It was when Dr. Chatterjee wanted to sell his old apartment to raise finances to buy a larger one, he came to know about the concept of the Fair Market Value.
For properties acquired before 2001, this concept is extremely important for Income Tax purposes.
In the next few minutes, we will discuss the concept and its implications.
Let’s dive in.
The Concept of FMV
The term Fair market value (FMV) stands for the current value of a property. This is used to sell or buy an asset in the open market. This can be calculated based on market conditions and trends. The non-banking financial companies (NBFCs) and government organizations take into consideration the FMV when they assess the collateral assets or taxed properties.
It should be noted that both the buyer and the seller of a property will be impacted if the sale/purchase consideration stated in the agreement is lower than the FMV of the property.
Thus, the FMV is decided based on the consensus of both the buyer and the seller.
The Finance Act of 2017, shifted the base year for fixing the cost inflation index (CII) from 1981 to 2001.
How FMV is Calculated
There is more than one way to calculate the FMV of a property.
Let’s discuss them.
One way to determine FMV is by referring to government-notified circle rates. If the property was acquired before April 1, 2001, you can refer to the circle rate applicable for that year in the respective locality to determine the FMV.
On the other hand, a registered valuer, recognized under wealth tax rules, can assess your property and provide a detailed valuation report to determine FMV. The valuation report from a registered valuer is generally accepted by the Income Tax Department, making it a reliable method to substantiate FMV.
The FMV determined as of April 1, 2001, can be indexed using the Cost Inflation Index (CII) to calculate the indexed cost of acquisition. This indexed cost is vital for computing long-term capital gains during the property sale.
It is important to note that, under income tax laws, the FMV as of April 1, 2001, cannot exceed the stamp duty valuation of the property on that date. This cap ensures that FMV used for tax purposes aligns with government-notified values.
Which Factors Influence FMV?
Property value is not static, it changes based on several factors.
Let’s examine some of them.
Locality
FMV of a property is dependent on where the property is located. For example, the FMB of a property located at Ballygunge or New Alipore will be far higher than a property in Garia or Madhyamgram.
Moreover, the specific location within a locality of a property matters. Factors like being a corner plot or proximity to the main road can influence FMV.
Nature of the Property
Whether the property is a standalone building or a housing complex loaded with modern amenities is also big determining factor while calculating FMV.
Additionally, properties with legal complications may experience reduced market value.
Housing Price Index
A housing price index, updated quarterly based on the revenue department’s transaction data, gives a fair idea about the existing market and price trends across different Indian cities.
Some of the popular property indices in India are the National Housing Bank’s Residex and Reserve Bank of India’s Housing Price Index (HPI) and Residential Property Price Index (RPPI).
Government Policies and Taxation
Changes in property taxes, housing regulations, and government incentives can directly impact property valuations.
Infrastructure
Current and upcoming infrastructure greatly impact the market value of any property.
For example, properties situated along the Metro lines tend to cost more than areas where the Metro is absent.
The Metro network in Kolkata is expanding, and the areas within a short distance from the Metro stations are on the way up.
Apart from the above factors, some other conditions also affect the market value of a property. For instance, demand/supply equilibrium, interest rate environment, and construction conditions affect the FMV.
Why FMV is Vital for Pre-2001 Properties
As per Section 2(22B) of the Income Tax Act, “Fair Market Value” of a capital asset, means the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date.
Any profit on the sale of a property is taxed under the income tax laws. The profit is arrived at by deducting the cost of acquisition and cost of improvement, from the sale consideration. If the property is held for more than two years, you are allowed to avail of the benefit of indexation while calculating the cost of acquisition.
However, this has been amended in 2024. Under the revised provisions, all properties registered before July 23, 2024, can avail of both options- long-term capital gains tax with indexation at 20% or long-term capital gains tax without indexation at 12.5%.
For properties that are acquired before April 1, 2001, you have the option to take the Fair Market Value of the property in 2001, in place of the cost of acquisition. So, the concept of FMV is important for finding out the cost of acquisition, for capital gains purposes.
If the difference between the agreement value and the fair market value of the property is more than 5%, is taxed in the hands of the buyer, as well as the seller, under different provisions of the income tax laws.
We hope the concept of FMV and its implications are now clear.
Please let us know in the comments if you need further guidance on this.
