Simplified Laws Guide to Taxation and Legal Concern Effective from 1st October, 2023 the Guidance Value of properties in Karnataka is increased by 10% to 30%.
But what is Guidance Value (GV) and how does it affect property transactions? It is the minimum price at which a property is to be registered at the sub-registrar’s office in Karnataka. In other states like Haryana or Uttar Pradesh, it is referred to as the District Collector rate, while in Maharashtra it is called as the Circle rate or Index value. It goes by the name Stamp Duty Value (SDV), Ready reckoner rate, among other terms.
It may sound like a joke (or ridiculous or meaningless!) to hear that GV plays a crucial role in real estate transactions and can have significant tax implications for buyers and sellers. However, it is how the rule is structured. Let me illustrate the impact of GV/SDV in your future real estate transactions.
Mr. Anand, residing in London owns a flat in Prestige Project in Bangalore. He has identified a potential buyer, Mr. Rajesh, for a sale price of Rs.1.25 Crore. The revised Guidance Value of this project stands at Rs.1.50 Crore. The implications of increased GV are –
1: Higher Stamp Duty: Buyers must pay Stamp Duty based on the guidance value, even if the actual sale price is lower, leading to increased cash outflow. In the above case, even though the actual sale price is Rs.1.25 Crore, the buyer of this flat has to pay Stamp Duty at 6.65% on Rs.1.50 Crore. Rajesh will incur an additional cash outflow of Rs.1,66,250.
2: TDS Calculation: – For Resident Indians (Not applicable for NRI/OCI as they are covered u/s 195), TDS is calculated on the guidance value u/s 194IA of the Income Tax Act, if the actual sale price is lower than the GV. In this case, if Mr. Anand is a Resident Indian, then TDS has to be done on Rs.1.50 Crore u/s 194IA of the Income Tax Act and not on the actual sale price.
3: Capital Gain Calculation for the Seller: If the guidance value is more than 110% of the actual sale price (Note: In the above illustration, the difference is more than 110%) then the seller has to pay capital gain taxes on notional income u/s 50C. In other words, guidance value shall be considered as the Sale Price. In the above case, Rs.1,50,00,000 will be considered as the sale price.
4: Notional Income from Other Sources for the Buyer: It is not just the seller who has to pay on notional income, even the buyer has to offer the difference amount, in this case, Rs.25,00,000 as income u/s 56(2)(x). The difference amount is taxed in the hands of both the seller and the buyer. It is a double-edged sword.
So, what needs to be done?
Action # 1 – In case you own a flat or a plot or any property in Bangalore, Karnataka, please check the Guidance Value (2023) from the Karnataka Stamp Department website.
Action # 2 – In case you decide to sell the property (or buy), you can keep the guidance value as the reference price. In order to avoid any complications from tax authorities or under the Stamp Act, make sure that the property is sold (or purchased) for a price either equal to or more than the Guidance Value.
What if the market value of the property is lesser than the Guidance Value, say, in the above example, the actual sale price is Rs.1.20 Crore, but the G. Value is Rs.1.50 Crore? In case of such genuine cases, there is a different process to be followed to mitigate the risk. (Those who are in such a situation, can write to me – prasad@balakrishnaandco.com for further guidance)
Understanding the implications of guidance value is essential for anyone involved in real estate transactions in Karnataka. After reading this, you may come across many queries. If so, please write to me or text me at 9845721255.
