When you enter into an agreement to buy a property, you have to pay stamp duty to the government. The amount of stamp duty is generally based on the value of the property mentioned in the agreement.
To avoid evasion of stamp duty through undervaluation of agreements and to minimise the disputes on quantum of stamp duty, all state governments publish an area-wise, stamp duty ready reckoner on a yearly basis. If the value of the property based on the ready reckoner is higher, than the value of the property stated in the agreement, then, you will have to pay the stamp duty on the basis of the value computed from the rates in the ready reckoner. However, if the agreement value is higher than the ready reckoner valuation, the stamp duty payable will be calculated with reference to the agreement value. The stamp duty valuation also has implications on the income tax of buyers and sellers.
Importance for the seller under income tax laws
As per Section 50C of the Income Tax Act, in case the agreement value is lower than the stamp duty valuation, the law presumes that the seller has received an amount equal to the stamp duty valuation and the capital gains is computed accordingly. However if the differene between the agreement value and stamp duty valuation does not exceed five per cent of the agreement value, this provision will not apply.
However, if the seller claims that the stamp duty valuation is higher than the fair market value of the property, the income tax officer can ask its valuation officer to assess the value the property for capital gains purpose. The value determined by this officer, shall be treated as the sale consideration of the property for income tax purpose. However, if the valuation given by the income tax officer is higher than the stamp duty valuation, such excess valuation shall be ignored and only the stamp duty valuation shall be treated as the sale consideration. This provision is applicable to all the tax payers, including limited companies.
In cases, where the stamp duty valuation is higher than the agreement value, and the tax payer invests the net sale consideration under Section 54F to claim exemption from long-term capital gains, s/he may have to borrow money as the money received may be lower than the amount required to be invested.
Importance for the buyer under income tax laws
As per Section 56(2) (x)(b) of the Income Tax Act, if the difference is higher than Rs 50,000 or five per cent of the agreement value, such difference between the stamp duty valuation and the agreement value shall be treated as income of the buyer. This provision apples to Hindu undivided families (HUFs) and individuals only.
However, if the agreement date and the date of registration are different and thus, the values on these dates are also different, the, the valuation as on the date of agreement can be considered for this purpose, only if full or part consideration was paid by means other than cash, either on or before the date of the agreement.
(The author is a tax and investment expert, with 35 years’ experience)