Sale Old Real Estate or Immovable Property before March 31, 2020 and Save Capital Gains Tax

If you are planning to sell an immovable property originally acquired before April 1, 2001, you may be better off if you sell the property on or before March 31, 2020.

Budget 2020 introduced a new provision restricting fair market value as on 1/4/2001 to the stamp duty value for calculating cost of acquisition of an immovable property.

Currently, cost of any immovable property acquired before April 1, 2001 is calculated as the Fair Market Value (FMV) as on 1-4-2001 or actual cost at the option of the tax payer.

Also, the registered valuers have been giving valuation report that is significantly higher than the acquisition cost or stamp duty value using complex formula or justification as per property owner’s requirement to save capital gain tax. To restrict such practice, Budget 2020 introduced the cap on FMV as now, it cannot exceed the Stamp Duty Value as on April 1, 2001.

This could significantly affect the long term capital gain tax as explained in the following table:

 

FY 2019-20 (Option A)

FY 2019-20 (Option B)

FY 2020-21

Selling Price

50,000,000

50,000,000

50,000,000

Purchase Price on 1/4/1985

500,000

500,000

500,000

Stamp Duty Value

1,500,000

1,500,000

1,500,000

FMV as on 1/4/01

3,000,000

7,500,000

3,000,000

COST of Acquisition

3,000,000

7,500,000

1,500,000

Index

289

289

298 (assume)

Indexed Cost

8,670,000

21,675,000

4,470,000

Capital Gain

41,330,000

28,325,000

45,530,000

Tax @26% (20% + 5% surcharge + 1% cess)

10,745,800

7,364,500

11,837,800

Additional Tax to Pay

3,381,300

0

4,473,300

The tax effect on high value transactions could be extremely high where there is significant difference between FMV and Stamp Duty Value. 

The proposal is effective from April 1, 2020. As a result, anyone sitting on a sideline or have a deal that is closer to be completed should follow up urgently to make the deal and register the transaction on or before March 31, 2020. It may be worth for NRIs or PIOs to specially make a trip and sell the property before March 31, 2020 to save the tax.

However, where the property was acquired after April 1, 2001 or where the stamp duty value is higher than the fair market value, there won’t be any difference as the proposal would not apply.

About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)

Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: www.newcfa.org). He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.
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