High land rates dampen property deals in Mumbai

The state government's decision to increase the rateable value of land is robbing buyers and sellers of benefits, they may get due to depreciation and long-term capital gains tax.

Rajesh Mehta, chairman and managing director of realty consultant Raha Realtors, said, "The decision to increase land rates and the method suggested in the ready reckoner to calculate property value is robbing a purchaser of whatever benefit he or she might get due to depreciation on stamp duty. Besides, it could result in forcing the seller to pay a long -term capital gains tax on an amount which he has not earned."

Explaining his point, Mehta said, "The government has increased land rates substantially for evaluating the market value of a property in the ready reckoner. As per the guidelines, the rate of depreciation claimed on old buildings is permissible to a maximum of 50 per cent of its market value. If the market value arrived at after allowing for depreciation is less than the developed land rate, then the valuation has to be done as per point no 7 of the guideline-value of the land + construction cost (as per depreciation) X percentage of profit for residential (1.15 times)/ industrial / office premises (1.25 times)/ shop (1.50 times). Elaborating on how it is going to affect the sellers, Mehta said, "As per the I-T Act provisions, long-term capital gains tax would be charged on the amount on which stamp duty is paid."

For instance, a person who purchased a flat of 1,000 sq ft in 1990 for Rs 7,00,000 and sold it in 2006 for Rs 40,00,000. After adjusting for inflation and taking into consideration all his expenses, such as giving a classified advertisement in newspapers and brokerage, his purchase value comes to Rs 19,46,150. This means, he will be required to pay a capital gains tax on Rs 20,53,850.

But Mehta points out that given the methods suggested for calculating the value of the flat, the stamp duty payable would be on Rs 44,00,000.

In such a scenario, the seller would have to pay capital gains tax on Rs 24,53,850 and not on Rs 20,53,850, which is his actual capital gains. That means he has to pay an additional long-term capital gains tax of Rs 85,910 as per the current I-T provision.