More Loss Than Gain In Undervaluing Your Property
It is common knowledge that the money you pay to the government as stamp duty and registration charges is used for your own benefit as a member of the society, but one could hardly be expected to look at the big picture when one is stuck in an immediate financial conundrum — arranging all that additional money that a house purchase involves is no easy task, and it is often so frustrating that one would resort to any means to lessen the burden. At a time such as this, one would need little convincing to fall for it immediately if you told them they could indeed lessen their burden by under-valuing their property.
Since the stamp duty and registration charges have to be paid in proportion to the property value, under-reporting the value would help you cut corners.
If you register your property at Rs 45 lakh even though it actually cost you Rs 50 lakh, for example, you could be saving some money. Supposing five per cent is the stamp duty charge, you would save Rs 25,000 if you undervalued your property on paper. (At five per cent, stamp duty would come down to Rs 2.50 lakh for a property worth Rs 50 lakh, and Rs 2.25 lakh for a property worth Rs 45 lakh.)
Similarly, registration charges would come down, too. At the rate of one per cent, the registration charge for a property worth Rs 50 lakh on paper would be Rs 50,000. In case this property is reported at Rs 45 lakh on paper, the buyer would save another five grand in registration charges.
At this juncture, given that you are hard-pressed, you may be open to saving every penny you can. Those who have been in your shoes would vouch for that! Undeniably, you have made a short-term success for which you may have to pay in future.
Why undervaluing your property is not a good idea?
You expect your real estate investment to fetch you at least double the amount if you decided to liquidate it in the near future. This is where the problem would pop out. The truth is you might find a buyer who would be willing to pay you the price you cite, if the market is functioning brilliantly. However, it is here that your past mistake would come to haunt you.
When a buyer sees you bought this property for Rs 45 lakh five years back and are trying to sell it off for Rs 1 crore now, they are bound to bargain hard. It would take some convincing for them to understand that the property actually cost you about Rs 55 lakh at that time. But, this is not the tougher part. You will also have to now find a buyer who would be willing to commit the same “mistake” you made at the time of your property purchase ─ that is undervaluing it.
Why is that?
On the gains that you make on your property sale, you will be liable to pay long-term capital gains tax. In case the buyer does not undervalue the property and is interested in an all-white deal, you could end up paying enormous amount of money to the government as tax (20 per cent of the gain, in case this money is not invested in another property purchase within a specified time).
Amid all this, you will mastermind many a base scheme to circumvent the law. In a deal where no short-changing of the set procedures is done, you are spared all that trouble. You get all that is rightfully yours without having to nurse any financial headaches.
On a social plane as well, it does little good. When you talk to your friends about your newly purchased home, you would like to slightly inflate the price, would you not? This would be done, often unintentionally, with a view to dazzle them with your financial achievement. If they were to find out you not only bought the property for much less than what you are publicizing but also misreported the transaction value, it would leave a bad impression on them. It is another matter that your friends would invariably fall for the same trick in their time of need.