When you enter into an agreement to purchase a property, it is required to pay the stamp duty charges to the Government at the time of purchasing a property. Stamp duty’s amount is generally based on the value of the property mentioned in the agreement. The amount of stamp duty varies from state to state and also property type—old or new. It is a crucial part of their revenue collections, which will be used for the development work.
In India, buying a property below the stamp duty value is very much prevalent to save the Stamp Duty on registration. It causes loss of revenue to the Government and thus it acts as a barrier in development work. Therefore, to plug such loss the government introduced Section 56(2)(x) in the Income-Tax Act in 2017 as a measure to counter tax evasion by buying a property at lower than the stamp duty value values.
What is Stamp Duty Value?
Stamp duty value means any value assessed by any authority of the Central Government or a State Government for payment of stamp duty for the immovable property.
In case an immovable property is received without consideration or inadequate consideration, stamp duty value of property in excess of such consideration is to be declared in a person’s income tax return as income from other sources. This amount will be taxed according to the respective tax slab.
Hence, if the taxable income is over Rs 10 lakhs in the fiscal year 2017-18, then the differential amount will be taxed at 30%, such transactions will also have certain tax exemptions in case:
The stamp duty value does not exceed 105% of the consideration
The difference between consideration and stamp duty value does not stand over Rs 50,000.
Why undervaluing your property doesn't make sense?
Stable property prices and stamp duty value:
The undervaluing of property for home buyers does not make sense because stable property prices and stamp duty value is currently being the norm as the Union Government has made property transactions more transparent by reducing black money from these transactions to an extent. The prices are also getting stable for the last few years as the flow of black money has been drawn out of the system. In the past few years, stamp duty value has also increased to an extent and there is much lesser gap. Hence, it is not easy to evade stamp duty these days.
Low-cost funding for house:
A lower interest rate of 8.5% for a taxpayer is now reduced by tax benefit up to 30%. Hence, the effective interest rate becomes 5.95 per cent. There is an interest subsidy of Rs 2.67 lakh under the Pradhan Mantri Awas Yojna credit-linked subsidy scheme. In the recent budget, the tax benefit on home loan interest has also been increased from Rs 1.5 lakh to Rs 3.5 lakh for the current year to enable middle-class first-time buyers for purchasing houses now.
Lower down payment:
If there is no gap in stamp duty value and actual price, your down payment is only 20% of the exact property value.
Our Recommendation: We recommend that you should not buy property under stamp duty value, instead use the tax benefit and interest subsidy to build your house. Since the effective cost of fund is also lower due to higher tax benefit and interest subsidy, it is recommended to buy ready house property for self or rental benefits rental by availing the maximum loan for a most prolonged period and so that your taxes can be minimised.