What is Section 50C: Taxability Details on Sale of Land and Building
As India’s population is rising at an increased rate, demand for real estate is also surging. This affects the demand-supply curve increasing a seller’s gain over a sale of land and building. The Indian government levies a tax on gains earned by a seller under Section 50C of the Income Tax Act. This Section is applicable at the time of sale of land/building, or both. Learn about it in detail below!
What does Section 50C State?
Capital gains earned by a seller on a sale of land/building or both held as a capital asset are taxable under Section 50C of the Income Tax Act 1961. However, some points need to be kept in mind for proper calculation, like the sale value consideration shall not be more than the stamp duty value decided by authorities.
Also, the Income Tax Department has a set marginal relief of 20%. However, this Section will not be applicable if a seller holds land/building or both as a stock.
What is Capital Gains?
There are five categories in which the Income Tax Department divides a person’s income for tax calculation. One among these five categories is ‘capital gain.’ It includes the income that a person earns upon the sale of capital assets. Note that various assets come under the definition of capital assets, including land and building. While calculating income from capital gains, you have to deduct the acquisition cost from the sale proceeds.
Why was Section 50C Introduced?
Section 50C of the Income Tax Act was introduced to curb tax manipulation practices and bring in better accountability. Under this provision, sellers needed to maintain a valuation limit set by the Stamp Valuation Authority or SVA. Hence, taxpayers have to consider the valuation set by SVA at the time of tax calculation.
Later, the Finance Ministry increased the safe harbour rate for taxpayers from 10% to 20%. It is the variation rate between actual sale consideration value and property stamp duty value as allowed by the government.
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What is the Applicability of Section 50C?
Here are the conditions related to Section 50C:
- A transfer of land or building must have taken place.
- The land or building should be a capital asset.
- The land/building can be a long term capital asset or a short term capital asset.
What is the Stamp Valuation Authority (SVA)?
Stamp Valuation Authority is an authority that determines stamp duty value. A state government assesses, considers and evaluates it at the time of capital gain calculation. This consideration made at the time of transfer of a capital asset will be used for calculation under Section 50C of the Income Tax Act to determine the total value of consideration.
Note that there can be a difference between the stamp duty valuation and the actual consideration by up to 20%.
How to Calculate Capital Gain Under Section 50C?
Refer to this table to understand how to calculate capital gains under Section 50C:
- Sale value: Rs. 20 lakh
- Stamp duty value (Valuation by SVA): Rs. 20.5 lakh
- Transfer Expenses: Rs. 5,000
| Particular | Amount (Rs.) |
| Full value of consideration (sale value or stamp duty value, whichever is higher) | 20,00,000 |
| Less: Expenses incurred for transfer | 5,000 |
| Net consideration | 19,95,000 |
| Less: Cost of acquisition | Nil |
| Less: Cost of improvement | Nil |
| Capital gain or loss | 19,95,000 |
Consideration
Here we took the sale value as the total value of consideration since authorities allow a variation rate of 20%. As stamp duty value is not more than 120% of the sale value, it can be considered the value of consideration. If the sale value had been Rs. 13 lakh, then stamp duty value would have been its full value of consideration.
What Can Happen if the Selling Price is Less Than the Value SVA Adopts?
The actual selling price of a capital asset can be lower than its value adopted by SVA for many reasons. This is why there are considerations covered under Section 50C of the Income Tax Act, 1961. It would safeguard a seller against fluctuation in a property’s value which is caused due to a significant gap between various stages of transaction of a sale.
So, to remove the hardship experienced by sellers at the time of capital gain calculation, authorities made an amendment to the law under Finance Act 2016. The amendment mentioned that if the agreement date is not the same as the sale registration date, then one must consider the value set by SVA as the contract date. However, a seller must get a part of the sale consideration in cheque, bank draft, or ECS.
What Can Happen If a Seller Refuses to Accept the Value SVA Adopts?
There can be times when a stamp value of a capital asset set by SVA does not depict a fair market value of a land or building. So, a seller may not feel satisfied with this value, given many other factors affect its cost.
At this time, the capital asset purchaser may not feel concerned even though they are the bearer of the tax. It is because it will seem negligible in comparison to their purchase cost. However, it will be a big deal for sellers, affecting their income tax calculation.
So, if a seller chooses not to adopt a stamp duty value set by SVA, he/she may not question the Stamp Valuation Authority for valuation purposes. Instead, since it will affect income tax realisation, one must present the question before the Income Tax Authority.
For determining Fair Market Value (FMV), valuation officers may access the land record and other documents. They will also give a chance to taxpayers to present their point of view, stating how to carry out the valuation.
What if the Value Set by Valuation Officer is Higher Than the Value SVA Adopts?
A valuation officer gets a reference to find out the market value of a capital asset. As a result, any hardship that taxpayers may experience gets eliminated. Any referral made to a valuation officer will not affect the taxpayer in any way.
Let’s understand this with an example:
Suppose SVA sets a valuation of Rs. 13,00,000, while the sale consideration that a seller has set is Rs. 8,50,000. At the same time, the valuation officer’s valuation stands at Rs. 15,00,000. In such a case, its full value of consideration will be equal to Rs. 13,00,000. However, if a valuation officer had set the value at Rs. 10,00,000, then its full value of consideration would have been Rs. 10,00,000.
Final Word
To sum it up, Section 50C of the Income Tax Act was introduced by the Government of India (GOI) to avoid the undervaluation of properties. As a result, GOI was able to realise the correct tax and stopped all malpractices. Follow the above sections carefully to know the applicable tax value, calculation, and other details.
FAQs
Ans: No, at the time of transferring tenancy rights, there is no requirement to follow Section 50C. It is only applicable for the calculation of capital gains when selling land, building, or both. It helps in setting a stamp value duty of properties.
Ans: Section 50C is a provision covering the sale of land or building and is applicable for depreciable assets. This includes assets that an owner is using for more than 180 days and on which authorities allow depreciation of 50%.
Ans: When filing your income tax return, show your purchase or sale of property in Form 26AS. In case the purchase or sale value exceeds an amount of Rs. 30 lakh, then the Income Tax Department will be observant of you.
Ans: If a seller receives or claims sale consideration on the sale of land/building or both, which is lower than the value set by the Stamp Valuation Authority (SVA), it becomes the transaction’s actual sale consideration.
Ans: Section 50C(1) contains an amendment in which authorities added an electronic payment mode in addition to the mentioned mode of payment under Section 50C. In other words, buyers can also pay through an electronic clearing system via a bank account.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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