When purchasing immovable property, it’s not just the negotiated price that matters — the Income Tax Department also looks at the property’s stamp duty value (SDV). If the SDV significantly exceeds the purchase price, the difference may be treated as taxable income under Section 56(2)(x) of the Income Tax Act, 1961. This provision aims to curb the understatement of property values in real estate transactions. In this blog, we explore the tax implications for buyers when the SDV is higher than the actual consideration paid, and highlight practical strategies to reduce or avoid unexpected tax burdens legally.
🔸 1. Sale or Transfer of Property (Immovable Property)
👉 Relevant Sections: Section 50C (Capital Gains) & Section 56(2)(x) (Income from Other Sources)
- Income Tax Department considers the higher of:
- Actual sale consideration, or
- Stamp Duty Value (SDV) or Circle Rate (i.e., Benchmark Value fixed by the State government)
✅ Therefore:
- Benchmark value (SDV) is considered if it is higher than the market value or sale price.
- A tolerance limit of 10% variation is allowed (i.e., no adjustment if actual sale price is within 10% of SDV).
🔸 2. Gift of Immovable Property
👉 Relevant Section: Section 56(2)(x)
- If an immovable property is received without consideration or for inadequate consideration, and the SDV exceeds the consideration by more than ₹50,000 or 10%, then SDV is taxed in the hands of the recipient as “Income from Other Sources”.
🔸 Summary Table
| Transaction Type | Value Considered by IT Dept. |
|---|---|
| Sale of immovable property | Higher of actual sale price or SDV (Section 50C) |
| Purchase/gift of immovable property | SDV if more than actual value by ₹50,000 or 10% (Sec 56) |
Let us Discuss the Rule with one Typical Example:
Since you purchased land for ₹50 lakhs while its Stamp Duty Value (SDV) is ₹1 crore, the income tax department will consider this as a case of inadequate consideration under Section 56(2)(x) of the Income Tax Act.
Let me break down the implications for you (the buyer):
🔴 Tax Implication Under Section 56(2)(x)
- You purchased an immovable property (land) for ₹50 lakhs
- SDV is ₹1 crore
- The difference = ₹1 crore – ₹50 lakhs = ₹50 lakhs
- This difference exceeds ₹50,000 AND also exceeds 10% of the consideration (i.e., more than ₹5 lakhs)
✅ Therefore, ₹50 lakhs will be treated as your income under the head “Income from Other Sources” and will be fully taxable in the year of purchase.
🧮 Example: Total Taxable Income Addition
| Particulars | Amount (₹) |
|---|---|
| Stamp Duty Value (SDV) | 1,00,00,000 |
| Actual Purchase Consideration | 50,00,000 |
| Deemed Income under Sec 56(2)(x) | 50,00,000 ✅ |
| Taxable under | “Income from Other Sources” |
- This ₹50 lakhs will be added to your total income and taxed as per your applicable slab rate.
⚠️ Exception:
You can escape tax under Section 56(2)(x) if:
- The difference between SDV and purchase price does not exceed 10% of the purchase price (known as the safe harbor limit) — but in your case, the difference is 100%, so this doesn’t apply.
💡 Capital Gains for Seller
If you are also the seller in another scenario:
- The seller will be taxed under Section 50C, where SDV (₹1 crore) will be considered as the sale price for computing capital gains.
✅ What You Should Do:
- Disclose this transaction properly in your Income Tax Return (ITR).
- Show the ₹50 lakh under “Income from Other Sources”.
- Pay tax as per your slab.
- Keep proper documentation (Sale Deed, SDV copy, etc.) in case of scrutiny.
Some Potential Stategies to Reduce the Tax Burden in Such Cases:
✅ 1. Challenge the Stamp Duty Value (SDV) Before Sub-Registrar
If you believe the market value is truly lower than ₹1 crore, you can:
🔸 File a challenge with the stamp valuation authority under Section 50C(2) / 56(2)(x) proviso.
- Request for valuation by a Valuation Officer (VO).
- If VO determines FMV < SDV, that value will be considered for tax.
👉 Requirement: This should ideally be done before registration or soon after, with supporting documents (e.g., market trends, locality issues, comparable sales).
✅ 2. Cancel & Re-Structure the Transaction
If the transaction is recent and not yet registered or can be reversed, consider:
- Splitting the transaction into multiple agreements:
- One for land
- Another for development rights, or
- Including value for other assets/rights (if any)
⚠️ Must be genuine and supported by documentation — otherwise it may be seen as tax avoidance.
✅ 3. Buy the Property in Joint Ownership
If you co-purchase the land with another person (e.g., spouse, parent):
- The difference (SDV – Purchase price) gets divided in proportion.
- Each co-owner pays tax only on their share of the deemed income.
✅ May help keep you in a lower tax slab or under exemption limit.
📝 Only works before registration.
✅ 4. Utilize Available Basic Exemption or Losses
If you have:
- No or low other income, or
- Carried forward losses (like house property or business losses)
You can adjust the ₹50 lakh deemed income against these to reduce tax liability.
✅ 5. Structure Purchase as Agreement to Develop (JDA)
Instead of buying land outright, you could:
- Enter into a Joint Development Agreement (JDA) with the seller/landowner.
- You pay part in cash + part in constructed area/benefits later.
- If properly structured, SDV provisions may not apply in the same way.
⚠️ Needs professional structuring and legal clarity.
🔴 What Not to Do
- Don’t under-report the consideration in the ITR.
- Don’t rely on informal arrangements or receipts without valid contracts.
- Avoid back-dated changes — it can lead to penalties under Section 270A for under-reporting.
🔍 Recommendation
Given the ₹50 lakh deemed income, it’s worth consulting a Tax expert to:
- Evaluate whether SDV can be challenged
- Help document a case for VO valuation
- Explore restructuring if registration isn’t done yet
-
Optimize tax liability based on your total income