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Income Tax relief for Real Estate Developers and Home Buyers

income-tax-relief-for-real-estate-developers-and-home-buyers

As part of the AatmaNirbhar Bharat Package 3.0 as announced by Hon’ble Finance Minister on 12th November 2020, certain income tax relief measures were brought in for real-estate developers and home buyers.


The differential between circle rate and agreement value in real estate income tax under Section 43CA of the Income Tax Act, 1961 (“Act”) has been increased from 10% to 20%. This is for primary sale of residential units up to Rs. 2 Crore (from date of announcement of this scheme, till June 30, 2021). Consequential relief up to 20% shall also be allowed to buyers of these units under section 56(2)(x) of the Act for the said period. The Income Tax relief provides an incentive to the middle class to buy homes.


In a press release issued by CBDT on 13.11.2020, it was clarified that in order to enable the real-estate developers to liquidate their unsold inventory at a rate substantially lower than the circle rate and giving benefit to the home buyers, it has been decided to increase the safe harbour from 10% to 20% under section 43CA of the Act for the period from 12th November, 2020 to 30th June, 2021 in respect of only primary sale of residential units of value up to Rs. 2 crore. Consequential relief by increasing the safe harbour from 10% to 20% shall also be allowed to buyers of these residential units under section 56(2)(x) of the Act for the said period. Therefore, for these transactions, circle rate shall be deemed as sale/purchase consideration only if the variation between the agreement value and the circle rate is more than 20%.


Section 43CA was introduced in the Act by the Finance Act, 2013 and was made effective from AY 2014-15. As per section 43CA,  where the consideration for the transfer of an asset (other than a capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business or profession”.


It is also provided that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this exception shall apply only in those cases where the amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.


Prior to the insertion of section 43CA, there is a section called section 50C in the Income Tax Act, 1961 which provides for substitution the actual consideration with the stamp duty valuation for computing the income under the head ‘capital gains’. When a capital asset, being land and/or building, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then such value (stamp duty value) is taken as full value of consideration under section 50C of the Income-tax Act. 


Since section 50C was applicable only in case land and/or building is transferred as a capital asset and not as a stock in trade, these provisions do not apply to the transfer of immovable property, held by the transferor as stock-in-trade. Thus real estate developers for whom land and/or building constitutes stock-in-trade were out of the scope of section 50C. Thus in order to bring such land/building held as stock-in-trade, section 43CA was introduced in the Act with effect from 1st April, 2014.


Up to 2018, section 43CA the Act provided for deeming of the stamp duty value (circle rate) as sale consideration for the transfer of real estate inventory in the case the circle rate exceeded the declared consideration. The was no margin for variation in the actual consideration and stamp duty value/circle rate was allowed.


Hence, both the section 50CA and section 43CA are applicable to sellers of immovable properties being land and/or building.


On the other hand, section 56(2)(x) of the Income Tax Act, 1961 provides that where any immovable property is received by a person for a consideration which is less than the stamp duty value of such immovable property, then the difference between the stamp duty value and actual consideration of such property, if it exceeds Rs. 50,000, would be charged to tax in the hands of the buyer as ‘income from other sources’.


Consequentially, stamp duty value was deemed as purchase consideration in case of the buyer under section 56(2)(x) of the Act. 


In order to provide relief to real estate developers and buyers, the Finance Act, 2018, provided a safe harbour of 5%. Accordingly, these deeming provisions triggered only where the difference between the sale/purchase consideration and the circle rate was more than 5%. In order to provide further relief in this matter, Finance Act, 2020 increased this safe harbour from 5% to 10%. Therefore, currently, the circle rate is deemed to be the sale/purchase consideration for real estate developers and buyers only where the variation between the agreement value and the circle rate is more than 10%. The safe harbour of 10% variation is applicable for section 43CA, section 50C and section 56(2)(x).


In order to boost demand in the real-estate sector and to enable the real-estate developers to liquidate their unsold inventory at a rate substantially lower than the circle rate and giving benefit to the home buyers, it has been decided to further increase the safe harbour from 10% to 20% under section 43CA of the Act for the period from 12th November, 2020 to 30th June, 2021 in respect of only primary sale of residential units of value up to Rs. 2 crore. Consequential relief by increasing the safe harbour from 10% to 20% shall also be allowed to buyers of these residential units under section 56(2)(x) of the Act for the said period. Therefore, for these transactions, circle rate shall be deemed as sale/purchase consideration only if the variation between the agreement value and the circle rate is more than 20%.


It should be well noted that the relief or relaxation in the safe harbour limit of 20 percent is provided only for section 43CA and section 56(2)(x). No such relief is provided for section 50C. Hence, the increase of safe harbour to 20 per cent for the specified period shall only be available to real estate developers only and not to any other investors. Normally, a real estate developer held the flats, etc as stock-in-trade and thus the income therefrom is chargeable to income tax under the head ‘income from business’. 


In case even if the real estate developer sells the immovable properties as a capital asset and the deeming value of full value of consideration is triggered by section 50C, then the margin of variation between the stamp duty value/circle rate and actual consideration cannot exceed 10%. The increased limit of 20 per cent is not applicable to capital assets where section 50C is attracted.


From the reading of the press release, the followings are noteworthy for applicability of increase limit of 20 per cent variation between the actual consideration and stamp duty value/circle rate:


1. The increase in the safe harbour will apply only to real estate developers of residential units. Hence, the increase in the limit of safe harbour to 20% shall not apply to commercial buildings. Further, the relief is not extended to land but is limited to buildings only.


2. It is clear that whether completed residential units shall be eligible for the increase safe harbour limit of 20%. It is not clear whether under construction property shall be eligible for the higher limit of 20% variation between the circle rate and actual consideration. This is because the press release states that the objective to provide the relief is to  enable the real-estate developers to liquidate their unsold inventory which signifies completed units only. However, section 43CA and section 56(2)(x) shall apply to under-construction properties also.


3. It is further stated that the value of residential units shall be upto Rs. 2 crore. It is not clear whether the value refers to actual sale consideration or the stamp duty value. However, it seems the value of Rs. 2 crore refers to actual sale consideration of the residential units. Thus if the actual sale value of a residential unit is Rs. 2 crore, the circle rate/stamp duty value shall not exceed Rs. 2.40 crore, being 120% of the actual sales value.


4.  The increase in the safe harbour from 10% to 20% under section 43CA of the Act shall be available for the period from 12th November, 2020 to 30th June, 2021 in respect of only primary sale of residential units. The term ‘primary sale’ is not defined. It seems it covers the sale of flats to the buyers by the developers only. Any sale by an individual or any other person of the flat as capital assets shall not be eligible for higher safe harbour.


Further, the relief is not available in case of re-sale of the property even if the flat or unit is sold as stock-in-trade. The flat should be actually sold by the developer to the buyer who developed the flats/units.


The relief shall not apply to commercial units or office spaces/shops/ godowns etc. Further, it shall not apply where the value of the residential unit exceeds Rs. 2 crore.


5. The primary sale of the residential units shall be completed within the specified period between 12th November 2020 and 30th June 2021. The registration may be done even after the end of the specified period. This is due to applicability of section 43CA(3) which specifies where the date of agreement fixing the value of consideration for the transfer of the immovable property/asset and the date of registration of such transfer of asset are not the same, the stamp duty value in respect of the transfer of the asset shall be the stamp duty value as on the date of the agreement.


Hence, from the above, it can be seen that the relief in the real estate sector is given only to a few limited set of transactions and does not have a wider scope. Further, the CBDT should issue more clarifications on the issues enumerated and notify the legislative amendments so that fine prints can be evaluated. Further, discrimination is made between purchases of residential units from a real estate developer and in case of purchases from other home-owners. In a case where the flats were developed on land owned by the landowner under a joint development agreement (JDA) between the landowner and the developer, it seems the benefit of sfae harbour limit of 20% will extend to developer’s share of residential units but may not apply to land owner’s share of flats.


Despite the above-meniotned issues, the relief is likely to help developers, as they can now sell their property at a price lower rate than the prevailing circle rate and hence better price rationalization of the unsold properties. There are certain locations where the stamp duty value is disproportionately high than the market prices. 


State governments set the circle rates or stamp duty valuations of the properties for the purpose of collection of stamp duty. The circle rate or stamp duty value is revised at regular intervals by the state governments. This is done, to discourage the evasion of stamp duty and registration fees by sellers and buyers, by mentioning a lower property price than the actual prevailing market rate.


Readers are aware that due to country-wide lockdown imposed to combat Covid-19 pandemic, real estate is one of the worst affected sectors in the country. 



The press release further state that legislative amendments in this regard shall be made in due course.




Read the full text of the Press Release dated 13.11.2020 on Income Tax relief for Real-estate Developers and Home Buyers

Government of India

Department of Revenue

Ministry of Finance

Central Board of Direct Taxes


New Delhi, 13thNovember, 2020


PRESS RELEASE


Income Tax relief for Real-estate Developers and Home Buyers


As part of the AatmaNirbhar Bharat Package 3.0 as announced by Hon’ble Finance Minister on 12th November, 2020, certain income tax relief measures were brought in for real-estate developers and home buyers.


Up to 2018, section 43CA of the Income-tax Act, 1961 (‘the Act’) provided for deeming of the stamp duty value (circle rate) as sale consideration for the transfer of real-estate inventory in the case the circle rate exceeded the declared consideration. Consequentially, stamp duty value was deemed as purchase consideration in case of buyer under section 56(2)(x) of the Act. 


In order to provide relief to real estate developers and buyers, the Finance Act, 2018, provided a safe harbour of 5%. Accordingly, these deeming provisions triggered only where the difference between the sale/purchase consideration and the circle rate was more than 5%. In order to provide further relief in this matter, Finance Act, 2020 increased this safe harbour from 5% to 10%. Therefore, currently, the circle rate is deemed to be the sale/purchase consideration for real estate developers and buyers only where the variation between the agreement value and the circle rate is more than 10%.


In order to boost demand in the real-estate sector and to enable the real-estate developers to liquidate their unsold inventory at a rate substantially lower than the circle rate and giving benefit to the home buyers, it has been decided to further increase the safe harbour from 10% to 20% under section 43CA of the Act for the period from 12th November, 2020 to 30th June, 2021 in respect of only primary sale of residential units of value up to Rs. 2 crore. Consequential relief by increasing the safe harbour from 10% to 20% shall also be allowed to buyers of these residential units under section 56(2)(x) of the Act for the said period. Therefore, for these transactions, circle rate shall be deemed as sale/purchase consideration only if the variation between the agreement value and the circle rate is more than 20%.


Legislative amendments in this regard shall be proposed in due course.



(Surabhi Ahluwalia)

Commissioner of Income Tax

(Media & Technical Policy)

Official Spokesperson, CBDT


Download Copy of the Press Release dated 13.11.2020 on Income Tax relief for Real-estate Developers and Home Buyers in pdf format.

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