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Know the fair market value of your house

LiveMint logoLiveMint 08-03-2017 Ashwini Kumar sharma

The Finance Bill 2017 has proposed that the base year of cost inflation index (CII) be moved from 1981 to 2001. If this is approved, this would make a slight change in how the long term capital gains (LTCG) would be calculated for properties that were purchased before 2001. For the purposes of calculating capital gains on such properties, you have to know the fair market value (FMV) of a property in 2001.

According to the Income-tax Act, 1961, fair market value is the price that the capital asset would ordinarily sell in the open market on the relevant date.

But, given that real estate is a heterogeneous market, in which properties can vary a lot, even within the same locality, it is difficult for an individual to determine the FMV of a particular apartment or a house, that too, for a date 17 years ago. Read ahead what you should do if you need to find FMV of your property in 2001.

According to the Income-tax Act, 1961, FMV shall be the higher of

—cost of acquisition of the property, or

—the price that the property shall ordinarily sell for if sold in the open market.

However, “There is no fixed formula to calculate FMV of a property. The technique most widely used to estimate FMV is to look at the sale instances of similar properties in the same neighbourhood. The other option is to look at circle rates,” said Sachin Sandhir, global managing director, emerging business, RICS.

One could take into consideration the circle rate to calculate the FMV, but there are a couple of problems in that too. Circle rates are usually lower than the prevailing market value. Apart from that, “The concept of circle rates came into existence for the first time in 1999 in Bihar. In other places like Delhi, it was adopted in 2007,” said S.N. Bansal, general secretary, Institute of Government Approved Valuers, which is based in Delhi.

Before the circle rates were adopted, several other rates were declared by different government authorities. And even now, some places don’t have any circle rate.

To determine FMV, you can also consider real estate indices, such as the National Housing Bank’s (NHB’s) Residex, and two indices of the Reserve Bank of India (RBI)—Housing Price Index (HPI) and Residential Property Price Index (RPPI).

But again, the utility of these indices is limited. The problem is that most of them are new and do not provide price trends before 2001.

Unlike developing nations, countries like the US have indices like the S&P/Case-Shiller 20-City Composite Home Price Index, which have measured the value of residential real estate in 20 major metropolitan areas on a monthly basis since January 1987.

Another way to find the FMV of a property is by finding out average sale price of a similar properties in the neighbourhood, which were sold in the year 2001. But as pointed out earlier, this is difficult and not very practical for an individual. 

Calculating the LTCG based on any arbitrary FMV can land an assessee in trouble, if the assessing officer (AO) has a different opinion or doubt over the declared value. So, what should one do?

Most experts believe that sellers should take help of a registered property valuer, rather than arbitrarily deciding the FMV of the property. “Assumptions of any type for consideration of value shall not be entertained by the income tax department. In case of any enquiry, the department will consider the value stated in the valuation report from a registered valuer,” said Archit Gupta, chief executive officer and co-founder, ClearTax.in.

Agrees Kapil Nayyar, head-international taxation and mergers and acquisition, International Business Advisors, “It is advisable to get the valuation of the property done from the registered valuer.”

Government-approved valuers follow a standard process for the valuation and provide a detailed report. In addition to other parameters “to derive at the FMV of a property, a valuer also considers area and dimensions of the property, is it freehold or leasehold, is there any restrictive covenant in regard to use of such property, insurance of the land and property, if the land falls under any development plan of the government,” said Nayaar.

“A valuer needs to be registered under section 34AB of Wealth Tax Act, 1957, to act as a recognized valuer of income tax department,” said Bansal. Each valuer is provided with a license from the department to work as a valuer. Fee and charges that a valuer can charge are also prescribed under the Act, and depend on the value of an asset. For instance, for first the Rs5 lakh of asset value, fee would be 0.50% of the value. For next Rs10 lakh, it would be 0.20%, for next Rs40 lakh 0.10% and 0.05% of the value thereafter. “Typically, a valuer takes 3 to 4 days to prepare a valuation report,” said Bansal. In case and AO raises any doubt over the report “it is our (valuer) responsibility to reply, and if needed , the valuer can even visit the AO for clarification on the report,” added Bansal.

An assessee should keep the valuation report along with other documents related to capital gains, for at least 8 years after the relevant assessment year. 

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