New depreciation formula, the taxes on old properties 

Recently, Maharashtra State Government circulate new circular, which aims to increase the stamp duty revenue with the help of change in method of calculation of depreciation in old residential as well as commercial building  and it has caused a flutter in the real estate industry of Mumbai.

As per the statement of legal experts, The department’s November 4, 2015 circular showed that property value has rise by up to 35 percent. Consequently, it is the combined liability of both seller as well as buyer of the property as it can increase by up to 75 percent when they pay stamp duty¸ capital gains tax and income tax. Apart from that it could also do the negative impact on the real estate market in the Mumbai city as well as in state. A realtors’ body, National Real Estate Development Council (NREDC), recently wrote to the finance minister of state by stating that people will find it hard to sell and buy immovable property in an in an already “depressed and a very slow real estate market”. The more he added that “This circular will change the method of calculation when it comes to the depreciation of property in respect to the old buildings and due to that we increase the value of all kinds of constructed properties”. However; the real estate experts warned that this change in the method of calculating depreciation will also add substantially to the cost of premises and it can make the property even more burdensome for those who want to buy property.

Till now the state government guidelines were specifying that buildings age will be taken into the consideration and due to that the value of the building can be depreciated due to the age of building.  However; in present, land is no longer a consideration for calculation of depreciation. According to Lawyer Anil Harish, a real estate specialist stated that this new method of calculation of the property will increases the ready reckoner value of at least by the 30 percent because the depreciation is not allwed after certain level. And therefore it will increase the stamp duty directly amount.  The more he added that the circular now allows that depreciation to a lower extent and due to that the value of premises will be higher for any property and it would increase the quantum of the stamp duty without any confusion”.
According to Ashok Narang, the property consultant “This circular will have a negative impact on the real estate market and the volume of business in real estate in the city Mumbai as well as in state because it will create little more complications for valuation of property for computation of capital gain tax as well”. It will draw a impact on property buyer as they have to pay the excess stamp duty while the seller has to pay additional amount for the capital gains tax. However; government will receive additional revenue by increasing the stamp duty in long run, it will dampen the number of transactions.

How new rule will hit the real estate market?

According to the circular of November 4, 2015;

If you have a 150-square-metre office, which is equal to the 1,614 square feet and it is located at the 4^th floor of a 30-year-old building in the area of Veer Nariman Road, Zone 2/16 of Fort division.

So the value of land will be;

1. As per old method of calculation:

For commercial building the rate per square metre * Area of office * Depreciation factor for age of building

Rs 5, 01,300 * 150 * 0.6 = Rs 4, 51, 17,000

Total value of the property = Rs. 4, 51, 17,000 (Rs 4.5 crore)

2. As per new method of calculation:

Rate per square metre of open land * Area of office

Rs 2, 19,400 * 150 = Rs 3, 29, 10,000

Rate per square metre of commercial building Less Open land rate * Area of office * Depreciation factor for age of building

Rs 2, 81,900 * 150 * 0.6 = Rs 2, 53, 71,000

Total value of the property = Rs 5, 82, 81,000 (Rs 5.8 crore)

Immovable properties can now be transferred to blood relatives without any stamp duty.

All the immovable properties such as; land, house or flat can now be transferred to blood relatives or children’s without any stamp duty on registration. It is expected that this will be the major relief for millions of families who are living in Maharashtra, as now onwards they don’t have to pay 5% of the ready reckoner rate of the property as stamp duty.

Revenue minister Eknath Khadse, make the announcement by saying that, an affidavit on a Rs 100 stamp paper would be sufficient. He later changed his statement by stating that now government no longer deals in Rs 100 stamp paper for property matters, so you need to pay Rs. 500. While in other decisions he announced in the House on Wednesday, that those who own 500sq ft or smaller homes than this, now they do not have to pay the increased property tax and now government will allow them to twice the transfer of development rights to a landowner in lieu of land surrendered for a public amenity.

For the reply on a discussion on the budgetary allocation for urban development department, Chief Minister Devendra Fadnavis stated that the government is framing a new policy, as TDR will be indexed to the ready reckoner rate to, it will prevent them to earn a windfall from the use of TDR of one area in another. The main aim of decision is to increase the TDR as it was taken as the new Land Acquisition Act has increased compensation, whereas; the RR rate of the area where it is being utilized will apply, the more he added.

Khadse state that the decision to waive stamp duty on immoveable property being passed to heirs will cost the exchequer Rs 350 crore annually, as a construction amenity TDR or incentive TDR will be offered to a land-owner in addition to the regular TDR if he develops an amenity and hands it over to the local body. For land and other property, the ready reckoner rate has gone up considerably even if the owner does not sell them at that rate in the market.

For this we have received a large number of complaints from every part. They have been demanding to know that why should they need to pay a huge amount to government while transferring a property to their own blood relatives or children’s. Hence, Government of Maharashtra has decided to do away with the stamp duty,” he said.

Are you planning to buy a new flat near Metro line, Monorail line or any other major infrastructure project in Mumbai? If yes, then be ready to cough up an additional 10 % additional development tax on property transactions in such areas.

The residential and commercial properties could get costlier as the state government is contemplating a 10% development tax on property transactions in such areas. The logic is that properties in these areas will command a premium once the projects come up.

Chief minister Prithviraj Chavan has asked the Mumbai Metropolitan Region Development Authority (MMRDA) to send a proposal to the state planning commission on how this tax should be levied. The move comes after the MMRDA complained that its resources were getting depleted and there were no new avenues of revenue generation.

The MMRDA plans an initial one-time 10% development tax on the ready-reckoner value. This tax will have to be paid while registering the property in new developments or existing structures. While 7% of the tax is likely to go to the MMRDA, the remaining 3% will go to the civic body. A final decision on the move will be taken by Chavan, said the sources.

However, the move has evoked a strong reaction from home buyers. Prakash Ojha, who is looking to buy property near Pratiksha Nagar Sion from where Mono rail passes, said, “ In fact, no Development tax should be levied at all as all such services are already chargeable. Already salary classed employees are paying more than their portion as taxes which are deducted at source, hence such a move is despicable, he added.

“It will be very cruel, unfair and inhuman if development tax is levied in addition to the other duties and taxes like stamp duty, registration, vat and service tax”, said Suresh Mirajdar, an executive working with an MNC in Goregaon. Instead of imposing this tax on new home buyers, it should be spread over the entire population in the form of increase in the monthly maintenance tax payable by all the flat owners.

Agrees Monal Patil: the benefits of the development like monorail, metro line , mumbai trans harbour link is for all and not only for the new home buyers. If it is a burden then it should be passed on to all and not the new entrant only. Old residential flat owners already have the advantage of having bought the property at lower rates and majority of the existing home owners need not necessarily be the actual users and can also be investors. The government should look at it from the point of view of the new property owners, she said.

There is a great misconception among the home buyers that once a certain percentage of the cost of the apartment as stamp duty is paid and the flat got registered with the revenue department of the state government, they believe that their property has got all legal/requisite approvals. But this is plain nonsense.

Take for example the case of the residents of 106 flats in the Campa Cola society in Mumbai. They had all alone believed that since they had got sale deeds executed in their favour from the builder during the late ’80s by paying stamp duty of Rs. 1 lakh to Rs. 4 lakh each to the state revenue department, their illegally built apartments were legal. But such was not the case. Payment of stamp duty can’t turn any illegality into legal entity. Today they stand to lose everything as the Supreme Court has ordered the demolition of their flats as these were built in violation of sanctioned plans.

Though this case might be headed for closure after the SC refused to regularize the illegal structures, it has left many questions unanswered, provoking other apartment owners to raise pertinent questions. Why did the sale deeds, executed in their favour by the builder, not help their cause in establishing their title over the properties, especially when the government earned hefty revenue from stamp duty?

Vinodbhai Kothari, a resident of controversial Campa Cola society, who died on June 14, 2014, was the first person to get his apartment registered in 1985 by paying Rs. 1.5 lakh as stamp duty and registration fee to the revenue department of the state government. Since then, he and his family have been regularly paying property taxes which were revised and raised from time to time by the government. Had the revenue department refused to register the sale deed in favour of Kothari way back in 1985, holding that the flat was illegal, more than 800 residents would not have fallen prey to the greed of the developer,” says Vidya Srinivas, a flat owner in the Campa Cola society.

She has the point when she says: “Now if the flats are illegal, so are the revenues of the government. Can the government return the money with interest that it has charged from us in form of stamp duty and property tax?” asks Srinivas.

In India, it’s compulsory to get sale of apartment or land registered with the revenue departments of states. However, the Indian Registration Act of 1908 doesn’t require the registration authority to verify history of the apartment or ownership from the seller. One should also know that the apartment registration is not registration of title, but a deed of transaction. All these legal provisions make the home buyers vulnerable to a property fraud.

“Registration of properties is a fiscal instrument which helps the state earn revenues. However, it doesn’t provide any legal support of certainty to title. If the Registration Act of 1908 is amended and a mandatory provision is added for the registration authority to verify history of the land/apartment, the registration of illegal property will stop,” says a revenue official, requesting anonymity.

Legal and urban experts say that in India land ownership is “presumed,” which is questionable and can be challenged on multiple fronts: ownership, extent of boundaries, financial encumbrances, etc.

“In Delhi, the revenue department has issued several administrative orders to the sub-registrars, directing them not to register properties in unauthorised colonies. Sub-registrars comply with the orders as not doing so invites action against them. However, the Registration Act, which is a Central act, allows a sub-registrar to register any property without verifying its history. Those who have been penalised for doing so have had their suspensions revoked from the court as the existing law favours them,” says a former inspector general (revenue) from the Delhi government on conditions of anonymity.

In addition to amendments in the Registration Act, there’s need for a system that provides for individual rights and the ability to transfer these rights. In such a scenario, what is needed is a guaranteed title certification system that protects rights to land and property, say experts.

A government notification issued by Inspector General of Registration on LBT has ended all confusions over payment of one per cent Local Body Tax (LBT) by property buyers as stamp duty. The State government had increased stamp duty from April 1, 2013.

As per the notification, property buyers, whose sale agreements are registered before April 1, 2013 but who had their deeds executed after that date, will be benefited. If Stamp Duty has been paid on any sale agreement and registered before April 1, 2013, the buyer has to just pay Rs. 100/- as fees towards Stamp Duty. Such buyers need not pay any LBT on the purchase of the property. There was lot of apprehension among the buyers that they might have to pay LBT. The notification will bring relief to many property buyers who made sale agreements before April 1 2013.

The on-line payment of Stamp Duty and registration fees is proving beneficial as online payments will reduce frauds and ensure accountability of funds in government treasuries. Department of Registration and Stamps looks after registration of documents and collection of Stamp Duty through more than 470 sub-registrar offices across the State. More than 23 lakh documents were registered in 2011-12 under the Government Receipt Accounting System (GRAS). IGR is promoting on-line payments in place of physical payments, franking and E-secured bank and treasury receipt (ESBTR).

One of the most important financial decisions you will take in your life is purchasing a house and paying stamp duty is very common practice in purchase dealings. A buyer is responsible for the stamp duty. Always make sure that, in any case, stamp duty should not be bought in the name of a party/person not involved in the document.

What is stamp duty?

Similar to income tax, stamp duty is also a type of tax or duty collected by government for all the transactions made within the state by way of documents. Such documents include all Agreements, Bonds, Powers of Attorney and others. Stamp duty is payable under Section 3 of the Indian Stamp Act, 1899. It has to be paid in complete amount and timely manner. In case of a delay a penalty is charged. Stamp duty is considered as one of the key sources of revenue for every state. After sales tax, stamp duty is the second largest source of revenue For the Maharashtra.

When is the stamp duty payable?

Stamp duty is payable in three situations:

• Before execution of the document

• On the day of execution of document

• On the next working day of executing such a document

Document execution means putting signature on the instrument by the person’s party to the document. Here instrument implies any document by which any right is created, transferred, limited, extended, extinguished or recorded.

Stamp of legality

A proper stamp duty payment done on a document makes it legal. Such document achieves evidentiary value and can be presented as evidence in a court of law if needed. Unstamped or not properly stamped documents cannot be considered as evidence. Generally, it is necessary to stamp all document executed in the state before signing of the document. To pay a stamp duty, one needs to buy a stamp paper, adhesive stamps and finish with rubber-stamping.

Who is liable to pay stamp duty?

Generally, a buyer is responsible for paying the stamp duty in purchase transactions. In the absence of any agreement to the contrary, the purchaser is responsible to pay stamp duty or in case of property exchange, both parties are required to abide stamp duty equally.

Validity of stamp duty

In the state of Maharashtra, from the date of purchase, stamp duty purchase is legal for the period of six month. So it is necessary to execute the document within a period of six month of any stamp duty purchase. This validity period may differ from state to state.