No fear from changes in ready reckoner rates

Even if the deal gets extended to the next calendar year and circle rates go up, the tax liability will not increase

Those selling properties towards the end of a year usually rush to close the deal by December 31, because state governments declare new circle rates on the first working day of a year. Sellers fear that if circle rates go up, they will need to hike property prices in tandem. Sellers also face higher capital gains tax.

The government has proposed to change rules for calculating capital gains tax. In the Finance Bill, 2016, the finance ministry has modified Section 50C of the Income Tax Act. It deals with how individuals should determine the correct value of immovable property in case of transfer. A seller will now be able to take the stamp duty value of the property as per the agreement to sell (first agreement) rather than the value mentioned in the final agreement (signed during registration). This will only be applicable in cases where the buyer pays at least a portion of money to the seller through a banking channel — by cheque, draft or an electronic transfer.

“Many sellers had to pay more capital gains tax than they were liable for. The Easwar Committee report on tax simplification had also recommended change finance ministry has proposed,” says Kuldip Kumar, partner and leader personal tax, PwC India.

He further explains: For the purpose of calculating capital gains, the seller needs to select the higher value between the one quoted in the sale agreement and the value on which stamp duty is paid (as per the reckoner rate). If the agreement value of a property is Rs 75 lakh and the reckoner rate is Rs 90 lakh, then the latter should be taken as the sale consideration for computing capital gains, if it happens in the same calendar year. The stamp duty value of the property, however, can change if the deal starts in one calendar year and closes in the next, and the state government hikes ready reckoner rates. The seller, however, will not need to pay higher capital gains tax, as Income Tax department will accept the older stamp duty value mentioned in the first agreement.

“Property transaction, where negotiations start in October-November, can easily extend to the next year as it takes three-four months for a closure,” says Kumar.

For example, if you decide to sell your flat worth Rs 1 crore and enter into an agreement to sell it in October 2017. At this time, the price is not more than the state government rates. You take the token money from the buyer. He pays the full amount by January 2018. But by then, the state government hikes the circle rates in your locality and the value of your flat goes up to Rs 1.3 crore. According to the existing norms, the seller will need to pay capital gains tax on Rs 1.3 crore, even if he received only Rs 1 crore. Starting next financial year, the seller can calculate capital gains tax on the old rates (Rs 1 crore), if the token is not received in cash.