Double income taxation on sale, purchase of property: Will Budget 2023 provide relief? (2024)

In the last one year, property values witnessed double-digit growth in Tier 1 cities, and across tier 2/3 cities there is an upswing in property prices. Remote working culture and higher affordability have been major drivers for the stellar performance of the real estate sector. The state governments have also revised the circle rates (applicable for stamp duty payment) and in certain micro-markets of the Delhi-NCR region (Gurugram, Noida and Ghaziabad), the circle rates have been increased by up to 20-30 percent.

However, overall inflation and recent increase in home loan interest rates in the backdrop of global economic turbulence may not leave this sector unaffected. These factors will again pave way for slowing of demand and sharper price corrections in the real estate sector. Irrespective of how the real estate sector performs, there are certain provisions under the Income-tax Act, 1961 that continue to pinch homebuyers.

Here we look at what Budget 2023 can amend in the income tax provisions to ease the implications on buying and selling property for homebuyers.

Why is circle rate relevant for sellers and buyers of property for income tax purpose?
Circle rate is the minimum price at which the sale of an immovable property can be registered and forms the basis for stamp duty payment.

To plug under-reporting of sale amount in case of immovable property (such as land, buildings, flats or any kind of immovable property) which is sold below the government prescribed circle rates, the income tax law provides for penal provision whereby the difference between stamp duty value and actual sale price is considered as income for seller under section 43CA/50C of Income tax Act.

At the same time the difference is also considered as deemed income for the buyer under section 56(2)(x). For the buyer, the same difference is treated as deemed income which gets taxed at the effective rate applicable to the individual.

Comparing a situation where the sale price is higher than the circle rate, the government can collect an additional tax of 22%-25% from a seller depending on how much higher the actual sale price is as compared to the circle rate. In this case the buyer will not incur any additional tax due to the 'deeming' provision. However, in the case where the sale price is less than the circle rate, then both buyer and seller end up paying additional tax between 40%-60% (due to the deemed income provision), and this could very much be a situation where there is no under reporting and the market price is actually lower than the circle rates.

Take an example:

• 'Mr A' sells a flat to 'Mr B' which he acquired for Rs 1 crore in financial year 2017-18. The indexed cost of acquisition in Jan 2023 based on Cost inflation index is approx. Rs 1.21 crore. The actual sale price is Rs 1.75 crore whereas the circle rate is say, Rs 2 crore for the flat (difference of Rs 25 lakh).
• The actual long-term capital gains earned by 'A' is approx. Rs 54 lakh (Rs 1.75 crore less Rs 1.21 crore). However, as per income tax laws, 'A' would have to pay tax on gains of Rs 79 lakh (Rs 46 lakh + 25 lakh) @ 22.88%.
• In addition, 'B' whose taxable income is say more than Rs 50 lakh would also be taxed on the difference of Rs 25 lakh @ 34.32%.

In this example, 'A' and 'B' together would pay tax @57.2% on Rs 25 lakh of price difference vis a vis circle rate.

There is a safe harbour/tolerable range of 10% whereby there is no deemed income if the variation is up to 10% from the applicable circle rate, however this seems a fairly low range. This means that if the difference between the actual price and circle rate does not exceed 10% of the circle rate, then penal provision mentioned in the example does not come into effect. The current tax provisions do not consider that there are incidental expenses in a property purchase transaction which can range from 10% to 20% in certain cases and therefore the variation range should be higher.

For instance, there is GST on the purchase of under-construction flat or commercial units from builders which can be in the range of 5-12%. Further, stamp duty, registration charges can be in the range of 6-7% which is another cascading tax that applies on every sale. Last but not least, let's not miss brokerage of 1%-2%, which is a norm in property purchases. Therefore, the comparison between circle rate and sale price is unfair without factoring other costs borne by the homebuyer.

What can be done?
It's a long-standing ask to have a 20% safe harbour rule for all properties whether bought under primary allotment or under secondary sales. There is also a clear case to keep the deemed tax at one level so that the impact can be brought down to a normative tax level as applicable to other transactions. To be taxed on 'real income' and like 'real income' is a reasonable ask by property buyers and should be considered by the government favourably.

(Views expressed are personal)

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