Calculate Fair Market Value of an Immovable Property
From Financial Year 2017-18 onwards, to determine
the Capital Gain/loss on sale of an immovable property like house, which was purchased before 1st April
2001, the fair market value of the property as on 1st April 2001 can be
taken as its cost of acquisition (purchase cost) at the option of assessee and indexation will be done accordingly.
the base year for calculation of Long Term Capital Gain/Loss on sale of
a Capital Asset is shifted to year 2001, determination of Fair Market Value on April 2001 of the property being
sold has become very important.
Shifting of Base Year - Impact
It simply means that the purchase value of a capital asset purchased
before the base year ie-April 2001, can be replaced by its Fair Market
Value on April 2001 at the option of the assessee. So if the taxpayer
takes Fair Market Value on April 2001, the Capital Gain on sale of a
before April 2001 will be calculated as follows-
Less Indexed cost of Fair Market Value on 1st April 2001 XXXXXX
Shifting of the base year from April 1981 to April 2001 is a welcome
move and it should reduce the capital gains tax burden on the assessees.
In maximum cases Fair Market Value of the property on April 2001 will be higher then actual purchase
cost of the property and thus it will result in lesser capital gain. Along
with some expected tax relief, now there is an additional task of
finding out the Fair Market Value of the property being sold.
We have tried to figure out here all the possible options and their
pros cons; to calculate the Fair Market Value of a Capital Asset
purchased before April 2001.
Fair Market Value as Defined in Income Tax Act:
Lets first go inside the Income Tax Act. According to the defining
provisions under Section 2(22B) of the Income Tax Act, Fair Market
Value of a capital asset is defined as:
- The price that can be raised from the sale of the
capital asset in the open market on the relevant date ie. 1st April
2001. In simple words we
can say that the sale price of the asset on April 1st, 2001 should be
the fair market value.
- When the sale price of the asset on the desired
date is unascertainable, fair market value shall be detrmined according
the the rules made under Income Tax Act.
No Specific Guideline in Income Tax Act
- So, what needs to be done if the sale price of property is not easily
actually very much possible that you are not able to find out the sale
price of the property; as its about the time which can be 15 or more
years back. Going back to year 2001 and finding the sale
value at that time can be tricky.
As there are no specific guidelines prescribed under the Income Tax Act
determine the Fair Market Value of a capital Asset when sale price is
unascertainable or even if the sale price can be ascertained what
should be taken as fair market value. So finding out Fair Market Value on April 2001 is more like a guess work.
Methods to Calculate Fair Market Value of the Property
The most practical, seemingly correct and legally acceptable
methodologies to determine Fair Market Value(FMV) should be:
- Actual sale price of similar properties
- Actual sale price of a similar property in
neighbourhood during the desired time period can make you find out the
Fair Market Value. The point to take care here is never try to take a
price which is impractical. A price which can not be otherwise
justified may not be accepted by tax authorities.
- Stamp Duty Valuation or Circle Rate of the property
- Stamp duty Valuation of the property is an
accepatable and genuine way to determine the Fair Market Value. However
circle rates are generally much lower than the prevailing market price
of the property, the Fair Market Value on the basis of circle rates is
generally lesser than actual sale price of the property. This option
though acceptable to authorities may result in higher capital gains.
- Valuation of the property Through Registered Valuer
of the property through Registered Valuers is legally acceptable and
should bring out a Fair Price. Registered valuers calculate the Fair
Market Value considering all the aspects of the property and their
reports are legally admissible too.
Fair Market Value on 1st April 2001 as the cost of acquisition of the
property is a choice. if the assessee wants he can take the actual cost
of the property instead of Fair Market Value on April 2001 for
calculating Capital Gain/loss on sale.
Complete list of Cost Inflation Index
How to Calculate Indexed Cost of Acquisition
Capital Gain on Sale of House Property