Taxability of Sale of Land or Building – Section 50C of Income Tax Act

Owing to the large population, there is always a huge demand for real estate in India, and demand mostly overtakes supply. This demand-supply correlation and people's desire to own more lead to inflation in the value of real estate, which, in turn, means huge gains in the hands of the seller. It is unlikely that such gains fall out of the tax bracket.

What Is Capital Gain?

The income tax law has broadly classified incomes into 5 different categories for taxation purposes. One of the categories is ‘Capital Gains’.

Capital Gain is the profit received on the sale of any capital asset, like shares, bonds, jewellery, land or building by the seller. So, any gain on the sale of these capital assets attracts a capital gain tax in the hands of the seller.

Sale consideration reduced by the cost of acquisition (indexed cost of acquisition for land or building held for more than 24 months) is taxable as a capital gain.

Let’s discuss about the sale of capital assets like land or buildings here:

When capital assets like land or building are sold, the capital gain can be calculated as follows:

Capital gain =  Sale consideration- cost of acquisition

If the land or building has been held for more than two years, the cost of acquisition is also adjusted for indexation, which takes account of inflation. However, the indexation benefit is not applicable to properties purchased on or after 23rd July, 2024.

This capital gain is taxable in the hands of the seller.

In order to evade capital gain tax, people started understating the value of properties in the sale agreement and paying a substantial part of the consideration in cash to pay tax liability in the hands of the seller, which in turn led to a loss to the Government and unaccounted black money in society. 

The government introduced Section 50C by the Finance Act of 2002 to curb the large-scale undervaluation of real estate and bring unaccounted money into the tax net.

What Is Section 50C?

Section 50C applies only to land or buildings or both. It uses the value adopted by the Stamp Valuation Authority (SVA) to levy stamp duty on the registration of properties as guidance value to determine the undervaluation of land or buildings, if any, in the sale agreement.

In case the sale consideration received or claimed to be received by the seller on the sale of land or building or both is less than the value adopted by stamp valuation authority, such value adopted by the SVA would become the actual sale consideration received or accruing to the seller. Therefore, capital gain would be valuation as per the stamp valuation authority reduced by the cost/indexed cost of acquisition.

However, Budget 2018 has brought about an amendment in section 50C whereby no adjustments shall be made if there is a variation between stamp duty value and the sale consideration is not more than five percent of the sale consideration. This has been introduced in order to minimize hardship in case of genuine transactions in the real estate sector.

The Finance Act 2020, increased the safe harbour rate, i.e. the rate of variation that will be allowed between the actual sale consideration value and stamp value of the property, to 10% from 5%.

Summary: If SDV > 110% of consideration then SDV will be considered as Full value of consideration.

What Is Stamp Valuation Authority (SVA)?

The Stamp Valuation Authority is a state government authority responsible for imposing stamp duty on the assessed, adopted, or assessable value of the property to be transferred. Stamp duty is a tax imposed by the SVA on the value of the property transferred, and the value of the property is determined by the Stamp Valuation Authority. 

This stamp duty is the buyer's liability, but the assessee (seller) must pay capital gain tax on the value of the registered property. Therefore, the seller wants to keep the selling price low to avoid paying huge capital gain tax. Thus, the seller often books the undervalued selling consideration and collects the remaining value in cash as black money. 

Section 50C entitles the SVA to determine the fair market value of the property and check the black money transactions during the sale of a property. This section also guides on which value out of the three, actual sale consideration, valuation by the SVA or the valuation officer (discussed later), and the registration of the transferred property will be done. 

Applicability of Section 50C

Section 50C is applicable when the following conditions are fulfilled:

• There is a transfer of land or building
• The land or building is held as a Capital asset
• It can be held as a Long Term Capital Asset or Short Term Capital Asset
• It can be depreciable or non-depreciable
• The Stamp duty value is more than sale consideration

Exceptions to Section 50C

All sales of property do not require to follow Section 50C: There are certain exceptions which are discussed below:

• If the sales value is up to 5% less than the Stamp duty value
• If the property is gifted or is acquired compulsorily under any law, like land acquired by the government.

How Is Capital Gain Calculated Under Section 50C Of The Income Tax Act?

However, when the stamp duty value does not exceed 110% of consideration, the sale consideration will be treated as the full value of consideration.

Calculation Of Stamp Duty Value Under Section 50C

The stamp duty value is the value assessed by the Stamp Valuation Authority (SVA). However, the stamp duty on the date of the agreement may be different from the stamp duty value on the date of registration, resulting in the below two possible cases:

• Take stamp duty value on the date of agreement
  • Full/part of the consideration was received on the date of the agreement, and
  • Payment should be made through account payee cheque/draft (prescribed electronic mode)
• Take stamp duty value on the date of registration
  • If no payment has been made on the date of agreement, then the stamp duty value of the registration date will be taken.

What Happens If Selling Price Is Lower Than Value Adopted By SVA?

While there can be varied genuine reasons between the parties for the sale of land or buildings for a consideration lower than the value adopted by SVA, Section 50C provides a safeguard only against fluctuation in the value of property caused due to considerable gap between different stages of transaction of sale.

To explain this further, there have been litigations in the past in cases where the value of the asset on the date of agreement to sell and the actual sale differs due to economic factors such as demand and supply. 

In such cases, considering the value adopted by SVA as a sale consideration would cause undue hardship to taxpayers by compelling them to pay tax on something that is never received.

In order to remove this anomaly in the law, Finance Act 2016 amended Section 50C. As per the amendment, in case the date of agreement fixing the sale consideration and actual date of registration of sale of land or building is not the same, the value adopted by SVA as on the date of agreement can be taken as sale consideration. 

However, in order to avail this benefit, at least a part of the sale consideration must be received by way of account payee cheque, bank draft or ECS on or before the date of agreement of transfer. This amendment provides relief to taxpayers involved in the sale of land or buildings as, generally, negotiations take a considerable amount of time.

What Happens If the Seller Does Not Accept Value Adopted By SVA?

There is a possibility that the value adopted by SVA may not always depict the Fair Market Value (FMV) at all times, or the seller himself may not be satisfied with the value adopted by SVA based on factors known to him.

Though stamp duty is generally borne by the purchaser, the purchaser may not be very concerned with the value adopted by SVA, given that the amount he would be shelling out stamp duty would be meagre compared to cost of purchase.

However, it makes a huge difference to the seller as it impacts his income tax, which can be substantial based on the value. If stamp duty is not borne by the seller, he may not be questioned or contend the value adopted by SVA before the valuation authorities.

As it is an income tax matter for the seller, he is allowed to question the value adopted by SVA and claim the value is more than FMV under Section 50C before the income tax authority unless such value is already questioned before any other authority or court.

In such cases, the income tax officer is required to refer to the valuation officer, who will determine market value. The valuation officer, while determining market value, has to call for records/documents from the taxpayer if required, give the taxpayer an opportunity to be heard, and pass an order in writing stating his valuation. Any value determined by the valuation officer can also be questioned before higher authorities.

What Happens If Value Of Valuation Officer Is Higher Than Value SVA?

To determine the market value, a valuation officer is provided with a reference to benefit the taxpayer and save him from undue hardship. Such reference provided to the valuation officer does not impact the taxpayer in a negative way. Even when a reference is made to the valuation officer, the value determined by the valuation officer or adopted by SVA, whichever is lower, will be taken as sale consideration for computing capital gains.

For example, if the value adopted by SVA is Rs 12,00,000 as against Rs 8,00,000 sale consideration claimed to be received by the seller and the value determined by the valuation officer is Rs 15,00,000, sale consideration as per Section 50C will be Rs 12,00,000.

In the same example, if the value determined by the valuation officer is Rs 10,00,000, the sale consideration for the purpose of capital gains will be Rs 10,00,000.

Challenges faced by taxpayers (buyers)

Because of section 50C, many times, the taxpayer has to face difficulties:

• When taxpayers find the stamp duty value to be unfair, they approach the valuation officer for a fair stamp duty value. This process takes a lot of time and energy from the taxpayer.
• In the times of a sluggish market, taxpayers don’t get the fair price of the property. The stamp duty value under Section 50C, leads taxpayers to pay capital gain tax on the unrealised sale consideration.

Related Articles

Capital Gains Tax

Long-term capital gains

Short-term capital gain

Tax on Long-term Capital Gains on Equity Funds

Short Term Capital Gain on Shares

Capital Gains Exemption

Section 54F