According to income tax rules, the idea of equal market value is very relevant. If the sale/purchase consideration, as specified in the deal, is lower than the fair market value of the land, both the buyer and the seller of the land will be affected.

Importance under the income tax rules of equal market worth

Any benefit from the selling of land is charged in compliance with the rules from income tax. the benefit is usually derived from the sales consideration by deducting the cost of production and cost of the improvement. If the property is owned for more than two years, you are entitled to take advantage of the cost advantage of indexation.

In the case of assets purchased by you before 1 April 2001, you have the option of choosing the fair market value of the property as of 1 April 2001 instead of the purchase rate. Therefore, for the purposes of capital returns, the idea of fair market value is important for working out the purchase cost.

Similarly, if the price listed in the agreement is lower than the value of the property’s stamp duty, the value of the property’s stamp duty, which is a substitute for fair market value, shall be taken as the selling consideration instead of the value specified in the agreement. So, if the valuation of the deal is smaller than the equal value of the market, both the buyer and the seller will be affected.

Where the disparity between the value of the agreement and the fair market value is more than 5 percent, the difference between the value of the agreement and the fair market value shall be taxable in the hands of both the buyer and the seller in compliance with the various provisions of the income tax laws. Therefore, before implementing the deal, it is necessary to determine the fair market value in order to avoid paying for such a discrepancy.

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How to work out a property’s fair market worth

Ready reckoner or prices for circles:

Income tax rules do not include any guidance for how to obtain the fair market value of a house. There are, however,  some cases in which you can measure the fair market value of the land, which would be appropriate to the Income Tax Department in general.

The States also adopted a scheme of predefined rates, based on the region and the quality of the building, in order to avoid underreporting the consideration of purchase deals (which is done of order to avoid payment of the required stamp duty). This is achieved by the ready reckoner for stamp duty, or the declaration of circle rates, etc., which are normally told each year.

The Circle rate is the amount at which property in an area will not be acquired or sold. If a property is sold below the circle rate, the parties concerned will also need to record it at the expense of the state-fixed circle rate. In this case, if the property is sold at a higher rate than the circular rate, the stamp duty will be calculated on the basis of the transaction cost.

So, if the property was bought prior to April 1 , 2019, you will figure out the fair market value from the stamp duty ready reckoner of 2001. If you have obtained or built the property as a donation or inheritance during the year after April 1, 2001, so you will take the ready reckoner valuation and figure out the property’s fair market value.

The fair market value of a home, however, is not as easy to discover as it seems, since the real estate market is a rather heterogeneous market where property prices can differ significantly, even within the same region. If you have to figure out the fair market value on assets as old as 2001, it can get more complicated.

Report on Property Valuation:

If for a specific year the ready reckoner rate is not available, you have another choice a valuation report can be collected from a valuator who is licensed under the wealth tax laws and who is known for the purpose of assessing fair market value for income tax purposes.

For the intent of arriving at the valuation, the registered valuer follows a standard procedure and issues a comprehensive valuation report for the same. Under the regulations, the fee that a licensed valuer may charge is already prescribed.

The services of a licensed valuer can also be sought if you consider that the valuation is on the higher side as per the ready reckoner. this can arise because the rates declared in the stamp duty ready reckoner is identical for the same plot of land, without any reference being made at that time to the circumstances of the property and to any legal conflict involving the property.

The registered valuer inspects the property and issues a valuation report specifying the fair market value of the property, along with the basis for arriving at the valuation, depending on his inspection and all applicable factors and circumstances.

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Which system do you select?

It is necessary to remember that the prices shown in the ready reckoner for stamp duty are not obligatory and are merely recommendations. therefore, if you conclude that the stamp duty/circle values are higher by more than 105 percent, you can receive a valuation estimate from a valuer to substantiate your argument at the time of making the offer, without waiting for your argument to be chosen for detailed inspection.

Generally speaking, the Income-Tax Department recognizes the appraisal report of the registered valuer. out of the two options open to you, it is best to procure the valuation report from a licensed valuer, to make the matter clearer and more compelling.

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