Stamp duty and taxation on exchange of property

Can home buyers exchange one property for another? If so, how do the stamp duty and income tax charges on such a transaction vary from a regular purchase? 

When one buys a property, the sale consideration is generally paid for, by way of money. However it is not necessary that the consideration for the transfer of a property, should always involve money. You may want to move to another bigger place or a smaller place, depending on changes in space requirements and other financial considerations. 

Exchange of one property with another one, is permitted under the property law. It is not always necessary that you exchange one residential place with another residential place. You may also exchange one commercial property for another property, whether land or commercial property or residential property or even an under-construction property. If the value on both of the assets is different, the difference can be settled by way of payment in money. However such exchanges may have some stamp duty and income tax implications.

Stamp duty implications on exchange of property

For selling your property, you normally have to execute a sale deed or a sale agreement, which is required to be stamped with the rate applicable, on the market value of the property.

However, for an exchange of property, you need to execute an exchange deed and not a sale deed, as an exchange transaction is different from a sale transaction. The exchange of two properties can also be done, by executing two separate sale deeds. However, in case two separate sale deeds are executed for such an exchange, you need to pay stamp duty on both the agreements. Some states like Maharashtra, have provisions for payment of concessional stamp duty, in case an exchange deed is executed. As per Article 32 of Schedule I of the Maharashtra Stamp Act, in case of an instrument of exchange or exchange deed, with respect to an immovable property, the document needs to be stamped, as if it is for the sale of an immovable property. The value, for the purpose of stamp duty on the instrument, shall be taken as the property with the higher market value. So, if you exchange your bigger flat with a smaller flat in the same building, the stamp duty will be payable on the market value of the bigger flat.

As far as the question of who bears the cost of the stamp duty, it is a matter to be decided between the parties. In case of a sale deed, in the absence of any express understanding between the parties, it is the buyer who has to bear the cost of the stamp duty. However, in case of exchange, the matter needs to be resolved through mutual understanding. Since the exchange deed purports to transfer rights in an immovable property, as per Section 54 of the Transfer of Property Act, it needs to be registered with the office of the registrar of assurance.

Income tax implications on exchange of property

The exchange of an immovable property has income tax implications, as well. In case the property is exchanged after having been held for more than 24 months, any profit/loss made on such exchange shall be treated as long term. If the exchange is made within 24 months of its acquisition, the profit/loss shall be treated as short term.

There may also be exchanges, where both the parties may not put any value to the property and only the differential amount would be mentioned in the exchange deed. In such situations, for the purpose of working out the capital gains, you will have to find out the market value of your property as per the stamp duty ready reckoner and compare it with the cost for which you had purchased it. If the property was held for more than 24 months, you will be entitled to avail of the indexation benefits, as well as tax exemption avenues available under sections 54, 54 F and 54 EC.

In case of exchange of a residential property, the exemption is available under Section 54. For the owner of the smaller value flat, who is exchanging it for a bigger value flat, there will not be any tax liability. However, if you acquire a smaller flat and its market value is at least equal to the indexed long term gains, computed as above on the larger flat, there will not be any tax liability either. However, if the market value is lower than the indexed long term capital gains, you may have to pay tax on the difference at 20.36 per cent. Alternatively, you can invest the difference, in the capital gains bonds of specified institutions and claim exemptions under Section 54EC.

If you are exchanging your commercial property or land, for a residential property, you will need to check whether the amount of investment in the residential property is at least equal to the market value of the commercial property/land being exchanged. In the case of deficiency, the same can be invested in capital gains bonds under Section 54EC. In case you exchange your land/commercial property/residential property against another piece of land or commercial property, you cannot claim any tax exemption, with respect to the value of the property acquired in exchange, under Section 54. For claiming exemption on long term capital gains accruing on such exchange, you will either have to make investment in a residential house under Section 54F, or in capital gains bonds under Section 54EC.

From the above discussion it becomes amply clear that although you do not get any special tax benefit when you exchange one property against another, you may save money on stamp duty, when the same is done through an exchange deed.

by Balwant Jain

Courtesy: Housing.com