This measure will reduce hardships faced by both home-buyers and developers and help in clearing unsold inventories
Adding sparkle to the Diwali, Finance Minister Nirmala Sitharaman announced significant measures for those planning to buy residential units of up to Rs 2 crore.
The initiative will also benefit developers who are hard pressed to offload unsold inventories, especially in those locations where the current market prices are below the circle rate – a rate at which different levies such as stamp duty, registration fee and other taxes are computed and paid.
As part of the Atmanirbhar 3.0 initiative, the Minister announced an increase in the differential from 10 per cent to 20 per cent under Section 43CA of the Income Tax Act on sale of residential units valued at up to Rs 2 crore. Consequently, the buyers will be entitled for relief of up to 20 per cent under Section 56(2)(x) of the Act.
This limited period of relaxation will end on June 30, 2021, thus inducing a sense of urgency among the homebuyers and developers to complete transactions in time to avail the tax benefit.
In the words of the Minister, "this measure will reduce hardships faced by both home-buyers and developers and help in clearing unsold inventories.”
Helping homebuyers
Amit Maheshwari, Tax Partner, AkM Global, is of the opinion that the move will certainly help the homebuyers and developers as circle rates usually do not keep pace with the market rates and very often due to certain situations such as this pandemic. The market prices have dropped sharply, but the respective state governments may not correct the stamp duty rates quickly or not do so at all.
“The income tax provisions do discourage buyers where the variance between market rate and circle rate is considerably high. However, consequent amendments should also be brought to Section 50C to protect the individual home sellers as well,” he says.
Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP says that amongst various respites and benefits announced by the Finance Minister today such as fresh allocation for PMAY, a much-needed relief on dual tax on property sold below the ready reckoner rate was granted to the demand of the deprived real estate sector.
“Though circle rate and market rate appear to be two peas in a pod, both are always at odd, when it comes to determining tax on realty transactions with Section 43CA and 56(2)(x) staring at each other. Increasing the spread between the circle rate and agreement value from 10 percent to 20 percent under Section 43CA of the Income tax Act for primary sales till June 2021, is sure to provide pro tem breather to the industry,” says Jhunjhunwala.
During the COVID-19 crisis, as the actual deal values of properties have gone down, the difference between stamp duty value and actual deal value, has widened considerably, he adds.
Taking note of this, the relief in the variation has been increased to 20 per cent for primary sale of residential units of value up to Rs 2 crore, Jalan says, and added similar relief has also been provided to buyers for a similar period
“Hence, buyers would also not be taxed under Income from Other Sources until the difference between stamp duty value and purchase value of property exceeds 20 per cent,” says Vivek Jalan, Partner, Tax Connect Advisory.
Taxation based on rates
Under the regular norms, stamp duties and other taxes are levied at the circle rate even if the property is sold below the prescribed circle rate. The norm, based on the assumption that the actual price would always be higher than the circle rate, was framed to prevent tax evasion and generation of black money by undervaluing the property.
Declining property prices during the last couple of years prompted the government to revise the policy of charging the levies at the circle rate as it affected the buyers and sellers of certain properties adversely and without any justification. Why should a person be asked to pay tax on a deemed price, which is higher than the actual price?
Taking note of the prevailing situation in the property market, the government in the 2018 budget allowed a differential of 5 percent between the circle rate and transaction price for the purpose of computation of levies. Later the differential was raised to 10 percent and now it is being doubled to 20 per cent.
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