According to section 50C, the sale of a building or piece of land is treated as a capital asset for the purposes of calculating capital gain. Furthermore, if a structure or piece of land is owned as stock, this Section does not apply. This blog post is focused on “Section 50C of the Income Tax Act, 1961.” It discusses a specific clause that, in certain circumstances, provides for the full value of the consideration.
What is Capital Gain?
Capital gains are earnings from the sale of any assets that the seller possesses. Real estate is one of many assets that are considered capital assets. Therefore, any profit made by the owner through the sale of land or a building is taxable as a capital gain. A capital gain is taxed when the sale consideration is decreased by the cost of acquisition (cost of acquisition for property or buildings held for more than 24 months).
According to the Income Tax Act, there is no need to pay capital gains tax in India if a person inherits property and there isn’t a sale. The tax will need to be paid on the income from the sale, though, if the individual who inherited the property chooses to sell it. Examples of capital assets include jewelry, brands, patents, machines, cars, leasehold rights, real estate, buildings, and land.
What is Section 50C under Income Tax Act?
The calculation of capital gain from the sale of land, a building, or both that are held as capital assets is covered in Section 50C. This clause states that the purchase price cannot be less than the amount of stamp duty determined by the Stamp Valuation Authority. However, the income tax department does permit a marginal rebate of 10% of the difference. Furthermore, if a structure or piece of land is owned as stock, this Section does not apply.
The cost adopted by the stamp valuation authority (SVA) would become the actual sale consideration received by or increasing to the seller in the event that the consideration received or claimed to be received by the seller on the sale of land, a building, or both is less than the cost adopted by the SVA. Therefore, the cost of acquisition would be deducted from the capital gain calculated using stamp valuation professionals’ valuation.
The prerequisites for application under Section 50C
The following are the circumstances that apply in accordance with Section 50C of the Income Tax Act of 1961:
- It’s a capital asset that’s held.
- Whether it is a long-term capital asset or a short-term capital asset, there is a transfer of land, a building, or both.
- The asset may or may not be depreciable.
Type of covered transaction
According to Section 50CA of the Income Tax Act, where the consideration is less than the Fair Market Value (FMV) of the shares as determined by the prescribed method, the consideration for the transfer of a business organization’s shares (other than quoted shares*) shall be deemed to be the total consideration for the purpose of computing income under the head of capital gains.
Note: The transaction must not be covered by Section 47.
Value Authority for Stamps
The value accepted, assessed, or deemed assessable by any State Government authority for the purpose of paying stamp duty is known as the Stamp Value Authority (SVA). But the amount adopted, assessed, or assessable by the stamp value authority must not be greater than 105 percent of the consideration accruing or receiving as a result of the transfer. For the purposes of Section 48, the consideration thus received or obtained as a result of the transfer shall be deemed to constitute the full amount of the consideration. For the purposes of section 50C, there may be a difference between the stamp duty price and the actual consideration, but it may not be greater than 5% of the actual consideration.
Considerations for Sales
The date of registration for the transfer of capital assets and the date of the agreement establishing the consideration amount should coincide with the value adopted, assessed, or assessable by the value of consideration for such transfer. The first proviso, however, would only be applicable in certain circumstances where the consideration amount or a portion has been received via account payee bank draught, account payee check, or electronic clearing system through a bank account.
Class of people designated by Rule 11UAD for Section 50CA
If the following criteria are satisfied, an assesse may transfer unquoted shares of a company, its subsidiary, and the subsidiary of such subsidiary without violating Section 50CA of the Act:
- The tribunal suspended the board of directors in response to a request filed by the central government according to section 241 of the 2013 Companies Act and selected new directors who had been proposed by the central government; and
- In this situation, after the jurisdictional principal commissioner or commissioner was given a reasonable opportunity to be heard, shares of the company, its subsidiaries, as well as the subsidiaries of its subsidiaries, have been transferred as part of a resolution plan that has been approved by the tribunal under section 242 of the Companies Act, 2013.
Double taxation issue in this transaction
The transferor will be subject to tax under section 50CA if the sale consideration is less than FMV because he has not reported true consideration. Due to understating the purchase value, the transferee will be taxed under section 56(2) (x) in the interim. This results in double taxation.
For instance, on January 1, 2022, Mr. A transfers to Mr. B unquoted equity shares for Rs. 200,000. These shares have an FMV of Rs. 500,000. These shares were bought by Mr. A for Rs. 150,000.
Now, in accordance with section 50CA, Mr. A’s capital gains are as follows:
Sale Price (FMV as per Section 50CA): Rs. 500,000
Cost of Acquisition (COA): Rs. 150,000
Capital Gains: Rs. 350,000 (*FMV – COA)
In the case of Mr.B: Section 56(2)(x) will apply to Mr. B, and Mr. B will be taxed on Rs. 300,000 as income from other sources in accordance with Section 49(4). Mr. B’s acquisition cost will be Rs. 500,000.
If Mr. B is a relative of Mr. A as that term is defined by the act
- Regardless of who the transferee is, the provision still applies. Therefore, transfers between relatives are covered by the provision. Therefore, if “A” transfers shares to “B,” his son, A would be required to pay tax on the transaction in accordance with section 50CA unless the transfer occurred at a specified fair market value.
- At the same time, a transaction where the purchase is from a relative is excluded under section 56(2) (x). B would not be taxed as a result. As a result, Mr. B, who is related, is exempt from section 56(2)(x) in the aforementioned situation. Mr. A must, however, pay capital gains tax on the sum of Rs. 350.000.
Relevance of Section 112A
It is not stated in Section 112A that the shares must be routinely traded in order for it to apply. Therefore, even if the share is not regularly changed, the capital gains are taxed per section 112A. The sale price of the shares shall be the FMV in accordance with Section 50CA, and capital gains shall be taxed in accordance with Section 112A, provided that Section 112A’s requirements are met.
If you want to know more about Section 50CA then contact PhoenixTax- Tax consultant in Tambaram, Chennai.