This article highlights the income tax treatment on purchase/sale of a property below the Stamp Duty Value under Section 50C & Section 56(2)(x). Before the explaining the treatment, lets first understand the meaning of Stamp Duty Value.

Circle Rate/ Stamp Duty Value/ Ready Reckoner Rate/ Guidance Value

Each State Govt has a pre-decided minimum valuation on which Stamp Duty is to be paid. This pre-decided minimum valuation is called Circle Rate. In some states this is also called as the Ready Reckoner Rate or the Guidance Value.

In common parlance, it is also referred to as the Stamp Duty Value i.e. the rate on which the Stamp Duty is to be paid.

The Circle Rate differs from locality to locality depending on infrastructure and other related factors.

Although in majority of the cases the property is sold above the circle rate, in some cases it may be sold below the Circle Rate as well. This article emphasizes on the tax treatment of a property transaction below the circle rate in the hands of the seller as well as in the hands of the buyer.

Section 50C: Tax Treatment in the hands of the Seller

As per Section 50C if a property is sold below the Circle Rate, the circle rate of the property would be deemed to be the rate at which property has been sold and capital gains tax would be levied assuming that the property has been sold at the Circle Rate.

Irrespective of the consideration for which the property has been sold, if it has been sold for a price below the Circle Rate, the circle rate would be assumed to be the Sale Price and Capital Gains Tax would be levied.

However, in case the taxpayer claims before the Assessing Officer that the fair market value of the property is genuinely lower than the Circle Rate, the Assessing Officer may request the Valuation Officer to conduct a valuation of the property. In case a valuation is conducted by the Valuation Officer and

  1. Value ascertained by the Valuation Officer is lower than the Circle Rate: The Value so ascertained by the Valuation Officer would be deemed to be the Sale Price
  2. Value ascertained by the Valuation Officer is more than the Circle Rate: The Circle Rate would be deemed to be the Sale Price.

Thus, from the above it is clear that if a Reference is made to the Valuation Officer, the sale price to be considered for the purpose of Capital Gains cannot be increased but can only be decreased.

Budget 2016 Amendment

In case where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of computing the full value of consideration.

This provision shall apply only in a case where the amount of consideration has been paid by way of an account payee cheque or account payee bank draft or online transfer on or before the date of agreement for the transfer of such immovable property.

Section 56(2)(x): Tax treatment in the hands of the buyer

If a buyer purchases a property for a price below the Circle Rate and the difference in the “Price at which the property has been purchased” and the “Circle Rate” is more than Rs. 50,000, such difference would be assumed to be the income of the purchaser and would be chargeable to tax under head Income from Other Sources under Section 56(2)(x).

However, in case the circle rate changes between the date of agreement and the date of registration, the circle rate on the date of agreement will be taken as the sale price. This exception shall only apply in cases where part/full consideration has been paid in any mode other than cash on or before the date of agreement fixing the consideration.

In case a reference has been made to the Valuation Officer under Section 50C, the same shall be applicable for Section 56(2)(x) as well.

Impact of this Amendment

Earlier, in case a property was sold below the Circle Rate, the tax was levied only in the hands of the seller.

But now, as a result of this amendment, not only would the sale price be increased in the hands of the seller, but tax would be levied in the hands of the buyer as well.

Thus, this is a case of double taxation. First, the sale price in the hands of the buyer is increased and then the difference between the purchase price and the circle rate is added in the income of the buyer.

This is clearly a case of double taxation and signifies that the govt does not want transactions to be entered into below the circle rate. The govt suspects tax evasion if a transaction is being entered into below the circle rate and has therefore introduced such rules to discourage transactions below the circle rate.

Example of the above provisions

Mr. A purchased a property from Mr. B for Rs. 50 Lakhs. The Stamp Duty Value of this property is Rs. 60 Lakhs.

Tax Treatment in the hands of Mr. A (Seller): Rs. 60 Lakhs would be deemed to be the Sale Price and taxed under head “Income from Capital Gains”

Tax Treatment in the hands of Mr. B (Buyer) : Rs 10 Lakhs (i.e. 60 Lakhs – 50 Lakhs) would be deemed as Income of the Buyer and taxed under head “Income from Other Sources”

Budget 2018 Amendment – Above Sections not applicable for upto 10% Variation

The price of all properties is not accurately estimated by the Circle Rate/ Guidance Value/ Ready Reckoner Rate and variation can occur between the estimated rate and the actual rate at which the transaction has been completed. This variation may be because of several factors like Shape of the Property, Location of the Property etc.

And therefore, an amendment has been introduced in Budget 2020 which says that in case the difference between the Circle Rate/ Guidance Value/ Ready Reckoner Rate and the actual transaction price is not more than 10%, the above Sections i.e. Section 50C and Section 56(2)(x) would not be applicable.

In simple words, if the difference is not more than 10%, the additions no additional tax would be levied in the hands of the neither the buyer nor the seller. This is a welcome move as it reduces the hardship in case of genuine property transactions.

This limit of variation was earlier considered as 5% which was increased to 10% in Budget 2020

Video explaining all the above Sections

I’ve created a video explaining all the above mentioned sections and the same is shared below for your ready reference