How much is your property worth?

Valuation of Property for Capital Gains

People aspire to buy home for self occupation as it bestows a sense of pride and self respect and also as an investment to rent it out or to sell at a profit in future. The pricing of home is one of the challenges faced by both buyers and sellers, more so sellers. The pricing is critical not only from the point of realising market value for the seller but also to determine the best price for the buyer.

The other challenge, especially for seller of immovable property, is from the Income Tax perspective in determining the fair market value of the property for computation of capital gains. This becomes further complicated if property is acquired before April 2001 due the change of base year to 2001-02 for computing the indexed cost of acquisition. If property is acquired before 1st April 2001, in such case, the cost of acquisition shall be higher of actual cost of acquisition or fair market value of the said property. As per the Income Tax Act, the fair market value of the property is the price at which the capital asset would ordinarily sell in the open market on relevant date.

Fair market value is largely determined on the basis of sale transactions of similar properties in the same locality. But, real estate is a heterogeneous market and the property prices vary a lot even for the properties within the same locality. Income Tax authorities may even question the basis for determining the fair market value, in case it is over estimated.

How this challenge can be addressed? A registered Property Valuer with the Income Tax authorities can assist in determining the fair market value of the property. A registered Valuer is a person who possesses requisite qualification and experience and also registered under the provisions of Section 34 AB of the Wealth Tax Act, 1957. The report of valuation of any asset by a registered Valuer shall be in the prescribed form and be verified in the prescribed manner. It is the responsibility of a registered Valuer who has given a valuation report to reply to enquiries of Income Tax authorities and even visit the authorities for clarifications on the report.

Income Tax authorities have also prescribed the fees and charges of Valuer for the valuation of assets as per the following slabs.

(a) On the first Rs. 5,00,000 of the asset as valued                              1/ 2 per cent of the value;
(b) On the next Rs. 10 lakhs of the asset as valued                              1/ 5 per cent of the value;
(c) On the next Rs. 40 lakhs of the asset as valued                             1/ 10 per cent of the value;
(d) On the balance of the asset as valued                                           1 /20 per cent of the value.

(2) Where two or more assets are required to be valued by a registered valuer at the instance of an assessee, all such assets shall be deemed to constitute a single asset for the purposes of calculating the fees payable to such registered valuer.

(3) Where the amount of fees calculated in accordance with sub-rules (1) and (2) is less than Rs. 500, the registered valuer may charge Rs. 500 as his fees

For example, if property value is assessed as Rs. 1 Crore, the following is the calculation for fee payable to the Valuer.

 

ASSET VALUE SLAB  AMOUNT FEE %  FEE IN Rs.
Up to Rs. 5,00,000           5,00,000 0.50%           2,500
5,00,001 – 15,00,000        10,00,000 0.20%           2,000
15,00,001 – 40,00,0000        25,00,000 0.10%           2,500
40,00,001 – 1,00,00,000        60,00,000 0.05%           3,000
Total        10,000

Source: https://www.incometaxindia.gov.in/Rules/Wealth-Tax%20Rules,%201957/2010/103120000000006873.htm

Hence, it will be prudent to get the valuation of immovable property from a registered valuer for computation of capital gains and avoid hassles with enquiries by Income Tax Authorities.

By A Suresh,

Executive Director, PropSeva

CERTIFIED FINANCIAL PLANNERCM

Chartered Trust and Estate Planner TM