The last 4-5 years have not been the best period for the real estate industry in India. Many real estate companies have become bankrupt and many still continue to be under great financial stress due to stalled projects. Even a normal home buyer is not in a profitable position due to declining property rates. The Government is taking steps to uplift the Industry. Passing of ‘RERA’ or Real Estate (Regulation and Development) Act, 2016, bringing in various amendments in both direct and indirect taxation laws are some of the notable steps taken by the government.

Despite the stumbling real estate sector, the home buyers are still made to pay income tax on real estate transactions done by them even if such transaction is done at a loss!!! Yes, that’s true.

Following are the main causes of such unjustifiable tax-

  • Section 50C and Section 43CA- If a property is sold at a price which is less than the stamp duty value of such property, then the stamp duty value shall be deemed to be the sale price and taxability shall be determined accordingly (A variation of 5% is allowed)
  • Section 56(x)– If the property is purchased for a price which is less than the stamp duty value of such property, then the difference between the stamp duty value and purchase price shall be deemed to be Income of the home buyer and taxability shall be determined accordingly (A variation of 5% is allowed)
  • Capital gain Index does not indicate true picture– The Capital Gain Index (CII) is used to compute inflated or adjusted cost of a house property in case such property is sold after being held for more than 2 years. The 1st decade of 21st century saw the real estate boom and therefore in various cases the CII notified by the government does not compute the true value of the property which is being sold. Specially where the property was purchased in early 2000’s or late nineties.

So, there can be a situation where the assessee has genuinely sold or purchased the property at a reduced price or has not actually made a profit from sale of property but has end up paying Income Tax due to the above laws. In this article we will discuss some peculiar circumstances where a genuine assessee can be protected from the tax burden by your advice as a Chartered Accountant or Taxation consultant to such genuine assessees.

Let’s get started-

Circumstance 1- Assessee tells you– I have sold a property for Rs. 50,00,000 which is at par with market value. The stamp duty value of the property was Rs. 60,00,000. What should I do to protect myself from Income Tax?

What can be your advice- As per Section 50C, sub section 2, clause a-

  • Where the assessee claims before the Assessing Officer that the Stamp Duty Value exceeds the fair market value of the property as on the date of transfer, and
  • Such stamp duty value has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,

Then the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer.

In case the valuation officer reports-

a) Market value is less than Stamp Duty value and less than the actual sales consideration, then actual sales consideration shall be deemed to be sales consideration, or

b) Market value is less than Stamp Duty value but more than the actual sales consideration, then market value shall be deemed to be sales consideration, or

c) Market value is more than Stamp Duty Value then stamp duty value shall be deemed to be sales consideration.

Therefore, it is advisable that a valuation of the property as on the date of sale be done by the assessee and the actual sales consideration of Rs. 50,00,000 be considered as sales consideration for calculating capital gain, instead of considering Rs. 60,00,000 as sales consideration.  It is very important to note that such valuation should be done by a registered valuer which adds to the authenticity of the valuation and whenever the case comes up for scrutiny, the assessee should contend to the assessing officer that the market value of the property is equal to or less than the stamp duty value, and therefore the property is sold for a price less than the stamp duty valuation.

Circumstance 2- Assessee tells you– I have sold a property for Rs. 50,00,000 which is at par with market value. The stamp duty value of the property is also Rs. 50,00,000. The Indexed Cost of the property is coming out to be Rs. 30,00,000. How can I Save myself from the Income tax? I am ready to make any kind of investment.

What can be your advice- The Long-term capital gain chargeable to tax shall be Rs. 20,00,000 (50,00,000- 30,00,000). Now, the only way to save tax is to invest the money in any of the following two alternatives-

  1. Section 54- Investment in Residential House property– The tax on Long term capital gain from transfer of residential house property can be saved by investing the gain amount in another residential house property. In case the gain amount is not more than Rs. 2 crores then investment can be done in two residential house properties.

The investment should be made by purchasing the new house property 1 year before or within 2 years after the date of transfer or by constructing a new house property within 3 years after the date of transfer. The new residential house purchased should not be transferred within three years from the date of its acquisition or construction.

  1. Section 54EC- Investment in certain bonds– The tax on Long term capital gain from transfer of residential house property can be saved by investing the gain amount in certain specified bonds. These specified bonds are redeemable after 5 years and issued by:-
  • National Highways Authority of India (NHAI) or
  • Rural Electrification Corporation Ltd (RECL) or
  • Power Finance Corporation (PFC) or
  • Indian Railway Finance Corporation Ltd. (IRFC)

The maximum investment that can be done in these bonds is Rs. 50,00,000 and must be done within 6 months from the date of sale of house property. These bonds give a moderate return of 5.75% and carry zero risk. Considering the tax saving and stumbling real estate sector, this investment option is very compelling.

Circumstance 3- Assessee tells you- I invested Rs. 30,00,000 in an under-construction property project in January 2011. I took a loan of Rs. 3,00,000 to make the investment and I was supposed to get the possession by December 2015. I got the possession in December 2017 and sold the property for Rs. 50,00,000 in December 2018 and repaid the bank loan. The Interest paid to bank from January 2011 till December 2018 was Rs. 20,00,000.

What can be your advice- The possession of the property was taken in December 2017 and the property was sold on December 2018. Therefore, the resulting gain will be short term in nature against which the investment options as discussed above shall not be available.

Also, the benefit of interest paid on housing loan shall not be available to the assessee (under section 24) till FY 2016-17 as the possession was not taken. It is advisable that the assessee should refrain from taking the benefit of interest paid during FY 2017-18 and FY 2018-19 also as the benefit will be restricted to Rs. 30,000 only (Possession not taken within 5 years from the end of the Financial year in which loan was taken).

Now, by not taking the benefit of interest paid on loan under section 24 or any provision of the act, the assessee can claim the interest paid to bank as part of cost of acquisition and therefore short term Capital gain shall be = (50,00,000-30,00,000-20,00,000)= Nil

Circumstance 4- Assessee tell you- I have sold a property for Rs. 50,00,000. The indexed cost of acquisition of the property is Rs. 40,00,000. The assessee has paid interest of Rs. 2,50,000 p.a. for 10 years to a bank on a loan taken to purchase this property. Assume that the property was self occupied and the assessee has claimed the benefit of interest paid on such housing loan every year (under section 24 of the Act).

What can be your advice- Under section 24 of the Act, the benefit of interest paid on loan taken for purchase of self occupied property is restricted to Rs. 2,00,000 p.a. It must be noted that the interest, whose benefit is not taken under section 24 or any other provision of the Act, shall be available as part of cost of acquisition of the property.

Therefore, Rs. 50,000 (2,50,000-2,00,000) × 10= 5,00,000 shall be included in the cost of acquisition (Subject of applying indexation every year). So, LTCG shall be = 50,00,000- 40,00,000- 5,00,000 (subject to indexation).

Author Bio

Qualification: CA in Practice
Company: Vinay Sethi and Associates
Location: Delhi, New Delhi, IN
Member Since: 17 Apr 2018 | Total Posts: 4
Hello, CA. Shekar Shankar from New Delhi. A Practicing Chartered Accountant by profession, Partner in Vinay Sethi and Associates, and a teacher by passion. Teaching gives me happiness and I Wish to make a difference by sharing the power of knowledge by teaching in a simple manner and in the process View Full Profile

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5 Comments

  1. Sudhir Agarwal says:

    Very informative article..
    I shall be grateful, if you can advice in my strange scenario->

    I am an NRI. I booked one under construction house property in the FY 2012-13 and registered with the help of bank loan.
    Subsequently in 2015-16, that registration was cancelled, builder repaid money to the bank and allotted me under construction house, my balance earlier payment (Earlier paid to the builder minus builder refunded amount to the bank) considered for new house allotted me in 2015-16. I took new bank loan in 2015-16 for this property.

    I took the possession of this property on 13 March 2019 FY 2018-19 and showed deemed let out for 17 days. Actually it is rented out w.e.f. 1 April 2019.
    I filed my ITR2 in which I claimed 1/5th of the interest paid during FY 2012-13 to FY 1017-18 and full interest paid for the FY 2018-19.

    I am planning to sale the property in near future say in the FY 2019-20.

    1. Will it be STCG or LTCG?
    2. If I file revised ITR and do not claim interest, can I add as cost of acquisition while calculating STCG or LTCG?

    1. Shekhar says:

      Dear Mr. Sudhir,

      Thank you for reading the article and thanks for your kind words. Regarding the query you raised, following should be noted-

      1) The advance given by you for the 1 st property (i.e.) 2012-13 property has been refunded back by the builder and this contract stands cancelled. Therefore, interest paid on this old loan cannot be claimed as deduction under house property chapter. Interest paid on new loan only can be claimed as deduction. So, 1/5 interest can be claimed only from FY 2015-16 to FY 2017-18 (That too if you don’t claim, you can add the same to cost of acquisition of the property- See point 3)

      2) The balance payment due from builder (Earlier paid to the builder minus builder refunded amount to the bank) against which another flat is allotted, is just an advance for the new property. The actual possession has been taken in March 2019 and therefore period of holding of new property shall start from March 2019 only. If you are planning to sell the property in FY 2019-20, the capital gain will be short term (Holding is less than 24 months)

      3) Now, coming to the main point- Yes you can revise your ITR and remove the 1/5th deduction claimed from FY 2012-13 to FY 2017-18 and complete interest of FY 2018-19 and claim the entire interest from FY 2015-16 to FY 2018-19 as cost of acquisition and claim the benefit in capital gain. So yes it can be done. But whether it should be done will depend on the figures of gain.

      I hope this brings clarity to you. Thank you once again.

  2. Sudhir Agarwal says:

    Very nice article and intelligent examples!

    It is good learning to me that we can add interest in cost of acquisition, if not claimed deduction under house property income earlier.

    Recently I did mistake in claiming interest of newly occupied property, which I am planning to sale.

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