Importance of Stamp Duty in Relation with Income Tax

A property seller and buyer both have to face the income tax implications if there is a difference between the property selling/buying value and the ready reckoner value of a property as this cost directly reflects on the stamp duty charges. Remember that ready reckoner rate commonly termed as RRR is a term defined for circle rate. In India, a person is required to pay the stamp duty charges to the Government at the time of buying a property. So, in this blog post, we help you know the importance of stamp duty in relevance with income tax.

Stamp Duty

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1. What is Stamp Duty?

Stamp duty is an indirect tax levied by the State Government on the property deal which includes buyer and the seller or even more parties within the state’s jurisdiction. Many Indian states also offer a rebate in the stamp duty charges for women home buyers like the national capital Delhi, its neighboring state Haryana and Rajasthan charge 1% or 2% less stamp duty in comparison to the male home buyers.

2. Quantum of Stamp Duty

The stamp duty rate varies from state to state as it proves helpful to minimize the chance of evading stamp duty via undervaluation of agreements. All State Governments issue an area-wise list to make the citizens aware of the stamp duty rate on a yearly basis.

3. Reflection of Stamp Duty on Income Tax

The monetary transaction against property including buy/sell reflects in the person’s income tax and thus there are the two points that you must consider about stamp duty charge.

  1. Case I

In case the property value is higher according to the ready reckoner rate alias circle rate in comparison to the property cost quoted in the agreement then the buyer of the immovable asset has to pay the stamp duty calculated according to the ready reckoner rate i.e. the circle rate of the area.

     2. Case II

In case the property value quoted in the agreement is higher than the ready reckoner rate alias circle rate then the buyer of the immovable asset has to pay the stamp duty calculated according to the purchase/sell agreement.

4. Importance of Stamp Duty for Seller under Income Tax

The law assumes that the property seller has earned an amount equal to the stamp duty value under Section 50C of the Income Tax Act if the agreement value is lower than the stamp duty valuation. Also, the capital gain, in this case, is calculated accordingly.

Remember this implication is not applicable if the difference between the agreement value and stamp duty valuation is less or equal to five percent of the agreement value.

In case the seller asserts that the stamp duty value is greater than the market value of the property, then the income tax officer can get the property value assessment done for the purpose of capital gain by an officer. The value confirmed by this official will be considered as the sale amount of a property in regards with income tax.

But if the property valuation done by the income tax officer is greater than the stamp duty value then this excess value of the property stands ignorant and only the stamp duty value of the property will be considered for the sale purpose. All taxpayers including the limited companies come under this provision.

The taxpayer who is also the investor is likely to borrow money as the fund received can be lesser than the amount required to be invested. This is the case if the stamp duty valuation is greater than the agreement value, and the taxpayer invests the net sale consideration to claim exemption from long-term capital gains under Section 54F.

5. Importance of Stamp Duty for Buyer under Income Tax

The difference greater than Rs.50,000 or five percent of the agreement value will be treated as the buyer’s income according to Section 56(2) (x)(b) of the Income Tax Act.

* This provision is only applicable to Hindu undivided families (HUFs) and individuals.

The valuation on the date of agreement is considered in case the agreement date and the date of registration vary along with the property costs. Also, the valuation will be considered only if a cashless transaction for the same takes place on or before the date of the agreement.