Factors to consider in valuing property
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A valuer can offer advice on transaction of properties, writes C.H.Gopinatha Rao
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A valuer can be more useful than just provider of information and assessment about a property. He or she can provide value-added services and also offer reasonable advice on transaction of properties and capital gains. Three case studies are given here to illustrate this point.
Case 1: A property, acquired in 1976, comprising about four grounds and a two-storeyed residential building was to be sold and Rs.4 crores was offered for it in 2007. A valuer was commissioned to assess the property as on April 1, 1981 for computing the capital gains. This was necessary to have an idea of the liabilities payable towards capital gains tax.
The valuer can suggest the following procedure to save the tax in compliance with the provisions of the Act.
Computation of capital gains
The land was purchased in 1976 and the building constructed in 1978.
Value of the property as on April 1, 1981 is Rs. 1.82 lakhs.
Cost inflation index for the year 2007-08 is 5.51
Index of cost of acquisition is 1.82 lakhs x 5.51 which is about Rs. 10 lakhs
Expected sale consideration in 2007 is Rs. 4 crores
As per the provision of Section 50 C of the I.T Act, the higher side of sale consideration or the Registrar’s guideline value is to be considered in computing capital gains tax. As the guideline value in this case is less than Rs. 4 crores, the amount that will draw capital gains can be computed by deducting Rs.10 lakhs from Rs. 4 crores, which is Rs.3.9 crores.
The capital gains tax is at 20 per cent of the gain which will be (Rs 3.9 crores X 0.2) Rs. 78 lakhs.
One can save capital gains tax if an alternate residential property is acquired within a specified period or by depositing in specified bonds, which is limited to an amount of Rs. 50 lakhs.
Here a doubt may arise whether this concession is available if the owner has more than one residential property.
Experts are of the opinion that the expression ‘a residential house’ used in Section 54 of the I.T.Act could mean ‘any’ residential house and there is no expression of limitation such as the assessee should own only one house. It is argued that the expression ‘a residential house’ is descriptive of the nature of the property and has no numerical value attributed to the ownership of the property.
Not much clarity
On the contrary, some others argue that only one residential house or one unit or a flat is eligible for exemption. While some others argue that within a complex more than one dwelling unit can be acquired. There is not much clarity on this.
In order to avoid risks, the valuer suggested that before selling the property, the owner might make a settlement in favour of his three children. Allot them 25 per cent each and retain the remaining 25 per cent of the undivided share with him.
This way, the capital gain for each works out to Rs. 97.5 lakhs.
If the owner of the property does not make a settlement in favour of his sons before the sale then he is eligible to deposit only Rs. 50 lakhs in the specified bonds and the balance of Rs. 3.4 crores should be utilised for acquiring a residential property partly or in full and due taxes have to be paid.
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