Deed of exchange: Meaning, stamp duty and taxation

When one buys a property, the sale consideration is generally paid for, by way of money. However it is not necessary that the consideration for the transfer of a property, should always involve money. You may want to move to another bigger place or a smaller place, depending on changes in space requirements and other financial considerations. Exchange of one property with another one, is permitted under the property law. It is not always necessary that you exchange one residential place with another residential place. You may also exchange one commercial property for another property, whether land or commercial property or residential property or even an under-construction property. If the value on both of the assets is different, the difference can be settled by way of payment in money. However such exchanges may have some stamp duty and income tax implications.

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Check out this guide that will highlight the legalities involved- features of an exchange deed, format, and the various charges involved as part of the contract.

What is a deed of exchange?

A legal document that validates the exchange of movable or immovable properties between two parties is known as exchange deed. This is signed by owners of properties who want to transfer rights of their property to one another, thus getting the ownership of the other person’s property. In addition to immovable property, the exchange deed can also be executed for transfer of cash and other assets.

What components should deed of exchange include?

The date of exchange
Names and address of the parties amongst whom the property is exchanged
Specifications about the property like its location, area, and others
A statement mentioning the property transaction is an exchange
Signatures of the parties along with the signatures of the witnesses
The stamp duty or the registration fee applicable during the property exchange.

What is the difference between deed of exchange and sale deed?

Note that if one party is paying money in exchange for a property that is not money, the transaction will not qualify as an exchange but it will be a sale. An exchange deed and a sale deed are both different according to the Transfer of Property Act 1882. While the former is executed through exchange of properties, the latter is done through financial transaction.

What are the stamp duty implications on deed of exchange of property?

For selling your property, you normally have to execute a sale deed or a sale agreement, which is required to be stamped with the rate applicable, on the market value of the property.

However, for an exchange of property, you need to execute an exchange deed and not a sale deed, as an exchange transaction is different from a sale transaction. The exchange of two properties can also be done, by executing two separate sale deeds. However, in case two separate sale deeds are executed for such an exchange, you need to pay stamp duty on both the agreements. Some states like Maharashtra, have provisions for payment of concessional stamp duty, in case an exchange deed is executed. As per Article 32 of Schedule I of the Maharashtra Stamp Act, in case of an instrument of exchange or exchange deed, with respect to an immovable property, the document needs to be stamped, as if it is for the sale of an immovable property. The value, for the purpose of stamp duty on the instrument, shall be taken as the property with the higher market value. So, if you exchange your bigger flat with a smaller flat in the same building, the stamp duty will be payable on the market value of the bigger flat.

What is the stamp duty to be paid for exchange of property?

The stamp duty to be paid for exchange of property if property is exchanged with family member is 3% of the value of the property.
The stamp duty to be paid for exchange of property if property is exchanged with a person outside the family is 5% of the value of the property.

See also: All about Section 80C

Which party has to pay the stamp duty in property exchange?

As far as the question of who bears the cost of the stamp duty, it is a matter to be decided between the parties. In case of a sale deed, in the absence of any express understanding between the parties, it is the buyer who has to bear the cost of the stamp duty. However, in case of exchange, the matter needs to be resolved through mutual understanding. Since the exchange deed purports to transfer rights in an immovable property, as per Section 54 of the Transfer of Property Act, it needs to be registered with the office of the registrar of assurance.

Also read: All about TDS on property transactions under Section 194IA

Income tax implications on exchange of property

The exchange of an immovable property has income tax implications, as well. In case the property is exchanged after having been held for more than 24 months, any profit/loss made on such exchange shall be treated as long term. If the exchange is made within 24 months of its acquisition, the profit/loss shall be treated as short term.

There may also be exchanges, where both the parties may not put any value to the property and only the differential amount would be mentioned in the exchange deed. In such situations, for the purpose of working out the capital gains, you will have to find out the market value of your property as per the stamp duty ready reckoner and compare it with the cost for which you had purchased it. If the property was held for more than 24 months, you will be entitled to avail of the indexation benefits, as well as tax exemption avenues available under sections 54, 54 F and 54 EC.

See also: Elaborated in detail franking meaning

Tax exemption on deed of exchange for residential property

In case of exchange of a residential property, the exemption is available under Section 54. For the owner of the smaller value flat, who is exchanging it for a bigger value flat, there will not be any tax liability. However, if you acquire a smaller flat and its market value is at least equal to the indexed long term gains, computed as above on the larger flat, there will not be any tax liability either. However, if the market value is lower than the indexed long term capital gains, you may have to pay tax on the difference at 20.36 per cent. Alternatively, you can invest the difference, in the capital gains bonds of specified institutions and claim exemptions under Section 54EC.

See also: All about stamp duty and registration charges in Madhya Pradesh 2022

Tax exemption on deed of exchange for commercial property

If you are exchanging your commercial property or land, for a residential property, you will need to check whether the amount of investment in the residential property is at least equal to the market value of the commercial property/land being exchanged. In the case of deficiency, the same can be invested in capital gains bonds under Section 54EC. In case you exchange your land/commercial property/residential property against another piece of land or commercial property, you cannot claim any tax exemption, with respect to the value of the property acquired in exchange, under Section 54. For claiming exemption on long term capital gains accruing on such exchange, you will either have to make investment in a residential house under Section 54F, or in capital gains bonds under Section 54EC.

From the above discussion it becomes amply clear that although you do not get any special tax benefit when you exchange one property against another, you may save money on stamp duty, when the same is done through an exchange deed.

See also: All about laws of property registration in India

Where should you register the deed of exchange?

Since the exchange deed purports to transfer rights in an immovable property, as per Section 54 of the Transfer of Property Act, it needs to be registered with the office of the registrar of assurance.

See also: All about gift deed stamp duty

Steps to register deed of exchange for property

While it differs across states, in Delhi, you can register deed of exchange on the Doris Portal. Check out the following steps.

Go to the Delhi Online Registration Information System website and select the ‘Deed Writer’ option under online services.

Select Exchange of Property and select sub deed from the drop-down list.
Enter registered mobile number, email id, captcha.
Click on 1^st party or second party and enter the consideration value of property.
The stamp duty applicable on the transaction will be calculated and displayed on your screen.
Go to the Stock Holding Corporation of India website and pay the stamp duty as shown earlier.
Download the payment receipt after your payment.

See also: Can stamp duty be refunded if a property deal is cancelled?

Once your payment is made, you need to fix an appointment with the Sub Registrar of the revenue department. To do this, follow the steps below-

Go to the website of the Delhi Revenue Department.
Select your district name, area name, and SRO.
Fill up the stamp number provided on your payment receipt.
Select an appropriate date and time for the appointment.
Once the process is done you will receive a notification confirming the appointment through SMS.

Housing.com POV

Exchange of property is allowed legally. However, when you enter into such an arrangement, it is recommended to register the deed of exchange to avoid any legal issue going forward. Registering and paying stamp duty online is easy and is explained in detail in this guide, which you can always look into.

(The author Balwant Jain is a tax and investment expert, with 35 years’ experience)

FAQs

What are the essentials of exchange deed?

There must be two people for executing the exchange deed. Both should mutually agree to exchange the immovable property, cash or similar assets.

What is the meaning of exchange of property?

This is when you exchange your property, cash or similar asset with another person. There is no cash transaction taking place in this deal.

What is the difference between sale and exchange?

Sale means transfer of ownership for a price whereas exchange means mutually transferring.

Is exchange of property taxable?

There are tax implications associated with exchange of immovable property. If the property is exchanged in a period of more than two years then any profit or loss made owing to this will be considered long term.