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 Gains are income on the sale of any capital asset in the hands of the seller. Capital asset is defined to include various assets including real estate. So, any gain on the sale of land or buildings by the owner is taxable as a capital gain. 

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.

Over a period of time,  there were certain tax evasion measures adopted by parties to the transaction, including capital gain taxation of land or building as well. 

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 SVA would become actual sale consideration received or accruing to the seller. Therefore, capital gain would be Valuation as per stamp valuation authority reduced by 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 Ministry 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 (SVA) determines the value of stamp duty, a tax levied on property registration transactions. This valuation is considered while calculating capital gains. In many cases, the SVA uses a guidance value to calculate the value of land or buildings based on the total property market value. 

Section 50C of the Income Tax Act considers the value adopted by the SVA to impose stamp duty on property registration and as a guide to determine whether the land/building in the sale agreement is undervalued. If the sales consideration received is lower than the value adopted by the SVA, the SVA value reduced by the cost/indexation is considered for calculating the capital gain.

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

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

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.

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