Tax Implication on Sale & Purchase of Immovable Property for Seller & Buyer

Introduction

The sale or purchase transaction of immovable property carries specific tax implications. Immovable property means land or buildings or both. Land or building or both can be categorized as either capital assets or stock-in-trade. The sale of property is subject to both income tax and stamp duty. In this process, both buyers and sellers, as well as the registrar, bear certain obligations.

The determination of the full value of consideration for calculating capital gains in the hands of the seller is stipulated by Section 50C. This comes into play when the actual sale consideration is lower than the stamp duty value. Section 56(2)(x)(b) outlines the taxability of such transactions in the hands of the buyer, and Section 194-IA places the responsibility on the buyer to deduct tax at source when the value of property exceeds specified threshold.

Furthermore, Section 285BA places the duty on the registrar to report high-value transactions to the income tax department.

In this article, we will discuss the tax implications for both buyers and sellers.

What is Capital Asset?

A capital asset means property of any kind held by an assessee, whether or not connected with their business or profession. However, this does not include stock-in-trade, consumable stores, or raw materials held for the purpose of the assessee’s business or profession, Rural agricultural land, Personal effects, Specified Gold Bonds, Special Bearer Bonds, 1991 and Gold Deposit Bonds.

Capital assets are further categorized into ‘short-term capital assets’ and ‘long-term capital assets’ based on their holding period. An immovable property, such as land or a building or both, held for 24 months or less before its sale qualifies as a ‘short-term capital asset.’ If the such property is held for more than 24 months prior to its sale, it qualifies as a ‘long-term capital asset.’

The sale of a short-term capital asset results in short-term capital gain (STCG), while the sale of a long-term capital asset leads to long-term capital gain (LTCG).

What is Stock -in-Trade?

Stock-in-trade means asset held for sale in the ordinary course of business, assets in the process of production for such sale, or assets in the form of materials or supplies to be consumed in the production process or in the rendering of services.

For income tax purposes, why is an asset categorized as a capital asset and stock-in-trade?

Income from the sale of stock-in-trade, which is land, buildings, or both for this article, is computed under the head ‘Profit and Gains of Business or Profession’. The sales price of such stock-in-trade is determined in accordance with the provisions outlined in section 43CA.

Gains from the sale of a Capital Asset, like land or buildings or both, are calculated under the head ‘Capital Gain’. The full value of consideration for calculating gains from the sale of such capital assets is determined as specified in section 50C.

The tax rates differ between income derived from the sale of stock-in-trade and gains resulting from the sale of a capital asset. Long-term capital gains are subject to a special income tax rate of 20%.

What is stamp duty?

The state government levies a tax known as “stamp duty” on the sale of immovable property. Based on the property’s worth at the time of registration, stamp duty is collected.  States have different stamp duty rates. In most cases, the property buyer is responsible for paying it. Property’s worth for this purpose is also known as stamp duty value, circle Rate, Government Value, Guideline Value, Ready Reckoner Value.

Tax Implications for the Seller on the Sale of Immovable Property

How is the capital gain on the sale of immovable property computed in the hands of seller?

Property Sold Above Stamp Duty Value:

When the property is sold at a price higher than the stamp duty value, the actual sale consideration will be taken as the full value of consideration for computation of capital gain chargeable to tax.

Illustration 1. Mr. Mayank purchased a flat during the financial year 2018-19 for a consideration of ₹68,45,300/-. At the time of purchase, he paid stamp duty and registration charges amounting to ₹4,10,720. Later, in the financial year 2023-24, he sold the said flat for ₹1,15,00,000 and paid brokerage of ₹1,05,500/-. Notably, the stamp duty value of the property on the sale date was ₹1,02,09,820. Given that Mr. Mayank held the property for more than 24 months, it falls under the category of Long-Term Capital Gain. The Cost Inflation Index (CII) was 280 for the financial year 2018-19 and has increased to 348 for the financial year 2023-24.

In the present case, the actual sale consideration will be taken as full value of consideration for computing capital gain. The stamp duty value is ignored. Cost of acquisition of the flat was ₹ 72,56,050 (₹68,45,300 + ₹4,10,720).

Computation of income chargeable under the head “Capital Gains” of Mr. Mayank for A.Y.2024-25

Property sold Below Stamp Duty Value:

When the actual sale consideration is less than the stamp duty value, the determination of the full value of consideration is governed by the provisions of Section 50C of the Income Tax Act, 1961. This situation can result in two possible scenarios.

In the first scenario, if the stamp duty value is more than 110% of the actual sale consideration, and the second scenario in which the stamp duty value is equal to or less than 110% of the actual sale consideration.

In the first scenario, the stamp duty value shall be taken as the full value of consideration for computing the Capital Gain. In the second scenario, actual sale consideration shall be taken as the full value of consideration for working out the capital gain, stamp duty value is ignored.

In the first scenario, the seller claims before the Assessing Officer (AO) that stamp duty value (SDV) exceeds the Fair market value (FMV) of the property on the date of sale and make an application to AO, provided the seller hasn’t disputed the stamp duty value, for referring the property to the valuation officer for its valuation.

Upon receiving the seller’s application, the AO is obligated to make this reference. If the valuation officer determines a value lower than the stamp duty value, that determined value becomes the full value of consideration. If the determined value is higher than the stamp duty value, then the stamp duty value remains the full value of consideration.

Illustration 2. Mr. Sarthak purchased a residential property during the financial year 2013-14 for a consideration of ₹52,00,000. At the time of purchase, he paid stamp duty and registration charges amounting to ₹3,12,000. Later, in the financial year 2023-24, he sold the property for a consideration of ₹105,00,000 and paid brokerage of ₹75,500. Notably, the stamp duty value of the property on the sale date was ₹1,20,00,000. Given that Mr. Sarthak held the property for more than 24 months, it falls under the category of Long-Term Capital Gain. The Cost Inflation Index (CII) was 220 for the financial year 2013-14 and has increased to 348 for the financial year 2023-24.

In the current scenario, the stamp duty value of the property sold is more than the actual sale consideration. This triggers the application of Section 50C for determining the full value of consideration. 110% of the actual sale consideration is ₹1,15,50,000 (110% of ₹1,05,00,000). As the stamp duty value is more than ₹ 1,15,50,000 and therefore, the stamp duty value of ₹1,20,00,000 will be taken as the full value of consideration. The cost of acquiring the residential property was ₹55,12,000 (₹52,00,000 + ₹3,12,000).

Computation of income chargeable under the head “Capital Gains” of Mr. Sarthak for A.Y.2024-25

Illustration 3. Let’s consider an alternative scenario for illustration 2. In this case, the sale consideration is ₹1,16,50,000-, and the stamp duty value of the property on the sale date stands at ₹1,26,56,400. All other information remains the same.

In the current scenario, the stamp duty value of the sold property exceeds the actual sale consideration. This triggers the application of Section 50C for determining the full value of the consideration. 110% of the actual sale consideration is ₹1,28,15,000 (110% of ₹1,16,50,000). Since the stamp duty value of ₹1,20,00,000 is lower than ₹1,28,15,000-, the actual sale consideration of ₹1,16,50,000 will be considered as the full value for calculating capital gains.  The cost of acquiring the residential property was ₹55,12,000 (₹52,00,000 + ₹3,12,000).

Computation of income chargeable under the head “Capital Gains” of Mr. Sarthak for A.Y.2024-25

Illustration 4.  Now, let’s explore an alternative scenario for illustration 2. In this case, Mr. Sarthak, without contesting the stamp duty valuation of the property claim that the STV is more than FMV of residential property, has applied to the AO to refer the property for valuation by a valuation officer. The valuation officer, upon receiving the AO’s reference, assessed the property’s value at ₹1,16,50,000. All other details remain unchanged.

In the present case, the stamp duty value of the sold property exceeds the actual sale consideration. This triggers the application of section 50C, where the stamp duty value of ₹1,20,00,000 is taken as the full value of consideration. However, upon Mr. Sarthak’s application and the subsequent reference by the AO to the valuation officer, the property has been valued at ₹1,16,50,000. This value determined by the valuation officer is less than the stamp duty value of ₹1,20,00,000 and more than the actual sale consideration of ₹1,05,00,000. As a result, the full value of consideration for capital gain computation will be ₹1,16,50,000.

Computation of income chargeable under the head “Capital Gains” of Mr. Sarthak for A.Y.2024-25

Illustration 5.  Now, let’s explore an alternative scenario for illustration 2. In this case, Mr. Sarthak claims that the SDV is more than the FMV of residential property, without contesting the stamp duty valuation, has applied to the AO to refer the property for valuation by a valuation officer. The valuation officer, upon receiving the AO’s reference, assessed the property’s value at ₹1,21,50,000. All other details remain unchanged.

In the present case, the stamp duty value of the sold property exceeds the actual sale consideration. This triggers the application of section 50C, where the stamp duty value of ₹1,20,00,000 can be taken as the full value of consideration. However, upon Mr. Sarthak’s application and the subsequent reference by the AO to the valuation officer, the property has been valued at ₹1,21,50,000. This valuation, determined by the valuation officer, exceeds both the stamp duty value of ₹1,20,00,000 and the actual sale consideration of ₹1,05,00,000. As a result, the stamp duty value of ₹1,20,00,000 remains the full value of consideration for capital gain computation.

Computation of income chargeable under the head “Capital Gains” of Mr. Sarthak for A.Y.2024-25

Tax Implications for sale of immovable Property with Different Agreement and Sale Dates, and immovable property sold Below Stamp Duty Value

When the date of agreement differs from the date of registration of immovable property, and either the stamp duty value on the agreement date or property registration date is more than the actual sale consideration, this triggers the application of Section 50C for determining the full value of consideration. A question arises as to which of the two dates’ stamp duty value will be taken into account for the determination of the full value of consideration. This question gives rise to two possible scenarios.

In the first scenario, whether token money has been received by the seller on or before the date of entering into the agreement by way of account payee cheque or account payee bank draft or the use of electronic clearing systems such as IMPS, UPI, RTGS, NEFT, Net banking, debit card, credit card, or BHIM Aadhar Pay.

In the second scenario, token money has been received by the seller on or before the date of the agreement not by way of the mode prescribed in the first scenario.

In the first scenario, the stamp duty value as of the date of entering into the agreement will be considered for determining the full value of consideration. In the second scenario, the stamp duty value as of the date of property registration will be considered for determining the full value of consideration.

Let us take a case where for sale of building –

• the actual consideration is₹ 100 lakhs;
• the stamp duty value on the date of agreement is ₹ 109 lakhs; and
• the stamp duty value on the date of transfer is ₹ 112 lakhs.

(i) If any part of the consideration is paid by prescribed electronic mode on or before the date of agreement

The actual consideration of ₹ 100 lakh would be the full value of consideration, since stamp duty value of ₹ 109 lakhs on the date of agreement does not exceed 110% of actual consideration of ₹ 100 lakhs.

(ii) If no part of the consideration is paid by prescribed electronic mode on or before the date of agreement

Stamp duty value of ₹112 lakhs on the date of sale would be the full value of consideration, since the same exceeds 110% of actual consideration of ₹100 lakhs.

Tax implication on the buyer of Immovable Property

When a buyer acquires an immovable property for a consideration which is less than the stamp duty value, the buyer may become liable for income tax under section 56(2)(x)(b) of the Income Tax Act, 1961. This section comes into effect when the difference between the stamp duty value and the cost of acquisition is more than the higher of ₹50,000 or 10% of the consideration. If the buyer subsequently sells the immovable property to which the provisions of section 56(2)(x)(b) apply, the cost of acquisition for the computation of capital gains in the hands of the buyer will be the stamp duty value, not the actual cost of acquisition.

There can be another scenario in which section 56(2)(x)(b) will not be applicable, even if the actual cost of acquisition is lower than the stamp duty value. This is because the difference between the stamp duty value and the cost of acquisition is not more than the higher of ₹50,000 or 10% of the consideration. In this situation, the cost of acquisition for calculating the capital gain on any subsequent sale of the immovable property by the buyer will be based on the actual cost of acquisition.

The buyer of an immovable property is obligated to withhold tax at source under section 194-IA when the cost of acquisition or the stamp duty value of the property is ₹50 lakhs or greater. The tax deduction is made at a rate of 1%. After deducting the tax, the remaining cost of acquisition is then paid to the seller.  This tax deducted is reflected in form 26AS and AIS of the both buyer and seller.

Let’s analyze the scenario using the following information:

Illustration 6. Mr. Sarthak, an automobile dealer, sold a building situated in Hazaribag to his friend Mr. Reyansh, who is in the business of dealing with automobile spare parts. The sale took place on January 1, 2024, at a price of ₹1,08,00,000, while the stamp duty value of the building at that time was ₹1,25,00,000. It’s mentioned that Mr. Reyansh intends to use the building as his office premise. We will discuss the tax implications and other obligations in the hands of Mr. Reyansh.

In this case, the stamp duty value of the building exceeds the cost of acquisition, resulting in a difference of ₹17,00,000. This difference is more than ₹10,80,000 which is calculated as the higher of ₹50,000 and ₹10,80,000 (10% of actual consideration ₹1,08,00,000)

As a result, the entire difference of ₹17,00,000 is considered chargeable to tax under the head “Income from Other Sources” in the hands of Mr. Reyansh as per section 56(2)(x)(b). Additionally, Mr. Reyansh will need to withhold tax of ₹1,25,000, as the value of the transaction is ₹1,25,00,000, which exceeds the ₹50,00,000 threshold as required under section 194-IA.

Furthermore, it’s important to note that the cost of acquisition for the computation of capital gains in the event of a subsequent sale of the building by Mr. Reyansh will be taken as ₹1,25,00,000, which represents the stamp duty value of the building at the date of its acquisition.

Illustration 7. Mr. Gyan Prakash, an automobile dealer, sold a plot of land situated within Hazaribag municipal corporation to his friend Mr. Nainish, who is in the business of dealing with automobile spare parts. The sale took place on January 1, 2024, at a price of ₹1,08,00,000, while the stamp duty value of the building at that time was ₹1,18,35,200. We will discuss the tax implications and other obligations in the hands of Mr. Nainish.

In this case, the stamp duty value of the building exceeds the cost of acquisition, resulting in a difference of ₹10,35,200 (₹1,18,35,200 – ₹1,08,00,000). This difference is less than ₹10,80,000 which is calculated as the higher of ₹50,000 and ₹10,80,000 (10% of actual consideration ₹1,08,00,000). Provisions of section 56(2)(x)(b) will not trigger in this case since ₹10,35,200 less than of ₹10,80,000.

As a result, nothing will be chargeable to tax under the head “Income from Other Sources” in the hands of Mr. Nainish as per section 56(2)(x)(b). Additionally, Mr. Nainish will need to withhold tax of ₹1,18,352, as the value of the transaction is ₹1,18,35,200, which exceeds the ₹50,00,000 threshold as required under section 194-IA.

Furthermore, it’s important to note that the cost of acquisition for the computation of capital gains in the event of a subsequent sale of the plot of land by Mr. Nainish will be taken as ₹1,08,00,000, which represents the actual cost of acquisition of the plot of land paid to the Mr. Gyan Prakash.

Responsibility of the registrar

The Registrar of Immovable Property bears the responsibility of reporting high-value transactions to the income tax authority. Transactions involving the sale or purchase of immovable property for a consideration of ₹30 lakhs or more are categorized as high-value transactions for reporting purposes. These high-value transactions are documented in Form 26AS and the Annual Information Statement (AIS) of both the property seller and buyer. The Assessing Officer conducts a cross-verification process to ensure that the taxpayer has accurately reported such transactions, along with the relevant capital gains and the difference as per section 56(2)(x)(b), in his Income Tax Return (ITR).

Conclusion:

The sale and purchase of immovable property carry significant tax implications that must be carefully considered by both buyers and sellers. Immovable property can be categorized as either capital assets or stock-in-trade, each having distinct tax treatment. The determination of the full value of consideration, particularly when it deviates from the stamp duty value, plays a crucial role in calculating capital gains. Sections 50C, 56(2)(x)(b), and 194-IA of the Income Tax Act play vital roles in determining the tax liability and obligations of both parties. The scenarios involving property sold above or below the stamp duty value create complex tax computations for sellers. Buyers also face tax obligations under Section 56(2)(x)(b) when acquiring property for a consideration below its stamp duty value.

In essence, navigating the tax implications of immovable property transactions requires a deep understanding of the various provisions within the Income Tax Act. Both sellers and buyers should meticulously evaluate the applicable sections and seek professional advice to ensure compliance and optimal tax management in these transactions.

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Disclaimer: The information provided in this article is for general informational purposes only. It is not intended as professional advice and should not be construed as such. No action should be taken based solely on the information contained in this article. Always consult with a qualified professional for advice tailored to your specific situation.