Legal Minefield: Leasehold, Tenancy Rights and the Capital Gains Tax Trap

You must value tenancy rights and leasehold at stamp duty rate for accurate tax calculations

- DHARMESH SHAH

Tax on capital gains has long led to disputes in many areas. One such area is capital gains from the sale of leasehold or tenancy rights. Selling tenancy rights is quite common in Mumbai, where several tenanted properties are undergoing redevelopment. It is an accepted legal position that such rights are capital assets and thus liable for capital gains tax. Capital gains on the transfer of leasehold rights is computed by taking into account the sale consideration received on the transfer of such rights and deducting the cost incurred for acquiring these rights.

Deemed sale consideration introduced in 2003
In 2003, the Indian Income-tax Act added a rule (Section 50C) stating that if you sell a property (land, building, or both) for a price lower than the value assessed by the government for stamp duty purposes, then for income tax calculations, the government will consider the higher stamp duty value as your sale price, not your actual lower selling price.

For example, if a taxpayer sells a plot of land for Rs 1 crore and the land was valued at Rs 1.25 crore for the purpose of stamp duty, he is required to pay capital gains tax based on a sale value of Rs 1.25 crore and not Rs 1 crore. The issue of whether Section 50C covers tenancy rights has been raised before various appellate authorities.

Judicial position on tenancy rights