In India, the property registration process involves officially recording the ownership of a property in the government records, a crucial step in securing legal rights to the property. During this process, accurate property valuation is essential as it directly impacts the payable stamp duty and registration fees. However, some builders and sellers may persuade buyers to undervalue properties during registration to reduce these costs. While this might seem like a tempting way to save money, undervaluing property can lead to significant legal and financial risks in the long run. Understanding the importance of fair valuation and the consequences of undervaluation is key to making informed decisions during property registration.
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Understanding property valuation and its impact on stamp duty and registration charges
Property valuation refers to the process of determining the market value of a property based on its location, size, condition and prevailing market trends. This valuation is a critical aspect of real estate transactions as it provides an accurate assessment of a property’s worth. For buyers, sellers and lenders, property valuation is a benchmark for determining a fair property price, ensuring that all parties involved in the transaction are dealing with accurate and justifiable figures. This is essential to avoid disputes and ensure that property-related financial decisions are sound.
In India, property valuation plays a significant role in determining the amount of registration fees, stamp duty and other taxes to be paid during the property registration process. Stamp duty, which is a state-imposed tax, is calculated as a percentage of the property’s market or transaction value, whichever is higher. Similarly, registration fees are linked to the property’s value. Therefore, an accurate property valuation ensures that the correct amount of duty and taxes is paid, preventing legal complications or penalties in the future.
The Indian legal framework has specific guidelines for property valuation, particularly during registration. According to the Registration Act, 1908, properties must be valued accurately based on the circle rate or guidance value set by the state government, which is the minimum rate at which a property can be registered. These circle rates are periodically revised to reflect changes in the real estate market. Undervaluing property during registration to reduce stamp duty and taxes is illegal and can result in severe penalties, including fines, legal action and the possibility of the property being seized by the government. Hence, buyers and sellers should adhere to the legal requirements and conduct property valuations transparently to ensure a smooth and lawful registration process.
What does it mean to undervalue a property?
Undervaluing a property refers to the practice of declaring a lower property value than its actual market worth on official documents. This is done to reduce the amount of stamp duty, registration fees and taxes to be paid during the registration. The undervaluation is reflected in the sale deed where the property’s sale price is recorded at a lower figure than the agreed–upon value.
For example, a property is valued at Rs 50 lakh. However, you register it at Rs 45 lakh to save on certain fees. Assuming a 5% stamp duty rate, the duty on this property at Rs 50 lakh would be Rs 2.5 lakh, whereas at Rs 45 lakh, it would be Rs 2.25 lakh. This would result in a saving of Rs 25,000. Similarly, for 1% registration charges, the fees for a property valued at Rs 50 lakh would be Rs 50,000, while at Rs 45 lakh, it would be Rs 45,000, saving Rs 5,000. Hence, you will save Rs 30,000 in upfront costs.
While this might seem like an attractive option to save money upfront, it is illegal and can lead to significant legal and financial consequences.
Why do some buyers undervalue their property during registration?
Buying a house involves substantial financial outlays, including the down payment, home loan processing fees, legal fees, interior costs and other associated expenses. Amidst these mounting costs, buyers may find themselves strapped for cash and look for ways to save. When faced with the additional burden of paying hefty stamp duties and registration fees, undervaluing the property to reduce costs can seem tempting. It can feel like a significant relief in an already expensive process.
In some cases, builders might encourage buyers to undervalue properties during registration. This is due to the builder’s desire to close deals quickly and attract buyers by offering seemingly lower costs. Builders may present undervaluation as a common or harmless practice, downplaying the risks and emphasizing the potential savings. For buyers, it may not take much convincing to agree to this. Furthermore, by undervaluing the property, builders might avoid paying higher taxes as the final sale price affects their tax liabilities. A quick sale with lower upfront costs to the buyer can mean faster inventory turnover, allowing them to move on to new projects sooner.
Legal and financial implications of undervaluing your property during registration
While the short-term savings from undervaluation might seem attractive, the long-term legal and financial consequences can outweigh the benefits, making it a risky and costly decision.
Legal risks
Undervaluing property during registration is illegal under Indian law. The law mandates that properties must be registered at their true market value and any attempt to undervalue them can lead to serious legal consequences. Authorities can impose heavy penalties and fines on both the buyer and the seller if the undervaluation is detected. In some cases, the property transaction can be declared null and void, leading to potential legal disputes and challenges. Moreover, undervaluation can attract the attention of tax authorities who may investigate the transaction, potentially leading to additional fines or legal action.
Financial consequences
The financial repercussions of undervaluing a property can be severe. It can negatively impact the home loan process. Banks and financial institutions base loan amounts on the property’s registered value. If a property is undervalued, the loan amount sanctioned may be lower than expected, forcing the buyer to arrange additional funds to cover the shortfall. Additionally, when reselling the property, the buyer may face difficulties in achieving its true market value. Since the property was initially registered at a lower value, potential buyers might question its actual worth or the seller could face increased capital gains tax liabilities if the sale price significantly exceeds the registered value.
Undervaluation complicates the process of obtaining insurance coverage. Insurance companies assess property value based on official registration documents. If a property is undervalued, the insurance coverage might fall short, leaving the owner exposed to financial risk in case of damage or loss. This gap between the insured amount and the actual market value can lead to significant out-of-pocket expenses during insurance claims.
‘Facing financial constraints, I chose to undervalue my property during registration, believing it would reduce my immediate costs, such as stamp duty and registration fees. I was planning on redirecting these savings towards the interiors. My builder assured me that this would not create any future problems. However, I soon discovered that I could not obtain insurance for the actual price I paid. This has left me vulnerable in case of unforeseen events,’ said Prakash Pathak, a resident of a low-floor project in Knowledge Park 5, Noida.
Impact of undervaluing your property: Case studies
Thousands of homebuyers in Kerala received notices for undervaluation
In March 2023, media reports indicated that around 2 lakh individuals received notices for allegedly undervaluing land prices in their sale deeds and were at risk of facing revenue recovery procedures. These notices were issued to those involved in land transactions between 2018 and 2023, with a requirement to pay the fair value determined by officials before the specified deadline to avoid further legal action.
Homebuyer loses out on a flat purchase due to hampered home loan process
Vijay Thakur had his eyes set on a 2 BHK in an under-construction society in Greater Noida’s Knowledge Park 5, valued at Rs 55 lakh. After making a 20% down payment to the builder, he planned to finance the remaining through a home loan. However, during the registration process, the builder suggested undervaluing the property at Rs 45 lakh to save on stamp duty and registration charges. Vijay agreed, hoping to cut down on upfront costs. This decision, however, backfired when his home loan application was processed. Since the bank would only finance 80% of the officially declared property value, which was now Rs 45 lakh, his loan approval was limited to Rs 36 lakh. This left Vijay with a shortfall of Rs 8 lakh, which he needed to arrange on short notice to complete the purchase. Unfortunately, he was unable to gather the additional funds and had to forfeit the flat he had hoped to buy.
Homeowner faced heavy capital gains tax due to undervaluing property
Aanchal Singh bought a 3 BHK apartment in Sector 120, Noida, for Rs 1 crore in 2010. However, on the builder’s advice, she agreed to undervalue the property. As a result, the property was officially registered at just Rs 75 lakh. This decision backfired years later when she decided to sell the property. In 2023, Aanchal sold the property for Rs 2.5 crore, taking advantage of the significant appreciation in the real estate market. However, the undervaluation led to a much higher capital gains tax liability when she calculated her tax obligations. Here’s how it played out:
- Registered purchase price (Undervalued): Rs 75 lakh
- Actual purchase price: Rs 1 crore
- Sale price: Rs 2.5 crore
- Indexed cost of acquisition: Since the Cost Inflation Index (CII) for 2010 was 167 and for 2023 is 348:
- Actual Indexed Cost: (Rs 1 crore X 348/167) = Rs 2.08 crore
- Undervalued Indexed Cost: (Rs 75 lakh X 348/167) = Rs 1.56 crore
- Capital Gains Calculation:
- With Actual Purchase Price:
- Capital Gains: Rs (2.5 crore – Rs 2.08 crore) = Rs 42 lakh
- Capital Gains Tax (20%): Rs 8.4 lakh
- With Undervalued Purchase Price:
- Capital Gains: Rs (2.5 crore – Rs 1.56 crore) = Rs 94 lakh
- Capital Gains Tax (20%): Rs 18.8 lakh
Due to the undervaluation, Aanchal’s taxable capital gains were significantly higher, leading to a capital gains tax of Rs 18.8 lakh instead of Rs 8.4 lakh – a difference of Rs 10.4 lakh.
Housing.com POV
Navigating the property registration process in India requires careful consideration of legal and financial factors. While the prospect of saving on upfront costs might make undervaluing seem appealing, the long-term consequences can be severe. Accurate property valuation is essential for ensuring compliance with legal requirements and avoiding significant financial pitfalls.
Undervaluing a property to save on immediate costs can lead to legal penalties, financial complications and challenges with home loans, insurance and future sales. As demonstrated by the case studies, such practices can result in hefty fines, increased capital gains tax and other unforeseen costs. By understanding and adhering to proper property valuation practices, buyers and sellers can protect themselves from these risks and ensure a smoother, more secure real estate transaction.
Making informed decisions during the registration process is crucial for safeguarding your financial interests and maintaining legal integrity. Avoiding shortcuts, such as undervaluation, can help avoid future worries and ensure that your property transaction remains legal and beneficial in the long run.
FAQs
What are the risks of undervaluing property during registration?
Undervaluing property during registration can lead to legal complications, including penalties and fines. It may result in disputes during future transactions as the actual market value is not accurately reflected in official records.
How does undervaluing affect stamp duty and registration fees?
Undervaluing a property reduces stamp duty and registration fees, however, this short-term saving can backfire. Authorities may reassess the property and demand additional payments, leading to financial penalties and delayed transactions.
Can undervaluing a property impact future sales?
Yes, undervaluing property can create issues during future sales. Buyers may face difficulties securing loans and the property’s resale value might be questioned, potentially complicating or derailing the sale process.
What legal actions can authorities take if a property is undervalued?
If a property is undervalued, authorities can impose hefty fines, initiate legal proceedings and demand payment of the correct stamp duty. These actions can cause delays and financial losses for the property owner.
Is it possible to rectify an undervalued property registration?
Yes, however, rectifying an undervalued property registration involves paying the difference in stamp duty along with penalties. It is a time-consuming process that can delay other transactions and incur additional legal costs.
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