MARKET VALUE OF PROPERTY FOR CAPITAL GAIN

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Valuation of Property :

For calculating the long term capital gains on sale of property, the Fair Market Value of the property needs to be ascertained as per the Income Tax Act. With effect from 1st April, 2017, the Cost Inflation Index has been shifted from 1981 to 2001 for the calculation of capital gains. This means that in case an immoveable property purchased before 2001 is sold to a buyer after 1st April, 2017, the Fair Market Value (FMV) of the property as on 1st April, 2001 needs to determined for the calculation of Long Term Capital Gains (LTCG)as per the Income Tax Act.  It may be noted that earlier the value was to be determined as on 1st April, 1981 but now the same has been shifted to 1st April, 2001. This change in base year may be helpful in saving capital gains tax for those who had acquired the property before 2001.


Capital gain on Sale of Property / Land

Whenever a person sells any immoveable property at a profit, he needs to pay the Tax on the profit which is known as Capital Gains tax. If the property has been sold after being held for more than 2 years, then it will be classified as a Long Term Capital Gain and will be taxed at 20% after indexation.  On the other hand, if the property has been sold within 2 years from the date of its acquisition, the profit will be classified as Short Term Capital Gains Tax and added to the relevant year’s regular income.

Capital gains tax is levied on the transfer of all capital assets for which the computation mechanism has been prescribed under sections 45 to 55A of the Income-tax Act. Section 55 of the Income Tax Act deals with the computation of the cost of acquisition of a property/land for the purpose of calculation of Capital Gains. The provisions of section 55 of the Act also deal with the concept of Fair Market Value (FMV) which shall be taken as the cost of acquisition in case the capital asset has been acquired before 1-4-2001.

Need for Property Valuation Report:

To estimate the market value of a property, the Ready Reckoner / circle rates fixed by the state government can be used. However, there were no Circle rates in Delhi in 2001 for properties in Delhi which could be used to assess the fair market value (FMV). In such cases, a person should take the help of a government approved property valuer (registered under the Wealth Tax Act and Income Tax Act) for the calculation of property’s fair market value as on 1st April, 2001. The valuation report prepared by the valuer is accepted by the Income Tax department for the ascertainment of the market value of the property and calculation of capital gains tax. If the person does not obtain a valuation certificate and calculates the capital gains on the basis of an arbitrary market value, he can land himself into trouble if the value does not match the Assessing Officer’s opinion.
 

Report from Government Registered Property Valuers:

​The government registered valuers follow the prescribed norms and standars for the valuation of property and provide a detailed valuation report. For determining the property’s fair market value, they consider a number of factors such as the location of the property, its area, cost of construction, method and year of construction, quality of construction, classification of locality, proximity to civic amenities, number of floors, share in land, leasehold or freehold status etc. Generally, they take around 3 to 4 days’ time for the preparation of a valuation certificate. In case of any inquiry/scrutiny, the Income Tax officers will consider the Property value indicated by the registered property valuer in his report. The person needs to retain the valuation report for at least 8 successive assessment years.

Alternatively, the value can be calculated by finding out other instances of sale of similar properties in the locality to find out the average sale price of similar properties in the neighbourhood.

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