Everything You Need to Know about Stamp Duty and Taxation on the Exchange of the Property

Can home buyers exchange the property? Yes, they can. What are the conditions for stamp duty and taxation for the said property? We explain in detail.

It is a general perception that when you buy a property, you will have to pay the cost in money. Well, it is not necessary that the transfer of property should always involve money. According to one’s requirement, they may move from a bigger property to smaller one and vice- versa. Exchange of property is permissible under the law. It is also not necessary to exchange a residential property for a residential property. You can exchange the commercial property for residential or a land or under construction property. if the value of the property is different than it can be settled with money.

Though there are some implications of the same on stamp duty and income tax.

We discuss the implications below.

1.Stamp duty:
To buy or sell a property one has to establish a sale deed or agreement which then has to be stamped with the rate applied by the state.

However, in case of exchange of the property one has to establish an exchange deed, not the sales deed or agreement. The exchange of two properties can also be done with two separate sale deeds. In this case, stamp duty has to be paid for each of the sale deeds. States like Maharashtra have provisions for a concession on the sale deed of the exchange property.

According to Maharashtra stamp duty act Article 32 of Schedule I, 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.

This means, if you are exchanging your bigger property for a smaller one, then the stamp duty of the cost of the bigger property is payable.
In case of exchange of property, it has to be mutually decided by the parties about who is going to pay the stamp duty.
 
2.Income tax:
If the property is exchange after 24 months of buying it, then the profit or loss made on the exchange is treated as long term. If it is exchanged within 24 months, then it is treated as short term.

In case of the property exchanges, where the parties only pay the differential amount, it should be mentioned in the sale deed. In such cases, to work out the capital gains, you will have to find the cost of the property and compare it to the price you bought it at. If the property is exchanged after 24 months, then you are entitled to avail indexation benefit as well as tax exemption avenues under Section 54, 54F, 54 EC.
In case of exchange of residential property, there are provisions as well. If one is exchanging a smaller property for a bigger one, then there is no tax liability. If you are exchanging to a smaller residential property and its market value is at least equal to long term gains, computed as above on the larger flats, there will be no tax liability as well. If the market value is lower than the indexed long term gains, then you will have to pay the tax on the difference at 20.36 percent.

If you are exchanging the commercial property for residential property, then you will have to check if the amount of investment on the residential property is at least equal to the market value of the commercial property.
 
It is evident that one does not get any tax benefit in the exchange of the property but can surely save some money on the stamp duty.