duty valuation. In the above example, 10% of 55 Lakh is Rs. 5.50 Lakh and so few taxpayers form an opinion that if the property is sold for anything above Rs. 49.50 Lakh (i.e., Rs. 50 Lakh in the present case), no repercussion would be there. This is not true. If the taxpayer sells the property, say for Rs. 49.51 Lakh & the difference would be taxable as the difference between actual & stamp duty valuation is more than 10%.

This limit of 10% has been enhanced to 20% by the Finance Minister on 12th November, 2020 for Real-estate Developers and Home Buyers as part of the Aatma Nirbhar Bharat Package 3.0. The press release clarifying the above provision was as under:

13 NOV 2020 4:17PM

PIB Delhi

As part of the AatmaNirbhar Bharat Package 3.0 as announced by Hon’ble Finance Minister on 12th November, 2020, certain income tax relief measures were brought in for real-estate developers and home buyers.

Up to 2018, section 43CA of the Income-tax Act, 1961 (‘the Act’) provided for deeming of the stamp duty value (circle rate) as sale consideration for transfer of real-estate inventory in the case the circle rate exceeded the declared consideration. Consequentially, stamp duty value was deemed as purchase consideration in case of buyer under section 56(2)(x) of the Act.

In order to provide relief to real estate developers and buyers, the Finance Act, 2018, provided a safe harbour of 5%. Accordingly, these deeming provisions triggered only where the difference between the sale/purchase consideration and the circle rate was more than 5%. In order to provide further relief in this matter, Finance Act, 2020 increased this safe harbour from 5% to 10%. Therefore, currently, the circle rate is deemed to be the sale/purchase consideration for real estate developers and buyers only where the variation between the agreement value and the circle rate is more than 10%.

In order to boost demand in the real-estate sector and to enable the real-estate developers to liquidate their unsold inventory at a rate substantially lower than the circle rate and giving benefit to the home buyers, it has been decided to further increase the safe harbour from 10% to 20% under section 43CA of the Act for the period from 12th November, 2020 to 30th June, 2021 in respect of only primary sale of residential units of value up to Rs. 2 crore. Consequential relief by increasing the safe harbour from 10% to 20% shall also be allowed to buyers of these residential units under section 56(2)(x) of the Act for the said period. Therefore, for these transactions, circle rate shall be deemed as sale/purchase consideration only if the variation between the agreement value and the circle rate is more than 20%.

Legislative amendments in this regard shall be proposed in due course.

Summary of above Announcement & Press Release:

  1. The tolerance limit has been raised from 10% to 20%.
  2. The benefit is to both the buyer as well as seller.
  3. The enhanced limit of 20% is available only on sale real estate Developers. It means that any other person other than real estae developer is transferring the property, the tolerance limit of 10% would be relevant and not 20%.
  4. It is for a “primary sale” and not for subsequent sale. It means that the builder seller & buyer will be able to able to enjoy the 20% limit on their first sale and not on their resale.
  5. Though the same has been announced, no amendment has yet been done in the Income Tax Act – 1961 yet. It is expected that the announcements will form the part of the Budget Document for FY 2021-22.