Stamp duty value as sale consideration; forfeited advance money

(i) Stamp duty value as full value of consideration (section 78, formerly section 50C)

When land or a building (or both) held as a capital asset is transferred for a consideration below its stamp duty value, the stamp duty value is deemed to be the full value of consideration for computing capital gains (section 78(1)). The stamp duty value is the value that an authority of the Central Government or of a State Government has adopted or assessed for stamp duty on the property, or would adopt or assess if the property were referred to it for that purpose (the assessable value) (section 2(105)). The rule stops the gain from being understated by recording a low price in the sale deed.

When the stamp duty value is not taken

1. Tolerance band: if the stamp duty value does not exceed 110% of the actual consideration, the actual consideration is taken (section 78(1)(b)).
2. Date of agreement: where the agreement fixing the price and the registration are on different dates, the stamp duty value on the date of the agreement may be taken, provided part or all of the consideration was received on or before that date through a specified banking or online mode, such as an account payee cheque or electronic transfer (section 78(1)(a)).

Reference to the Valuation Officer (section 78(2)-(3))

If the assessee contends that the property's fair market value on the date of transfer is below its stamp duty value, and that value has not been disputed in an appeal or revision, or has not been referred to any other authority, a court or the High Court (section 78(2)(a)-(b)), the Assessing Officer may refer the valuation to a Valuation Officer. If the Valuation Officer's value is lower, it is taken; if it exceeds the stamp duty value, the stamp duty value is still taken.

(ii) Advance money received and forfeited

When the owner of a capital asset receives an advance (earnest money) during negotiations for its sale and keeps it because the buyer backs out, the treatment depends on when it was forfeited:

1. Forfeited on or after 1 April 2014: the forfeited sum is taxed as Income from other sources in the year of forfeiture, provided the negotiations did not result in a transfer (section 92(2)(h) of the 2025 Act; section 56(2)(ix) of the 1961 Act, which brought in this treatment from that date). It is then not deducted from the cost of the asset when the asset is later sold (section 81(b)).
2. Forfeited earlier: the sum was not taxed when forfeited; instead it is deducted from the cost of acquisition (or written down value or fair market value, as the case may be) when the asset is later transferred, which raises the capital gain then (section 81(a), formerly section 51).
3. The deduction under section 81(a) cannot make the cost negative, and only the advance actually retained by the assessee (not one retained by a previous owner) is deducted.

Illustration (our own)

Ms. Kapoor sells a flat for ₹80,00,000 whose stamp duty value is ₹86,00,000. As ₹86,00,000 is less than 110% of ₹80,00,000 (₹88,00,000), the actual price of ₹80,00,000 is taken. Had the stamp duty value been ₹92,00,000, that value would be the full value of consideration. Earlier, she had received an advance of ₹2,00,000 for the flat from another buyer who backed out; as it was forfeited recently, it was taxed as income from other sources in that year and is not deducted from her cost now.