MUMBAI: The Maharashtra state government hiked the Ready Reckoner valuations of immovable properties in Mumbai, substantially for 2014, though property prices have not grown as much. How does this affect the common house purchaser or house seller?
Stamp duty is levied by the state government on a document transferring property. This is payable on the sale agreement value or the market value depending on whichever is higher. The market value of the property is determined by the local stamp office. The Ready Reckoner is an annual statement of rates prevalent in different areas, based on which, the valuation of market value is done and the stamp duty is accordingly collected from property buyers. The Ready Reckoner divides the immovable property into various categories such as developed land, undeveloped land, residential, industrial, commercial, etc., and fixes their market value.
The Ready Reckoner values are revised on January 1 each year and are applicable for the entire calendar year. The values for 2014 represent a 20 per cent hike over 2013 across the city. For example, if the Ready Reckoner value of a flat in Bandra in 2013 was Rs 5 crores, in 2014, the 20 per cent hike would raise the cost of that flat to Rs 6 crores. This would accordingly translate into a 20 per cent higher stamp duty payment in many cases, where stamp duty is normally borne by the purchaser.
Will the increase in the Ready Reckoner rate only affect the property buyers in the form of payment of a higher stamp duty? The answer is no. The registration fee is also payable on the higher value of the actual consideration or the market value but is fortunately capped at Rs 30,000. It also has implications under the Income tax Act. It will adversely affect the capital gains computation of sellers of immovable properties, as well as those persons receiving an immovable property as a gift and some purchasers of an immovable property.
Capital gains arise in the hands of a seller of an immovable property. Capital gains are computed by reducing the cost or indexed cost of acquisition and improvement from the sale proceeds receivable (consideration) for transfer of the property. Section 50C of the Income tax Act, provides that where the consideration for transfer of property as per the agreement is less than the stamp duty Ready Reckoner value, the Ready Reckoner value will be taken as the consideration. Due to this provision, in such cases, the seller will be required to pay the capital gains tax on the higher amount, which he has not actually received.
With an increase in the Ready Reckoner rates and the realty market not faring very well, in many cases, the consideration could be lower than the Ready Reckoner value. This will result in an increased outflow on account of the capital gains tax. Where the Ready Reckoner value is substantially higher than the consideration agreed upon, it is advisable to apply to the Collector of Stamps for adjudication of the stamp duty value, so as to reduce the amount of stamp duty payable as well as the capital gains tax amount.
The increase in the Ready Reckoner rates also affects persons receiving immovable properties as gifts. The person giving the gift does not have to pay any tax. As per the provisions of section 56 of the Income tax Act, any individual or HUF (Hindu Undivided Family), receiving any immovable property with a stamp duty value of more than Rs 50,000 as a gift, is required to pay tax on the stamp duty value of the property received, since the Ready Reckoner value is considered as the income of the recipient. This is taxed as regular income and taxed at the applicable slab rates.
Section 56 also applies when any individual or HUF acquires any immovable property for a consideration, which is less than the Ready Reckoner value by Rs 50,000 or more. The difference between the stamp duty value and the actual consideration paid, is taxable as income in the hands of the individual or HUF in such cases. There are exemptions for immovable property received by the individual from a blood relative or received on the occasion of his marriage or received under a will or by way of inheritance or in contemplation of death of the donor or from any charitable trust or local authority.
In these cases, section 56 does not apply and no tax is required to be paid by the recipient. Any increase in stamp duty values, therefore, is likely to increase the income tax liability of both, the seller (capital gains tax), as well as the recipient of the gift or purchaser (regular income tax). There is therefore, a cascading effect of such increase – with a Rs 1 lakh increase in ready reckoner valuation, leading to an overall additional possible tax burden of as much as 61.65 – 5 per cent stamp duty, 22.66 per cent capital gains tax for the seller and 33.99 per cent tax for the gift recipient or purchaser. This seems to be a rather harsh burden. It is important that Ready Reckoner valuations are not arbitrarily hiked every year, as they tend to be hiked without considering the market trends for immovable properties in those areas. One hopes that the government will lay down directives for determination of such rates in a professional manner, followed by subsequent partial rollbacks in response to public protests, as witnessed this year.