Capital Gains Tax on Leasehold Rights: Understanding the Rules
Taxing capital gains on the sale of leasehold or tenancy rights has long been a source of contention, particularly in Mumbai where several tenanted properties are undergoing redevelopment.
In 2003, the Indian Income Tax Act introduced Section 50C to address this issue. It states that if a taxpayer sells a property for a price lower than its government-assessed stamp duty value, the court will consider the higher value as the sale price for tax purposes. This means capital gains tax is often calculated based on a higher valuation than the actual sale price.
However, the question of whether Section 50C applies to tenancy rights has been a subject of debate among appellate authorities. Cases like Atul G. purnani and Vidarbha Veneere Industries Ltd vs ITO have highlighted that leasehold rights are not considered land or buildings for purposes of Section 50C.
In an April 2025 ruling, the Nagpur bench of the Bombay High Court reversed the earlier position, stating that Section 50C could apply to leasehold rights in various contexts, where rights to land are held through other methods.
Taxpayers must be vigilant in calculating their capital gains on the transfer of leasehold/tenancy rights. Valuing these rights for stamp duty purposes can result in a higher capital gains tax liability if the valuation is higher than the actual sale price. Additionally, if the considered consideration is used to receive investments and an exemption from capital gains tax is sought under certain sections (54, 54F, or 54EC), it’s crucial to accurately assess the valuation for proper exemption benefits.
This rule is part of the Bombay High Court’s March 12, 2019, ruling in Jagdish C. Dhabalia vs ITO, wherein Section 50C’s deeming fiction is applicable for purposes of these exemptions. If a taxpayer reinvests sales revenue in specified assets, they may hypothetically qualify for a tax exemption.
For more comprehensive information, check the article linked below:
Capital Gains on Equities: All You Need to Know When Filing Returns This Year
Newswise Shastri, a skilled lawyer in the fields of income tax matters, sheds light on these complex issues.
