Guidance value serves as the base for arriving at stamp duty, registration charges, and property  taxes which inturn are the sources of revenue to the Government. The guidance value is the minimum value at which a property can be registered at the Sub registrar office. It is also called as Circle rate, Index Value, Ready reckoner rate, Stamp Duty Value (SDM) and other terms.  Registering a property with a value below the guidance value may result in legal repercussions, encompassing fines and penalties. With effect from 1st October 2023, Karnataka Govt. had increased the guidance value from 10% to 30%. Specifically, for plots situated in proximity to national highways and technology hubs like Electronic City, the rise in guidance value can reach up to 50%.

The increase in guidance value can have a significant impact on buyers and sellers. Higher guidance values usually result in elevated stamp duty and registration charges. Buyers may need to allocate a larger budget to cover these increased transaction costs. Buyers may experience an increase in property taxes, as these are often calculated based on the guidance value. This could lead to higher annual tax payments for property owners.  For Sellers, a higher guidance value may translate into increased property value. However, sellers should consider that higher guidance value contributes to increased government revenue through stamp duty and registration charges when pricing their property.
 

For a better understanding we will take an illustrative example:

Increased Stamp Duty:

Buyers are obligated to pay Stamp Duty according to the guidance value, irrespective of a lower actual sale price. This results in a higher cash outflow. In the aforementioned scenario, despite the actual sale price being Rs.1.25 Crore, the purchaser of this flat is required to pay Stamp Duty at 6.65% on Rs.1.50 Crore. As a result, Swaroop will face an additional cash outflow of Rs.1,66,250.
 

TDS Computation:

TDS is computed based on the guidance value under section 194IA of the Income Tax Act if the actual sale price is less than the GV. In this instance, TDS must be conducted on Rs.1.50 Crore under section 194IA of the Income Tax Act, not on the actual sale price.
 

Seller’s Capital Gain Calculation:

If the guidance value exceeds 110% of the actual sale price (Please note: In the aforementioned example, the difference exceeds 110%), the seller is obligated to pay capital gain taxes on notional income under section 50C. Simply put, the guidance value is treated as the sale price. In the given scenario, Rs.1,50,00,000 will be regarded as the sale price.
 

Imputed Income for the Buyer:

It’s not solely the seller bearing the burden of notional income; the buyer is also required to declare the differential amount—in this instance, Rs.25,00,000—as income under section 56(2)(x). The disparity amount incurs taxation for both the seller and the buyer, making it a situation with dual implications.

Thus,  an increase in the guidance value can have financial implications for both buyers and sellers. It’s crucial for both parties to be aware of these changes and consider them in their decision-making processes. Buyers should factor in potential increased costs, while sellers should assess the market dynamics and adjust their pricing strategies accordingly.

Engaging the services of consultants can be crucial when buying or selling a property. BCL India has a team of experts who can guide buyers through the financing process and help them understand the financial aspects of property transactions. We assist in conducting due diligence on properties, ensuring that buyers are aware of any potential issues or risks associated with a property before finalising a purchase.  At BCL India, we provide tailor made services to the specific needs of our clients, providing personalised advice and solutions based on individual preferences and requirements.