Budget 2018: Proposed income tax changes, for transfer of real estate

The Union Budget 2018-19 has proposed to rationalise the capital gains taxation, vis-à-vis the difference between apparent consideration and circle rates and also increase the holding period for capital gains bonds. We examine the impact of these measures

Home buyers and home loan borrowers were expecting a lot from Budget 2018 but they have been left disappointed by the finance minister, as nothing has been done on this. However, there is mixed news for people who sell any immovable property, vis-à-vis the sale consideration.


Changes proposed, rationalising the taxation of difference between apparent consideration and value computed as per circle rates, for stamp duty purposes

The taxation of profits on sale of immovable property, is taxable under the head profits and gains of business or profession, if you are a developer. Otherwise, the same are taxed as capital gains. Computation provisions under both the situations provide for situations, where the difference between the stated consideration, is lower than the value computed based on circle rates.

Section 43CA deals with the computation for developers and Section 50C deals with this situation where the immovable property is a capital asset. Both the provisions provide that where the value of apparent consideration is lower than the value as per circle rate adopted for the stamp duty payment, the difference between the value as declared in the agreement and the circle rate, becomes taxable in the hands of the seller. If it is a business asset, the same becomes taxable as business income and becomes taxable as capital gains.

The value as per the circle rate, is deemed to be the consideration for sale of the immovable property. So, even for a small difference between these two rates, the seller was required to pay tax on the higher consideration. In case the tax payer had to make investments under Section 54, 54F or 54 EC to claim exemption, the investments to be made have to be computed with reference to the circle rate. Therefore, the seller of the property has to invest the money which he has never received. Likewise, in such a case, even the buyer is not spared and the difference between the circle rate value and agreement value, becomes taxable in the hands of the buyer under Section 56(2) as a gift, in case the difference exceeds Rs 50,000.

See also: Budget 2018: Is there a hidden silver lining for the real estate sector?

In order to reduce the litigation and hardship to both, the seller and buyers, in case of minor difference between the circle rate and apparent consideration, the finance minister has proposed that the provisions of Section 43CA and 50C shall not be applicable, in case the difference between these two values does not exceed five per cent. Likewise, the buyer will also not be required to pay any tax under Section 56(2), if the difference does not exceed five per cent. Even in case the difference between both these values is higher than five per cent but does not exceed 50,000, the buyer will not be required to pay any tax on such difference.

The finance minister has also inserted a clarification in Section 54 EC, applicable for capital gains. There were disputes, whether one can claim the tax benefits for investments in bonds, simultaneously with investments in residential house. The finance minister has proposed to include land or building or both, as being eligible for exemption in respect of long-term capital gains, by investments in capital gains bonds.


Extension of holding period of capital gains bonds

Here is the negative news for sellers of immovable property. Presently, you can claim exemption of long-term capital gains up to Rs 50 lakhs, by investing the amount of capital gains in bonds of National Highways Authority of India, Rural Electrification Corporation and other bonds notified by the government under Section 54EC. Presently, the bonds have a tenure of three years.

The finance minister has proposed to increase the holding requirement of such bonds, from three years to five years. Since the tax of 20 per cent that is saved will be spread over five years instead of the present three years, these bonds will now not be attractive to the tax payers, as presently, the tax saved of 20 per cent for three years, works out to around seven per cent per annum. If we add 5.25 per cent interest being paid on such bonds presently, the effective return comes to 12.25 per cent. With the increased holding period requirement, the 20 per cent benefit will be four per cent per annum and 9.25 per cent with interest, after the amendment comes into force. The holding period requirement of five years will come into effect after April 1, 2018. So, tax payers who wish to claim exemption under Section 54 EC and whose six months period spills over beyond March 31, 2018, should make their investments by March 31, 2018, so as to avoid the lock-in period of five years.

(The author is a taxation and home finance expert, with 35 years’ experience)