The Government of India had introduced Section 56 (2) (x) in the Income Tax Act of 2017 as a measure against tax evasion. This was done by taking transactions lower than their fair values and it had worked to an extent. There is a possibility that the difference between stamp duty value and actual consideration is taxed in the hands of both the seller and buyer.
Therefore, in case of immovable asset, in case it is received without proper consideration, the stamp duty value of property in excess of such consideration has to be declared in the income tax return as cited as income from other sources, and taxed according to the respective tax slab. Hence, if the taxable income is over Rs 10 lakhs, then the differential amount will be taxed at 30%. But such transactions will also have certain tax exemptions in case:
- The stamp duty value does not exceed 105% of the consideration
- The difference between consideration and stamp duty value does not exceed Rs 50,000.
How to decide
So for example, if someone purchased a property in December 2018 for Rs 50 lakhs, considering lower market rates or distress sale whereas the stamp duty value of the property was Rs 60 lakhs, then the individual has to pay income tax on the differential amount of Rs 10 lakhs, which according to the current tax slab would be charged at 30% and would amount to Rs 3 lakhs.
If the stamp duty value came as Rs 50,40,000, no taxes are going to be payable on it as the difference will not exceed 5% of the property value. In case the house was purchased below stamp duty value after 1st April, 2017, but one forgot to declare the differential amount as income from other sources in the ITR then it is advisable to deposit the due taxes with interest till the date as soon as possible for avoiding penalties due to tax evasion. It should also be noted that this provision is applicable to Hindu undivided families and individuals only.
Some other vital aspects to note
The agreement date stamp value will be considered provided part payment has been made via cheque at the time of purchase of before it. It should be noted that no exemption from tax from income is allowed by investing in NHAI or REC bonds because they do not fall under long term capital gains. It is hence, crucial, to plan the consideration amount and agreement date while one is considering a property purchase now onwards.
For these reasons, the under valuing of property for real buyers does not really make sense because stable property prices and stamp duty value is currently being the norm as the government has made property transactions more transparent by reducing black money from these transactions to an extent. The prices have been stable for the last few years as the black money has been drawn out of the system. Stamp duty value has also increased to an extent and there is much lesser gap, because of which it is not easy to evade stamp duty these days.
What else to remember
The low cost of funds for house is another factor as the lower interest rate of 8.5% for tax payer is now reduced by tax benefit up to 30%. The effective interest rate is now 5.95% and the interest subsidy is of Rs 2.67 lakhs under the Pradhan Mantri Awas Yojana credit linked subsidy scheme. Moreover, the tax benefit on home loam interest has also been increased from Rs 2 lakhs to Rs 3.5 lakhs for the current year so that middle class buyers may benefit from it.
The lower down payment amount is also another factor in case there is no gap on stamp duty value and actual price and the down payment is only 20% of the actual property value. It is however, recommended that property should not be bought under stamp duty value and it is a good idea to use tax benefit and interest subsidy to build the house instead. The effective cost of fund is also lower due to high tax benefit and interest subsidy and it is recommended that to buy ready house property for self or for rental benefits by availing the loan for a longest period so that taxes can be minimized. Yes, it is true that by paying taxes, one would not be eligible to pay any pension scheme from the government but by diverting monthly tax ad by the intelligent use of subsidy, one can create a house property for regular cash flow under the reverse mortgage system for income during the years of retirement.