Relevance of stamp duty value of property under income tax laws

One has to be aware of the stamp duty valuations of a piece of property when entering into any purchase or sale of property in India.

For the purpose of arriving at the fair market value of the house property, either you can take stamp duty reckoner rates if available or you may obtain a valuation certificate from a registered valuer.

In order to plug the loopholes in real estate transactions and to avoid litigations, the Income Tax Department benchmarks the valuation of property against its stamp duty valuation. For levy of stamp duty on property, various state governments come out with an annual ready reckoner of rates for valuation of property. This is also called circle rates in north India.

In this article, I intend to discuss some of the important provisions of income tax laws which refer to stamp duty valuation of a piece of property. Let us discuss.

Eligible property for additional benefits of interest

Section 80EEA allows a deduction up to Rs 1.50 lakh every year in respect of interest on home loans sanctioned between 1st April 2019 and 31st March 2022 for a residential property stamp duty valuation of which does not exceed forty-five lakh rupees. This deduction is available only if the assessee does not own any other house property on the date of sanction of the home loan.
It may be noted that this deduction is available during the construction period also unlike deduction under Section 24(b) which is available only after completion of construction. However, there is no provision for carry forward of this deduction in case income is not sufficient to set off this deduction. The valuation of property for this deduction has been benchmarked to avoid misuse of this provision where the agreement value may be kept at a lower amount just to claim this deduction.

Computation of long-term capital gains on sale of old residential property

Capital gains are computed by deducting the cost of acquisition from the sale consideration. For house property sold after holding for more than two years, you are allowed to enhance the cost of acquisition by applying cost inflation index which helps you reduce your ultimate tax liability. In respect of property acquired prior to 1st April 2001, you are allowed to take the fair market value of the house on that date which effectively makes the appreciation till 31st March 2001 tax free in your hands.

For the purpose of arriving at the fair market value of the house property, either you can take stamp duty reckoner rates if available or you may obtain a valuation certificate from a registered valuer. People used to get the valuer’s certificate of lower amount than the actual fair market value of the property to minimise their tax liability. In order to plug this loophole and to minimise litigations, the law was amended to provide that the fair market value of the property sold shall not be lower than the stamp duty valuation of the property as on 1st April 2001, if notified by the state government.

In case your agreement value is lower than the current stamp duty rates, you are deemed to have received the consideration equal to the stamp duty valuation and the difference is taxed as capital gains in addition to the capital gain computed as per your agreement value.

For Purchaser of property

Under the tax laws when a property is transferred without consideration, the same is treated as gift in the hands of the recipient. In other cases in order to avoid litigation, the tax laws provide for a tolerance limit of upto 10% of agreement value. So, when the property is transferred and the consideration is inadequate, higher of fifty thousand rupees or excess difference over 10% of the agreement value is taxed in the hands of the transferee unless the transaction is between specified relatives.

However, in case the property is purchased from a developer as first allotment of the property between 12th November 2020 and 30th June 2021, the buyer enjoys a higher tolerance limit of 20% over the sale consideration for properties with sale consideration upto Rs 2 crore. The same tolerance limit is also available to a developer while computing his business profits. In case of a developer for sale of properties not covered above the tolerance limit remains 10% over the agreement value.

From the above discussion, it becomes clear that one has to be aware of the stamp duty valuations of a piece of property when entering into any purchase/sale of property in India.

(The author is a tax and investment expert and can be reached at jainbalwant@gmail.com)

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