HOW BLACK MONEY IS USED IN PROPERTY TRANSACTIONS?

 

Hello everyone..

 

Today’s topic is of very keen interest for everyone, reason is quite simple it involves the hot topic of discussion in every get together or social gatherings i.e. Black Money and Property.

By this article i will try to unfold in simple language the modus operandi by which people route their black money to purchase property.

 

Let’s understand this by a hypothetical example..

Mr. Malhotra is a renowned business man dealing in trading of readymade garments. His turnover is Rs. 1 crore p.a. for past 10 years. His actual profit margin is 20% but in his income tax return he declared only 5 % (by claiming some dummy expenses).

In absolute terms instead of showing actual income of Rs. 20 Lacs and paying roughly Rs. 4 Lacs as income tax, Mr. Malhotra suppressed his income and declared only Rs. 5 Lacs as income and hence paid Rs. 0 as income taxes.(after claiming rebate of Rs. 12500 under section 87A. Upto Rs. 2,50,000 there is no income tax liability from 2,50,000 to 5,00,000 there is 5% tax liability but with rebate under section 87A).

 

Q) Why did Mr. Malhotra suppressed his income to Rs. 5 Lacs instead of declaring Rs. 20 Lacs?

 

Ans) To save income tax worth Rs. 4 Lacs per anum.

 

Moving forward, now in 10 years. Mr Malhotra has generated Rs.1.5 crore (20 Lacs-5 Lacs*10 years.) worth black money/ undisclosed income.(income on which income tax is not paid).

This has to kept in cash form, since it’s a black money it cannot be deposited in bank account.

Assuming personal expenses worth Rs. 5 Lacs every year, over the period of 10 years Mr. Malhotra should have saved Rs. 1 crore in cash.

 

In many states it is generally found that stamp duty value of property is far less than market value of property.

Meaning for a plot of land in richest area of a city, Government stamp duty value/Market value as per Government might be Rs.. 40 Lacs only but actual market price prevailing in market can be as high as Rs. 1 crore.

 What happens next is Mr. Malhotra approaches a broker to buy a property where stamp duty value is far less than the market value like we have seen in above example.

Broker shows him the property where stamp duty value is Rs. 30 Lacs and market value is Rs. 1.1 crore. The property was located in a premium location and the deal was locked.

(Mr. Malhotra was overwhelmed, thinking now life is set)

Let’s try to find out why Mr Malhotra is so happy getting this deal.

Q) how this deal will take place on record?

Ans) Since total price of the land is Rs. 1.1 crore, and stamp duty value of land is only Rs. 30 Lacs. The registry will take place at Rs. 30 Lacs only, meaning Mr. Malhotra will give Rs. 30 Lacs through banking channel either cheque, DD, neft, rtgs etc and rest 80 Lacs he will pay in cash. Stamp duty @ 6% will be paid on 30 Lacs only.

(Stamp duty is to be paid on every exchange of hand in property transaction.)

Remember on this 80 Lacs Mr. Malhotra didn’t paid any income tax and this black money which he can’t deposit in his bank account is now routed in economy through this deal.

So now on paper he is owner of land worth Rs. 30 Lacs only but actually he is owner of property worth Rs. 1.1 crore.

His unaccounted cash/undisclosed income is utilized and is now part of the economy.

 

Enjoy Reading!!!

 

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Disclaimer :- This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisor before engaging in any transaction.