Decoding capital beneficial properties tax on the sale of leasehold and tenancy rights

It is an accepted authorized place that such rights are capital belongings and thus responsible for capital beneficial properties tax. Capital beneficial properties on the switch of leasehold rights is computed by bearing in mind the sale consideration acquired on the switch of such rights and deducting the associated fee incurred for buying these rights.

Deemed sale consideration launched in 2003

In 2003, the Indian Income-tax Act added a rule (Section 50C) stating that should you promote a property (land, constructing, or each) for a value decrease than the worth assessed by the federal government for stamp obligation functions, then for revenue tax calculations, the federal government will think about the upper stamp obligation worth as your sale value, not your precise decrease promoting value.

For instance, if a taxpayer sells a plot of land for ₹1 crore and the land was valued at ₹1.25 crore for the aim of stamp obligation, he’s required to pay capital beneficial properties tax based mostly on a sale worth of ₹1.25 crore and never ₹1 crore.

Also learn | Capital gains on equities: All you need to know when filing returns this year

The difficulty of whether or not Section 50C covers tenancy rights has been raised earlier than numerous appellate authorities.

Judicial place on tenancy rights

In the case of Atul G. Puranik, a Mumbai tribunal rendered a choice in 2011, holding that Section 50C utilized solely to belongings within the nature of ‘land or building or both’. Leasehold rights are neither land nor constructing, so it was held that these provisions wouldn’t apply. This view was upheld in two different instances – CIT vs Heatex Products Pvt. Ltd, and CIT vs Greenfield Hotels and Estates Pvt. Ltd.

However, this authorized place was reviewed by the Nagpur bench of Bombay High Court within the case of Vidarbha Veneere Industries Ltd vs ITO in 2022. The courtroom took a opposite view in its judgement on 1 April 2025. It stated that although the language of the availability referred to ‘land or building or both’, there are a selection of the way during which land or constructing may be held – as proprietor, lessee, sub-lessee, allottee, tenant, licensee, gratuitous licensee or some other mode permissible or recognised by regulation. In different phrases, the holding of land is merely a technique by which rights to the land may be held or acquired by an individual. The courtroom concluded that leasehold rights would even be lined by Section 50C. 

Also learn: For some NRIs, capital gains from Indian mutual funds are tax-free

Hence, when computing capital beneficial properties tax on the switch of leasehold rights, one wants to seek out the valuation of such rights for the aim of cost of stamp obligation. This will likely be thought of because the sale worth whether it is decrease than the sale consideration acquired by the taxpayer.

Challenges for taxpayers

Following the ruling, taxpayers have to be cautious when calculating their capital beneficial properties on the switch of leasehold/tenancy rights. They have to worth such rights for the aim of stamp obligation cost, which can end in a bigger quantity of capital beneficial properties tax if the valuation adopted is increased than the precise sale consideration.

This might also pose one other problem to taxpayers in instances the place the consideration acquired on the switch of leasehold/tenancy rights has been invested and an exemption from capital beneficial properties tax has been claimed below sections 54, 54F or 54EC. 

On 12 March 2019, the Bombay High Court held within the case of Jagdish C. Dhabalia vs ITO that for the aim of 54F, the deeming fiction of Section 50C would apply and the improved sale consideration can be thought of for the aim of investments and consequential exemption.

(‘Deeming fiction’ is a authorized idea the place a statute or regulation declares one thing to be true, or to have occurred, even when it’s not true or has not occurred in actuality. The goal is to permit particular authorized guidelines or penalties to use as if that fictional state of affairs had been true. It’s a man-made building used to increase the literal that means of a regulation, simplify its software, or stop loopholes.)

Also learn | Vivek Kaul: Is capital gains tax to blame for the exodus of foreign investors?

For instance, say a taxpayer sells leasehold/tenancy rights in a property for ₹1 crore and reinvests the quantity within the specified belongings to get an exemption from capital beneficial properties tax. Ordinarily, the whole revenue can be exempted from tax. However, if the tenancy rights on the property is valued at ₹1.25 crore for the aim of stamp obligation valuation, as per Section 50C, he can be required to pay capital beneficial properties tax on ₹1.25 crore sale quantity. Hence, the extra ₹25 lakh can be thought of as capital beneficial properties and he must pay tax on it.

Dharmesh Shah practises as a counsel within the Income-tax Appellate Tribunal and excessive courtroom for revenue tax issues.