Income Tax Implications for Buyers, if any Immovable Property is Bought for a consideration less than Stamp Duty Value

Understand income tax implications for buyers when purchasing immovable property below stamp duty value. Learn about Section 56(2)(x) and its consequences. Get expert advice for smooth transactions.

Income-Tax Implications for the Buyers, if any Immovable Property is Bought for a consideration less than the Stamp Duty Value

When any person buys an immovable property for a consideration that is less than the fair market value adopted for Stamp Duty purposes, then the Purchase Cost of the immovable property is governed by the provisions of Section 56(2)(x) of the Income Tax Act. The property’s fair market value for Stamp Duty purposes is called by different names such as Stamp Duty Value, Government Value, Ready Reckoner Value, Guideline Value, Circle Rate, etc.

In this article, the consequences and remedies for the buyers for purchasing a property of a lesser value than the Stamp Duty Value have been discussed with examples for easy understanding.

I. Property purchased for a higher value than the Stamp Duty Value:-

Normally the immovable property is purchased at a higher value than the Stamp Duty Value. In this scenario, the actual purchase cost as per the agreement is taken as the purchase cost of the property and the stamp duty value is ignored.  Let us understand this with an example:-

Mr. A purchased a property for a consideration of Rs.1,10,00,000/-. The stamp duty value of the property on the date of purchase, let us presume, was Rs.1,00,00,000/-. Since the property has been purchased for more than the Stamp Duty Value, the stamp duty value is irrelevant and does not attract any Tax implications for the buyer.

II. Property purchased for a lesser value than the Stamp Duty Value:-

When a person purchases a property for consideration, which is less than the stamp duty value, then only all the complications arise. In this scenario, Section 56(2)(x) of the Income-tax Act is attracted. As defined in section 56(2)(x), if any person receives any immovable property for a consideration that is less than the Stamp Duty Value, then the difference amount between the Stamp duty value and actual consideration paid, is taxable in the hands of the buyer as Income from Other Sources (The difference between the   Stamp duty value and actual consideration paid is more than 50,000/- or more than 10% of the actual consideration, whichever is higher shall be added to the income of the buyer). Here it is pertinent to mention that this provision is applicable to the buyers irrespective of the fact that the immovable property is purchased from any person, including any builder.

For a simple understanding of the provisions of section 56(2)(x) of the Income-Tax Act, the different situations where the immovable property is purchased for consideration below the stamp duty value and their consequences/remedies are discussed hereunder:-

(a) Stamp duty value less than 110% of the actual consideration:- As provided in Section 56(2)(x), if the stamp duty value is less than 110% of the actual consideration, then the actual consideration shall be taken as the purchase cost of the property, and stamp duty value will have no Tax implication on the buyer. Let us understand this with the following example:-

Mr. A purchased an immovable property for a consideration of  Rs. 95,00,000/-. The stamp duty value of the property on the date of purchase was Rs. 1,00,00,000/-, which is higher by the amount of Rs.5,00,000/-.

Here, 110% of the actual sale consideration comes to 1,04,05,000/- (110% of 95,00,000/-). The stamp duty value is Rs. 1,00,00,000/-. Since the stamp duty value    (Rs. 1,00,00,000/-) is less than 110% of the actual consideration (Rs. 1,04,05,000/-), the actual consideration of Rs. 95,00,000/- shall be taken as the purchase cost of the property.

Although the stamp duty value of the property is Rs. 1,00,00,000/- was higher than the actual consideration of Rs. 95,00,000/-, the difference of  Rs. 5,00,000/- between the Stamp duty value and actual purchase consideration, has no Tax implication on the buyer.

(b) Stamp duty value more than 110% of the actual consideration:-

As provided in Section 56(2)(x), if the stamp duty value is more than 110% of the actual consideration, then the difference between the Stamp duty value and the actual consideration shall be taxed in the hands of the buyer as Income from Other Sources.  Let us understand this with the following example:-

Mr. A purchased an immovable property for a consideration of Rs. 90,00,000/-. The stamp duty value of the property on the date of purchase was Rs. 1,00,00,000/-, which is higher by the amount of Rs. 10,00,000/-.

Here, 110% of the actual sale consideration comes to 99,00,000/- (110% of 90,00,000/-). The stamp duty value is Rs. 1,00,00,000/-. Since the stamp duty value (Rs.1,00,00,000/-) is more than 110% of the actual consideration (Rs. 99,00,000/-), the Stamp duty value of Rs. 1,00,00,000/- shall be taken as the purchase cost of the property.

The difference of  Rs. 10,00,000/- between Stamp duty value (Rs. 1,00,00,000/-) and actual purchase consideration (Rs. 90,00,000/-), shall be treated as Income from Other Sources in the hands of the buyer, and Income Tax on the difference of Rs. 10,00,000/- is payable by the buyer.

Advice to the buyers:- From the above scenario (a) and (b), it is clear that the comparison of the stamp duty value with the actual consideration plays a very vital role. It is therefore advised that whenever you plan to purchase any immovable property, you must apply for a Pre-Sale Valuation Report of the property from the relevant Sub- Registrar Office before entering into any negotiation. The Sub-Registrar office issues a Pre-Sale Valuation Report, in which the Stamp Duty Value of the property is arrived at by the Stamp authorities. It will help you to understand the tax implications on the purchase cost of the property.

(c) Fair market value of the property less than the Stamp Duty Value due to encumbrances, litigations, distress sale, etc:- There may be a scenario where the buyer is getting a good deal and for the consideration which has a lesser value than the stamp duty value due to certain reasons/circumstances associated with the property. It may also be a scenario where the actual fair market value is less than the stamp duty value. Even otherwise, stamp duty value does not always reflect the true fair market value of the property. This is mainly due to the fact that stamp duty rates are fixed as per the area, and shortcomings in a specific property are not considered. Let us assume that in such a case the buyer purchased a property for lesser value than the Stamp duty value.

The Sub-Registrars send periodical reports of the property transactions registered with them, to the Income Tax Department. In the cases where the stamp duty value is more than the actual consideration, the Income-tax department gathers the data of these property transactions on the basis of the report of the Sub-Registrar. Here there is a strong possibility that the Return of Income of the buyer may be picked up for Assessment/Re-assessment by the department.

In such a scenario, during assessment/re-assessment proceedings, the buyer can request the Assessing Officer to refer the valuation of the property to the Govt. Valuation Officer. This request can be made to the Assessing Officer even if the Buyer has not challenged/disputed the value adopted by the Stamp Duty Authority before the concerned authority. If such a request is made by the Buyer, the Assessing Officer is legally bound to refer the valuation of the property to Govt. Valuation Officer. Once the Assessing Officer refers the matter to the govt. Valuation Officer, the value determined by the Govt. Valuation Officer shall be taken as the Actual Consideration of the property if the value determined by the Valuation Officer is less than the stamp duty value. If the value determined by the Valuation Officer exceeds the Stamp Duty Value, then the Stamp Duty Value shall be taken as actual consideration and the higher value determined by the Valuation Officer shall be ignored.

Advice to the buyers:- Please preserve all related documents to establish the problems and limitations attached to the property while purchasing the same. Also take and preserve photographs/Videos of the property on the date of purchase, establishing encroachment, etc. on the property. These documents will help you during assessment/re-assessment proceedings and also in the determination of the proper value of the property by Govt. Valuation Officer.

(d) Purchase Consideration where the date of Agreement and date of Registration of the agreement document are different:-

In many instances, while purchasing the immovable property, it happens that after negotiation with the seller, the purchase consideration is fixed, the token amount is also given and an MOU or Agreement is signed by both Seller and Buyer, recording details of the property, the amount of consideration fixed, other terms, etc.  There may be a letter of allotment of the property, wherein the details of the property, sale consideration, etc. are also specified. Also, part or full amount of the purchase consideration is paid before signing the MOU or Agreement by account payee cheque or through banking channels. It may happen that registration for the transfer of the property is done later on. In such a situation, the purchase cost shall be taken as the Stamp Duty Value of the property on the date of the MOU/Agreement/allotment letter and not the Stamp Duty Value on the date of registration of the documents. Let us understand this with the following example:-

Mr. B intends to sell his property.  Mr. A approached Mr. B to purchase the property in F.Y. 2019-20. The sale consideration was fixed at Rs. 90,00,000/- and Mr. A gives an advance of Rs. 5,00,000/- by way of an account payee cheque to Mr. B in F.Y. 2019-20. After Mr. A received the advance, Mr. A and Mr. B signed the MOU/Agreement/allotment letter, recording details of the property, sale consideration, etc. The stamp duty value of the property on the date of this MOU/Agreement/allotment letter was Rs. 85,00,000/-, which is less than the agreed purchase consideration of Rs. 90,00,000/-. However, due to some reason, the registration of the sale document was done in F.Y. 2022-23. The stamp duty value as on the date of registration in F.Y. 2022-23 becomes Rs.1,00,00,000/-.

Tax Implication on the buyer:-  Here the actual consideration of the property was fixed at Rs. 90,00,000/- in F.Y. 2019-20. An advance of Rs.5,00,000/- was also given to the seller in F.Y. 2019-20 through Account Payee Cheque before signing the MOU/Agreement/allotment letter. On this date, the stamp duty value of the property was Rs. 85,00,000/-, which is less than the agreed purchase cost of Rs. 90,00,000/-.

Although in F.Y. 2022-23 110% of the actual sale consideration comes to Rs.99,00,000/- (110% of 90,00,000/-) and the stamp duty value is Rs. 1,00,00,000/-, which is more than 99,00,000/-, the difference of Rs. 10,00,000/- between the Stamp duty value of F.Y. 2022-23 (Rs. 1,00,00,000/-) and actual consideration (Rs.90,00,000/-) will not be treated as Income from other sources and has no Tax implications in the hands of the buyer. Here the stamp duty value of F.Y. 2019-20 which was  Rs. 85,00,000/-, shall be considered for the purposes of Section 56(2)(x) of the Income Tax Act. In the above scenario, the actual purchase consideration shall be taken at Rs. 90,00,000/- and the stamp duty value of Rs. 1,00,00,000/- in F.Y. 2022-23 has no impact on the buyer.

Please note that Sub-registrar’s offices report the actual consideration of the property as per the agreement and the stamp duty value of the property as per stamp duty authority, to the Income-Tax Department. If the stamp duty value of the property is greater than the actual consideration, there is a strong likelihood that the case of the buyer will be picked up for assessment/Reassessment by the Income-Tax department. At the time of assessment/Reassessment proceedings, the buyer can produce documentary evidence before the Assessing Officer being an MOU/Agreement/allotment letter along with the evidence of payment of part/full payment through banking channels, to claim that stamp duty value on the date of MOU/Agreement/allotment letter should be considered for the purposes of Section 56(2)(x) of the Income Tax Act and the stamp duty value on the date of registration be ignored. Being satisfied with these documents, the assessing officer will not make any addition to the Income of the buyer on the basis of higher stamp duty value on the date of registration.

Things to be remembered and taken care of while entering into property transaction where MOU/Agreement/Letter of allotment is made and Registration is done afterward:-

• Procure the Pre-Sale Valuation Report of the property from the Sub-Registrar’s office as on the date of the MOU/Agreement/letter of allotment and preserve it.
• Sign the MOU/Agreement/Letter of allotment only after the Token/Advance money/Consideration amount is debited from your Bank Account and record the date of agreement properly.
• Pay the Token/Advance payment/Consideration only by way of Account Payee Cheque/Account Payee Bank Draft/NEFT/RTGS/Any other electronic mode.

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For any query or consultation on Income-Tax provisions, while entering into any property transaction, the Author may be contacted through email- at [email protected] or through WhatsApp at +91 9967745680.