Income-Tax Implications for Buyers of Immovable Property Purchased Below Stamp Duty Value
If you are a prospective property buyer, you may encounter a situation where the property’s value exceeds the stamp duty value. You can save money by purchasing the property for less than the stamp duty value. This article discusses the income-tax implications for buyers of immovable property purchased for less than stamp duty.
Understanding Stamp Duty Value
Stamp duties are the minimum value for immovable property transactions. It is a guideline for property registration and stamp duty calculation. Stamp duty rates are lower than property market value. The government sets this value based on location, amenities, etc.
Purchasing a Property Below Stamp Duty Value
Buyers often purchase properties below the stamp duty value to save on stamp duty and registration fees. For example, if the property’s actual market value is Rs 100,000, but the stamp duty value is Rs 80,000, the buyer can purchase the property at Rs 80,000 to save on stamp duty and registration fees.
Income-Tax Implications for Buyers
When you purchase a property below the stamp duty value, the Income Tax Act considers the difference between the actual market value and the stamp duty value as income for the buyer. The following sections discuss the income-tax implications for buyers of immovable property purchased below stamp duty value.
Section 50C of the Income Tax Act
Section 50C of the Income Tax Act applies when you purchase property below its stamp duty value. According to this section, the stamp duty value is a sale consideration even if the actual sale consideration is higher. In that case, the difference between the actual sale consideration and the stamp duty value is taxable as income under the “Capital Gain” category.
In simple terms, if the consideration received for a property transfer is lower than the value adopted by the state government for stamp duty purposes, the state government will consider the value adopted a sale consideration for computing capital gains. This provision introduces to prevent tax evasion by undervaluing property sales consideration.
Let’s say Mr. X sells a property for Rs. 50 lakhs, but the state government assesses the property at Rs. 60 lakhs. Section 50C will apply in this case, and the sale consideration for capital gains will be Rs. 60 lakhs, not Rs. 50 lakhs. So, Mr. X will have to pay taxes on capital gains based on Rs. 60 lakhs, even though he received only Rs. 50 lakhs from the sale.
Here’s another example: Mr. Y sells a commercial property for Rs. 80 lakhs, but the state government assessed the property at Rs. 70 lakhs. Section 50C will not apply since the sale consideration exceeds the state government’s value. So, Mr. Y will have to pay taxes on capital gains based on the actual sale consideration of Rs. 80 lakhs.
It is imperative to note that the state government’s stamp duty value may not always reflect the property’s actual market value. However, it is a sale consideration for computing capital gains under Section 50C.
Section 56(2)(x) of the Income Tax Act
Section 56(2)(x) of the Income Tax Act may also apply to buying property in certain cases. For instance, if an individual purchases a property from another person at a price lower than the fair market value (i.e., the price at which the property would ordinarily sell on the open market), and the difference between the fair market value and the actual purchase price exceeds Rs. 50,000, then the difference will be taxable under Section 56(2)(x) of the Income Tax Act as “Income from Other Sources.”
In other words, if you sell the property at a price lower than the fair market value and the difference between the two prices is more than Rs. 50,000, then the difference amount will be treated as income for the buyer, and they will have to pay tax on it.
This provision introduces the prevention of tax evasion by undervaluing property transactions. The government wants people to pay taxes based on property value, not undervalued prices.
However, it is imperative to note that this provision will not apply if the difference between the fair market value and the actual purchase price is within the prescribed limits. The government has provided specific safe harbor rules with a threshold limit beyond which would apply the provision. For instance, in the transfer of real estate, the difference between the stamp duty value and the actual sale consideration should be at most 10% of the primary sale consideration.
Therefore, while buying property, it is imperative to ensure that the transaction is conducted at fair market value or within the prescribed limits. It is to avoid tax liability under Section 56(2)(x) of the Income Tax Act.
Example 1: Mr. A purchases a residential property from Mr. B for Rs—50 lakh. However, the property’s fair market value is Rs. 75 lakhs. In this case, the difference of Rs. 25 lakhs (i.e., the property’s fair market value minus the actual purchase price) would be considered “income from other sources” in Mr. A’s hands and taxable as per the income tax slab rates applicable to him.
Example 2: Ms. C purchases a plot of land from Mr. D for Rs. 10 lakhs. However, the land’s fair market value is Rs. 12 lakhs. In this case, since the difference between the fair market value and the actual purchase price (i.e., Rs. 2 lakhs) is below the prescribed threshold limit of 10%, there would be no tax liability under Section 56(2)(x) for Ms. C.
Example 3: Mr. E purchases a commercial property from Mr. F for Rs. 2 crores. However, the property’s fair market value is Rs. 3 crores. In this case, the difference of Rs. 1 crore (i.e., the property’s fair market value minus the actual purchase price) would be considered “income from other sources” in Mr. E’s hands. It would be taxable at his income tax slab rates.
A registered valuer should determine the property’s fair market value. The valuation report should be ready for submission to the tax authorities. Conducting the property transaction at fair market value or within the prescribed limits is advisable. It is to avoid potential tax liability under Section 56(2)(x) of the Income Tax Act.
Exceptions to Section 56(2)(x)
A few exceptions to Section 56(2)(x) of the Income Tax Act exist. Suppose you purchase a property below the stamp duty value. The difference between the actual market value and the stamp duty value is due to unavoidable circumstances such as family arrangements, inheritances, or gifts. The difference is not taxable as income under Section 56(2)(x).
Tax Benefits for First-Time Home Buyers
First-time homebuyers can enjoy several tax benefits when purchasing a property below stamp duty. Per Section 80EEA of the Income Tax Act, first-time homebuyers can claim an additional deduction of up to Rs. 1.5 lakhs on interest paid on a home loan, provided the property purchased is of a value below Rs. 45 lakhs. This deduction is available over and above the Rs. 2 lakhs available under Section 24(b) of the Income Tax Act.
Penalties for Not Declaring Income
Purchase a property below the stamp duty value and do not declare the difference between the actual market value and the stamp duty value as income. The outstanding tax may be subject to penalties and interest. The income-tax department can also initiate legal proceedings against you in such cases.
Avoiding Tax Liabilities
To avoid tax liabilities when purchasing a property below the stamp duty value, you must declare the difference between the actual market value and the stamp duty value as income in your income tax return. You can also obtain a valuation report from a registered valuer to determine the property’s fair market value.
Points to Consider Before Buying a Property to Avoid Income Tax Implications
- Purchase price: According to a registered valuer’s assessment, the property should be at or above fair market value. If you purchase the property at a price lower than its fair market value, there may be tax implications under Section 56(2)(x) of the Income Tax Act.
- Mode of payment: Pay through banking channels such as cheques or electronic transfers. It will help establish the source of funds and avoid tax implications under the Income Tax Act.
- Stamp duty: Consider the stamp duty value of the property while determining the fair market value of the property. The difference between the fair market value and the actual purchase price should not exceed the prescribed limits. These limits vary depending on the property location and the state.
- Title of the property: The property title should be clear and free from disputes or encumbrances. Thorough due diligence should ensure its legality and technical soundness.
- Loan repayment: If you purchase the property with a loan, the loan repayment should be through banking channels. Claim the interest paid on the loan as a deduction from income under the Income Tax Act.
- Tax benefits: If you purchase the property with a home loan, tax benefits are available under the Income Tax Act. Claim the home loan principal repayment as a deduction under Section 80C of the Income Tax Act. In addition, claim the interest paid on the home loan as a deduction under Section 24 of the Income Tax Act.
- Capital gains: One should consider the tax implications of capital gains if you sell the property. If someone holds the property for more than two years, it is a long-term capital asset, and the capital gains tax is lower than that on short-term capital assets.
Final Thoughts
Purchasing a property below the stamp duty value can save you money on stamp duty and registration fees. However, it is essential to understand the income-tax implications of doing so. The Income Tax Act considers the difference between the actual market value and the stamp duty value as income for the buyer. You must declare it as such in your income tax return to avoid penalties and legal proceedings.
Talk to Alonika about income tax questions or advice before finalizing a real estate deal.