Income Tax Relief for home buyers & Real Estate Developers

In a recent press conference conducted by the Hon’ble Finance Minister Ms. Nirmala Sitharaman on 12^th November 2020 followed by a press release dated 13^th November 2020, Diwali gift for the real estate developers and home buyers was announced in the form of income tax relief where a new amendment was proposed in section 43CA and Section 56(2)(x) of the Income Tax Act, 1961 (“Act”).

Section 43CA of Act states that where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer (also known as circle rate), then in that case circle rate shall be taken as full value of consideration for the purpose of  computing profits and gains from transfer of such asset.

However, in case the difference between the circle rate and the actual sale consideration is less than 10% or equal to 10% of the actual sale consideration, then the amount received or receivable can be considered as the full value of consideration.

Now, the Finance minister has announced that the percentage of 10% is proposed to be increased to 20% from 12^th November 2020 to 30^th June 2021 for only primary sale of residential units of value up to Rs 2 crores.

The following change can be understood with the help of the illustrations given hereunder:

Further, here are a few illustrations covering different scenarios after the said amendment.

To give some background, the Section 43CA was introduced in Finance Act 2013 to cover such transfer of immovable property held as stock in trade wherein the undervalued portion of stamp duty valuation of immovable property held as stock in trade becomes taxable as business income in the hands of the seller. Consequently, section 56(2) was amended for the buyer of such property which is undervalued as compared to its stamp duty valuation wherein the difference shall be taxable under the head “Income from Other Sources”.

Subsequently, Finance Act 2018 inserted a proviso to Section 43CA to provide that where the stamp duty value does not exceed 105% of the consideration received (or accruing as a result of the transfer), the consideration so received (or accruing as a result of the transfer) shall be deemed to be the full value of the consideration. Thus, wherever the actual sale consideration is lower than the circle rate but still within the range of 5% of the actual sale consideration, the actual sale consideration shall be considered as full value of consideration. Similar 5% safe harbour was provided in section 50C and section 56(2)(x) of the act.

Further, the Finance Act 2020 extended the said safe harbour of 5% to 10% with effect from 1^st April 2020 i.e, for Assessment year 2021-2022.

Now, the safe harbour rule has been extended to 20% of actual sale consideration for the period from 12^th November 2020 to 30^th June 2021 in respect of only primary sale of residential units value up to Rs. 2 crores.

This amendment will help in boosting demand in the real estate sector and will enable the real estate developers to liquidate their unsold inventory at a rate substantially lower than the circle rate and thus provide benefit to the home buyers.

However, the extended safe harbour rules of 20% are applicable only for a limited set of transactions which satisfy the following conditions:

1. Residential units of value upto Rs. 2 crores.

2. Primary sale by real estate developer to home buyers (i.e, stock-in-trade)

3. Sale from 12^th November 2020 to 30^th June 2021

The following are some of the illustrative scenarios where the said extension of safe harbour rules will not apply.

1. Sale of Capital Assets (not stock-in-trade) i.e, sale by one home buyer to another.

2. Sale of land or commercial units (i.e, Offices/shops etc.)

3. Sale of residential units above Rs. 2 crores

It is important to note that stamp duty will still be paid at the circle rate and there is no change in the provisions of The Registration Act, 1908.

Lastly, government has only introduced these changes by way of press release, necessary amendment to the Act would be proposed in due course, only then the fineprints will be evaluated.

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About the Author: The Author, Deepanshu Gupta, is Managing Partner of DGA which is a multi-disciplinary audit and advisory firm providing gamut of services including audit, income tax, consulting and outsourcing services and can be contacted at deepanshu@dgaglobal.in