The government introduced Section 56(2)(x) in the Income-Tax Act in 2017 as a measure to counter tax evasion by undertaking transactions at lower than fair values. Hence, there could be a possibility where the difference between the stamp value and actual consideration is taxed in the hands of seller as well as the buyer.
In case immovable property is received without consideration or inadequate consideration, stamp duty value of property in excess of such consideration is to be declared in your income tax return as income from other sources to be taxed as per your slab. In case your taxable income is above Rs 10 lakh during the FY 2017-18 or later the differential amount is taxed at 30 per cent, such transactions will have tax exemption if the:
1) Stamp duty value does not exceed 105 per cent of consideration.
2) Difference between consideration and stamp duty value is not more than Rs 50,000.
For example, Mr X purchased a property in December 2018 for Rs 50 lakh considering lower market rates or distress sale whereas the stamp duty value of the property was Rs 60 lakh. Mr X has to pay income tax on the differential amount of Rs 10 lakh at his slab rate i.e. Rs 3 lakh at 30 per cent.
If the stamp duty value comes out to be Rs 50,40,000, no tax will be payable because the difference will not be more than Rs 50,000 or 5 per cent of property value. In case you bought the house below stamp duty value after April 1, 2017 but forgot to declare the differential amount as income from other sources in your ITR then deposit the due tax with interest till date at the earliest and request for filing the revised return to income tax authority for avoiding penalties due to tax evasion. It may be noted that the above provision is applicable to Hindu undivided families (HUFs) and individuals only.
Agreement date stamp value can be considered for taxation if part payment made by cheque at the time or before purchase agreement. For example, Mr Tax Budhu had an agreement on April 1, 2018, by paying an advance of Rs 10 lakh for Rs 50 lakh property when the stamp duty value was Rs 50.40 lakh.
However, when he registered it on March 31, 2019, the stamp duty value turned Rs 60 lakh. In this case, the valuation as on the date of agreement can be considered for computing income under section 56 (2) (x). Here, Mr Tax Budhu turned out to be lucky because the agreement date stamp duty value difference is less than Rs 50000. Hence no tax will be paid even if the registration date stamp duty value is Rs 60 lakh.
It may be noted that there is no exemption from tax from this income by investing in NHAI or REC bonds because this does not entail long-term capital gains. Hence, it is important to plan the consideration amount and agreement date while buying property now onwards.
Why under-valuing the property for real buyers doesn't make sense
a) Stable property prices and stamp duty value: The government is making property transactions more transparent to reduce the black money from these transactions as much as possible. Since the black money is getting out of property transactions slowly, prices are also getting stable for last few years. In the past few years, stamp duty values have been increased to the level of market price and there is lesser gap now. Hence, there is very less chance of evading the stamp duty nowadays.
b) Low cost of funds for house: Lower interest rate of 8.5 per cent for taxpayer gets reduced by tax benefit up to 30 per cent. Hence, the effective interest rate becomes 5.95 per cent. This is not all. There is an interest subsidy of Rs 2.67 lakh under Pradhan Mantri Awas Yojna credit-linked subsidy scheme. In the recent budget, the tax benefit on home loan interest has been increased from Rs 2 lakh to Rs 3.50 lakh for the current year to enable middle class for buying houses now.
c) Lower down payment: if there is no gap in stamp duty value and actual price, your down payment is limited to 20 per cent of actual property value.
Recommendation: Don't buy property under stamp duty value, rather use the tax benefit and interest subsidy to build your house. Since the effective cost of fund is low due to higher tax benefit and interest subsidy, it is recommended to buy ready house property for self or rental by availing maximum loan for longest period and keep your taxes minimised.
By paying taxes, you are not going to be eligible for any pension scheme from the government. However, diverting monthly tax and using subsidy, you can create house property for regular cash flow under reverse mortgage during retirement years.
(The author is the Chief Financial Officer, Taxspanner.com)