Often times you must have heard people discussing about stamp duties and tax charges on property to be sold or bought. If you are looking for information on the subject, you need to first understand that sale of property and exchange of property, are two different terms. Sale of property implies exchanging money when buying or selling the property. It can be either for making capital gains or just for the sake of getting lump sum capital amount. However, when we speak about exchange of property it implies exchanging property for the property. And therefore stamp duty and tax would be different for sale of property and exchange of property.
Let us understand the concept in detail and how transaction is to be made along with implications of stamp duty and tax on property.
Now, when we talk about exchange of two properties it can be either residential property for residential or residential property for commercial i.e. building or land. At the time of exchange the market value of both the properties is to be taken in consideration. And these market values can be same as well as different. When there is difference, it is settled by paying the differential amount. And this difference between the property rates is considered in the exchange deed. But many times it has been observed that exchange deal takes place on two different sale deeds instead of one exchange deed. However this kind of transaction attracts fulfilling stamp duty and tax charges twice as two sale transactions are considered. So it would be wise on part of both the parties to exchange the property through an exchange deed and not through two sale deeds.
How stamp duty is levied?
As mentioned above, when considering sale or exchange, market value of properties is to be considered. In case of exchange, when the market value of both the properties is different, the higher market value is considered for the stamp duty execution. For instance, if one property has market value of Rs 10 lakh and the other has market value of Rs 12 lakh, the stamp duty would be paid as per the property with market value of Rs 12 lakh.
What are the tax implications of exchange of property?
Tax implications on the property would depend on the period for which the property was held by the owner before sale. If the property is sold before 24 months of acquisition, the capital gain is termed as short term. And if property is sold after 24 months of acquisition, it would be termed as long term capital gain.
In case of exchange, market value of property would be calculated according to the stamp duty ready reckoner. You just need to fill every basic detail asked in the reckoner and you will be able to compute the market value of your property. Now compare this value with the value you bought the property for. If the property was held for the period of more than 24 months, you can avail indexation benefits along with exemptions provided under section 54, 54 F and 54 EC.
Points to be noted
- If the buyer wants to exchange residential property that is lesser in value with the one higher in value, there is no tax implication.
- There is no tax implication even when the buyer is acquiring the property with lesser value and if its market value is at least equal to the indexed long term gains of the property with higher value. However, in the same case if the market value is on the lower side as compared to the indexed long term capital gain, tax would be implied according to the rate of 20.36% on the differential value. Or if the buyer wants to claim exemption, he can do that u/s 54 EC and invest the differential amount in bonds specified under law.
- Similarly, exemption can be claimed if you are exchanging your commercial property for having a residential property. In case there is difference in the market value of both the properties, it has to be invested in specified capital gain bonds. However no exemption is provided if commercial property is bought in exchange of commercial property.
Last but not the least, as per Section 54 of Transfer of Property Act, when immovable property is exchanged it is the matter of the transfer of rights and this has to be informed and registered with the registrar office of assurance.