Planning to sell property? Here's how to save on tax

With real estate prices in many markets across the country seeing a correction, cases where the property is sold below market value are on the rise.
Selling property below market value can lead to litigation.
Tinesh Bhasin offers tips on how to avoid it.
Illustration: Dominic Xavier/Rediff.com

When a property owner sells his house below market value, should s/he use the sale price or the market price while taking income-tax benefit?

With real estate prices in many markets across the country seeing a correction, cases where the property is sold below market value are on the rise.

The taxpayer would want to use the sale price for computation.

Tax officers, however, insist on considering the market value.

Contention arises in two situations.

One is when a taxpayer sells a house below market value and invests in a new one to claim benefit under Section 54 of the Income-Tax Act.

Under this, when a taxpayer sells a house property, s/he can save tax by investing only the profit (capital gains) in another house.

"In such situations, most tribunals have said that the value of the property should be calculated based on market price," says Naveen Wadhwa, a chartered accountant with Taxmann.com.

Section 54F allows taxpayers to save tax if they sell long-term capital assets (like land, commercial property, gold, stocks) and invest the entire proceeds in house property.

Say, a property owner sells a piece of land below market value and wants to buy a house to save on capital gains tax.

In this case, there are no clear rules whether he should consider the market value or sale value.

In a recent case, the Income Tax Appellate Authority (ITAT) allowed the taxpayer to consider the sale value of a plot and take the benefit under Section 54F.

The judgment gives relief to taxpayers, who would otherwise need to arrange extra funds to get the tax benefit.

Say, a person sells a plot for Rs 1 crore, which has a market value of Rs 1.5 crore.

If a tribunal rules that the market value should be considered, the taxpayer would need to invest Rs 1.5 crore in a new house by arranging an additional Rs 50 lakh.

But chartered accounts warn that while the ITAT Kolkata bench ruled in favour of the assessee, there have been other tribunals that have held contrary views.

The ITAT judgment is applicable only within its jurisdiction.

If you are in a similar situation, refer to the judgments of the tribunal in your city.

"=If there is no precedent, it depends on whether the assessee is willing to pursue the case or avoid litigation," says Arvind Rao, a chartered accountant and founder of Arvind Rao & Associates.

If the taxpayer does not want to get into litigation, s/he can take the market value and accordingly claim benefit under Section 54F.

In the same case, the property owner had sold a plot and purchased another one. She also gave an advance to a developer for constructing a house.

The tax officer objected and said the taxpayer had bought a plot instead of a house as required under Section 54F.

But the tribunal held Section 54F allowed the taxpayers to construct a house to get the tax benefit.

The construction, however, has to be completed within three years from the date of selling the capital asset.