Tax Implications On Selling Property Below Market Price
Not each one of you has a choice in the matter — some of you had to sell a property you previously owned recently for a price you would not have accepted, had the circumstances not been exceptional. Rates of property in India, especially in metropolitans, have increased only marginally in the past half a decade, limiting the benefits of sellers, data available with PropTiger.com show. The fact that profits the seller incurs through the sale of his immovable asset are also taxable must add to your displeasure; paying taxes would seem less hurtful if the profits were handsome.
If the seller invests the profit in another residential property, they can escape paying capital gains tax. However, several provisions of the income tax law and their varying interpretations can hurt the taxpayer monetarily if due diligence is not applied. It is in this context we would discuss Section 54 and Section 54F of the I-T Act that offers buyers relief on capital gains tax (LTCG).
Under Section 54, sellers can get complete tax waiver if they invest the profits gained from the sale of one residential property into residential another.
Do note here this Section talks only about gains and not the entire amount. If you sell a property worth Rs 1 crore for Rs .1.20 crore, for example, the gain (Rs 20 lakh) would be entirely non-taxable if you invest this amount in buying another residential property. If the seller fails to invest the entire capital gain in the new property, the remaining amount would be taxable.
Time is of essence here — this investment must be made one year before or within two after the first property is sold.
In several instances, income tax tribunals across the country have ruled that the taxpayer must sell his property on fair market value to get tax exemptions. In case the property is undervalued, the taxman may refuse any waivers at the time of assessment.
This Section offer tax waiver if the entire sale proceeds – not just the profit – of long-term capital assets are invested in a residential property. Assets other than residential property are covered under this Section. These include commercial assets and land.
So, if one sells a land parcel of Rs 1 crore for Rs 1.50 crore, they have to invest Rs 1.50 crore in a residential property within the period specified earlier to get relief in tax payment. If the seller does not use the entire amount for the new purchase, he would be allowed exemption in proportion to the cost.
Unlike Section 54, there is no unanimity among the tax tribunals when it comes to undervaluation.
An owner sells a plot worth Rs 1 crore for Rs 80 lakh because of the weak market conditions. Now, they will have to arrange an additional Rs 20 lakh and invest the entire Rs 1 crore to buy or build another residential property in order to claim tax benefits under Section 54F.
If caught in such a situation, a seller must register the property on on its fair market value, tax experts suggest, to keep clear of future trouble with the taxman.