Section 50C of Income Tax Act: Applicability and Calculation

Acquiring property stands as a significant milestone in a person’s life. However, it also entails various tax obligations during the buying and selling processes. To avoid potential legal complications, charges and penalties, it’s crucial to grasp the provisions outlined in section 50C. This article aids in determining the accurate value of land or buildings and ensures precise tax calculations.

What is Section 50 C of Income Tax Act?

Section 50C pertains to the calculation of capital gains from the sale of land or buildings, or both, held as capital assets. According to this provision, the sale consideration value must not fall below the stamp duty value determined by the Stamp Valuation Authority. However, the income tax department allows a slight relief of 10% variation. This can be elucidated through the examples provided in the following questions. It’s important to note that Section 50C does not apply if the land or building, or both, are held as stock.

See also: What is capital gains tax?

Section 50C of Income Tax Act: What are capital gains?

For tax purposes, the Income Tax Department classifies a person’s earnings into one of five broad buckets. Among these five types, “capital gain” is one. Earnings from the sale of investments are considered part of this category. You should know that the term “capital assets” encompasses more than just land and buildings. Gains or losses on a sale of an asset are recorded as capital gains or losses once the purchase cost is subtracted from the selling price.

Section 50C of Income Tax Act: Scope

If the cost accepted by the Stamp Valuation Authority (SVA) is higher than the amount the seller claims to have received from the sale of land, a building, or both, the seller will be considered to have received more money from the transaction. Gain on investment would then be calculated by taking the stamp experts’ value and subtracting the purchase cost.

To prevent tax evasion and improve transparency, Section 50C of the Income Tax Act was enacted. According to this clause, vendors had to stick within a value range determined by the Stamp Valuation Authority (SVA). Therefore, taxpayers must take SVA’s value into account when figuring out their taxes. The tax haven rate was raised from 10% to 20% by the Finance Ministry later. It is the variance rate between real sale consideration value and property stamp duty value as authorised by the government.

Section 50C of Income Tax Act: What is Stamp Valuation Authority (SVA)?

The Stamp Valuation Authority (SVA) is responsible for determining the value of stamp duty, which is a tax imposed on property registration transactions. This valuation is crucial for calculating capital gains. Typically, the SVA uses a guidance value to assess the value of land or buildings based on the overall property market value.

Under Section 50C of the Income Tax Act, the value determined by the SVA is utilised to levy stamp duty on property registration and acts as a reference point to ascertain whether the land or building in the sale agreement is undervalued. If the sales consideration received is lower than the value established by the SVA, the reduced SVA value, adjusted by the cost/indexation, is considered for calculating the capital gain. 

Section 50C of Income Tax Act: Applicability

The terms of Section 50C are as follows:

• There must have been a sale or other transfer of the real estate.
• In other words, the property in question has to be treated as an investment.
• Either a long-term or a short-term capital asset might be considered for the land or the structure.

How to calculate capital gain under Section 50C of Income Tax Act?

Example: If the sale consideration is Rs 20,00,000, and the stamp duty value assessed by the authority is Rs 20,50,000.

If, in the event that the sale value would have been Rs 15 lakh, i.e. a variation greater than 10% from the stamp duty value, then the full value of consideration in such a case would have been Rs 2,050,000 (SDV).

Section 50C of Income Tax Act: How to calculate stamp duty?

To determine how much stamp duty must be paid, each state’s taxing body will adopt, assess, or deem assessable a value known as the Stamp Value Authority (SVA). However, the SVA cannot assess more than 105% of the consideration accrued or received as a consequence of the transfer, regardless of whether the value was adopted, assessed, or assessable. For Section 48, the whole amount of the consideration thus received or gained shall be considered to constitute the consideration. For subsection 50C, the stamp duty price and the actual consideration may differ by up to five percent, but in no event may the difference exceed five percent of the actual consideration.

Here’s an example of how stamp duty is calculated under section 50C:

See also about: Section 54 

What should be expected if the selling price falls short of the value adopted by SVA?

Section 50C provides protection only against fluctuation in the value of property caused by a considerable gap between different stages of a transaction of sale, even though there may be varying genuine reasons between the parties for having such a transaction of sale of land or building for a consideration lower than the value adopted by SVA. To elaborate, there have been occasions when litigation has ensued because of a discrepancy between the asset’s value on the date of the agreement to sell and the date of the actual sale owing to economic considerations like demand and supply. An unreasonable burden would be imposed on taxpayers if they were required to pay tax on the adopted value of SVA, even if they never received it.

The Finance Act of 2016 revised Section 50C to rectify this legal inconsistency. The amendment allows the value accepted by SVA as of the date of agreement to be used as sale consideration if the date of the agreement establishing the sale consideration and the date of registration of the sale of land or building is different.

This perk is only available if at least some of the selling consideration is paid in the form of an account payee cheque, bank draft, or ECS on or before the date of the agreement of transfer. This change helps taxpayers who are engaged in the sale of property or a building since, in most cases, the negotiating process might take a long period.

What are the consequences if the seller disagrees with the value adopted by SVA?

An SVA-determined stamp value of a capital asset may not always reflect the true market worth of a piece of property. Given the multiplicity of variables that go into determining price, a seller may not be happy with this estimate. The buyer of a capital asset may not worry about paying their share of taxes right now. As a result of the price differential, it will look quite a little. But this will have a major impact on the sellers’ bottom lines at tax time.

Therefore, a seller may not challenge the Stamp Valuation Authority for valuation purposes if the seller rejects a stamp duty value established by SVA. Instead, you should consult the Income Tax Authority on the matter since it may have an impact on your tax refund. Valuation officials may use the land record and other sources for calculating FMV. Taxpayers will have an opportunity to voice their opinions on the matter, outlining their preferred method of calculating values.

What if the valuation officer’s estimate is greater than the SVA estimate?

To determine the current value of a capital asset, a valuation officer consults a source. This alleviates any potential financial strain on taxpayers. The taxpayer will suffer no repercussions as a result of the reference to the valuation officer.

Conclusion

Section 50C of the Income Tax Act of 1961 aims to curb tax evasion and prevent undervaluation of property transactions. This provision ensures that the actual sale consideration or fair market value of the property is taken into account for taxation, rather than any undervalued or underreported amount. Over the years, amendments have been made to Section 50C to address ambiguities and provide clarity. Taxpayers are strongly advised to carefully assess the provisions of Section 50C before engaging in any property transactions to avoid potential tax liabilities or legal repercussions.

FAQs

Dhwani Meharchandani

Dhwani is a content management expert with over five years of professional experience. She has authored articles spanning diverse domains, including real estate, finance, business, health, taxation, education and more. Holding a Bachelor’s degree in Journalism and Mass Communication, Dhwani’s interests encompass reading and travelling. She is dedicated to staying updated on the latest real estate advancements in India.
Email: [email protected]

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