LEGAL GUIDANCE

Stamp Duty is Related to Income Tax

When you buy a property, you need to pay a certain amount to the government which is known as stamp duty. The stamp duty amount that has to be paid is based on the value of the property that is mentioned in the agreement. However, if there is any difference between the value mentioned in the agreement and the ready reckoner value of the property, then there might be some implications on the stamp duty payable as well as on the income tax of the buyer and seller.

All the state governments publish area wise stamp duty ready reckoner on a yearly basis to avoid disputes and fudging of stamp duty charges through underevaluation for agreements. If the property value based on the ready reckoner value is higher than the value of the property mentioned in the agreement then you need to pay the stamp duty based on the value computed from the ready reckoner rates. And if the property value mentioned in the agreement is higher than the ready reckoner valuation then the stamp duty payable is calculated with reference to the agreement value. The stamp duty valuation has its implication if the buyers and sellers’ income tax. Let’s understand how.

For buyers: if the agreement date and registration dates are different, then the values on both dates will also be different. Then the value as on the date of agreement can be considered for this purpose only if the part or full consideration have been paid through cash either on or before the agreement date.

In case the stamp duty value of the purchased property is higher by more than Rs 50,000 then according to Section 56(2) (vii)(b) of the Income Tax Act, the difference between the agreement value and the stamp duty value shall be considered as the income of the buyer. This provision applies to Hindu undivided families (HUFs) and individuals only.

For sellers: According to Section 50C of the Income Tax Act, if the value mentioned in the agreement is lower than the stamp duty value then the law presumes that the seller has received an amount that is equal to the stamp duty valuation and accordingly the capital gains is calculated. But if the seller claims that the stamp duty valuation is higher than the market value of the property, then the income tax officer can ask its valuation office to calculate the property value for the capital gain purpose. The value determined is treated as the sale consideration of the property for income tax. If the computed value is higher than the value of stamp duty then the excess value shall be ignored and only the stamp duty value shall be treated as the sale consideration.

In case the stamp duty value is higher than the value mentioned in the agreement and the tax payer have invested the net sale consideration under Section 54F to claim the exemption from the long term capital gains then the tax payer might need to arrange money as the money received might be lower than the amount required to be invested.