Overview

The real estate sector, particularly land transactions, is a significant conduit and repository for black money in India, with estimates suggesting up to 60% of unaccounted wealth invested in this sector.

One of the most important reasons for this dreadful situation is the taxation structure of real estate expenses and incomes.

High stamp duty on property transactions, high property registration charges, Goods and Services Tax (GST) on certain types of property sales, and income tax (on short-term capital gains), as well as long-term capital gains (LTCG) tax, encourage under-reported deals completed with unaccounted cash payments, perpetuating the black economy. On the other hand, complete GST exemption in land deals is also a ground for the generation of black money, but subsuming applicable stamp duty for such land into the GST system would streamline the deals into the mainstream economy.

Here is a detailed analysis of the black economy, real estate taxation structure, state-wise stamp duty details, LTCG tax, measures to eradicate black money, details of agricultural-gauchar-forest land, agricultural to non-agricultural land conversion issues and impact of all these issues on national economic goals.

1. The Black Economy in Real Estate:

Scale and Impact: The real estate sector, projected to reach $1 trillion by 2030 and $4.8–7 trillion by 2047, contributes 13–18% to India’s GDP. Its opacity, especially in land deals, needs to be addressed.

Drivers of the Real Estate Black Economy:

Under-Reporting: Buyers and sellers report lower transaction values to minimise or evade taxes, paying the difference with the actual transaction values in cash (e.g., a Rs 1 crore property registered at Rs 40 lakh, with Rs 60 lakh in cash). Land transactions, exempt from GST, and ancillary services (e.g., brokerage, legal fees) are likely done off record for intermediate dealings and final dealing (between the first owner and the final buyer) is done on record with partial on-record payment; the rest of the payment is done through unaccounted cash transactions.

Benami Deals: Properties are registered under proxies to conceal ownership, thereby evading taxes and tax scrutiny of real owners.

2. Real Estate Taxation - Black Economy:

Taxation in real estate (including stamp duty, registration charges, GST and income tax for short-term capital gains and LTCG tax) significantly impacts transaction costs, hindering economic growth and contributes to black money generation and circulation.

Taxation for the real estate sector must be based on certain objectives.

Differentiating between recurrent and capital expenditure and gains is a crucial factor for promoting economic activities for wealth creation and a rise in GDP.

Differentiating between a capital transaction that results in making the capital productive and one that makes the capital non-productive is also equally crucial for a highly populated country like India.

Differentiating between commercial and industrial properties and residential properties is also crucial because productivity is linked with commercial and industrial properties.

To promote entrepreneurship and wealth creation, transactions involving commercial and industrial properties should be minimally taxed or exempted from stamp duty, GST and LTCG tax rather than the usual trend of taxing these properties at higher rates compared to residential properties.

Capital, specifically the real estate capital, mostly acts as the foundation for economic activities and such capital formations and capital dealings for productive purposes must be rather encouraged by lowering taxes or by tax exemptions.

A capital that doesn't generate economic growth must either become generative or must change hands to be productive to avoid attracting taxes. Idle capital is a non-performing asset. The government should facilitate the change of ownership of idle capital rather than impose taxes hindering the change. If at all, taxes may be imposed on holding and hoarding of idle capital.

Land hoarding, as well as land short-selling without any productivity, is a kind of sick practice that sickens the entire economy. Each land parcel in a densely populated nation like ours must generate economic growth in each financial year, else it will be subjected to tax. A transaction that makes capital productive or more productive should be exempted from tax.

Recurrent Expenditure and Recurrent Incomes vs. Capital Expenditure (Capex) and Capital Gains from Taxation Viewpoint:

Recurrent Expenditure: These are ongoing expenses, such as utility bills, maintenance costs, municipal property taxes, and operational expenses (e.g., salaries, rent for leased properties) and expenses for consumables at all levels. Taxation on recurrent items, like GST, targets consumption, which is justified for revenue generation for the public exchequer. However, high recurrent taxes can reduce consumption and affect the economy adversely.

Capital Expenditure (Capex) and Capital Gains: Real estate, including land and building purchases, is a capex, representing long-term investments that drive wealth creation by increasing GDP.

High taxes on capex, such as stamp duty (4–8%), GST on under-construction properties (1–12%), together with taxes on capital income in the form of incometax on short term capital gains as well as LTCG tax (12.5% for properties held over 2 years), discourage investment, inflate capital costs, and push transactions into tax evasion and the resultant black economy. Fictitiously recorded capital losses based on indexation calculation, coupled with receipts in unaccounted cash, are also used as a trick to avoid direct taxes in certain cases. High taxes on capex and capital gains, including LTCG tax, deter entrepreneurship and wealth creation, particularly in commercial and industrial real estate.

Lowering capex taxes and capital gains taxes on real estate sector dealings would encourage formal investments, boost asset creation, and stimulate economic growth through multiplier effects on 300+ allied industries (e.g., cement, steel) and many other agricultural and allied sectors. A low-tax regime for capex would formalise transactions, reduce black money and align with India’s economic goals.

Real estate investments in economically productive properties generate long-term economic benefits, including infrastructure development, job creation and GDP growth.

Having outlined the objectives that can be used for policy-making and for action, let us now consider the real estate taxes, one by one. This will be followed by suggestions to eliminate the black economy to augment economic growth.

Stamp Duty - Registration Charges: Status

Overview: State governments levy stamp duty and registration charges under the Indian Stamp Act, 1899 and state-specific laws, significantly increasing transaction costs and encouraging under-reporting.

State-Wise Stamp Duty Rates (as of 2025, based on available data):

Gujarat: 4.9% stamp duty (3.5% stamp duty + 1.4% surcharge) plus 1% registration fee. Gujarat reduced stamp duty in 2020, reportedly boosting compliance and transaction volumes. But before attaining full effects, it rightly revised the circle rates (jantri), dampening the reduction in stamp duty.

Maharashtra: 5–6% stamp duty (6% in urban areas like Mumbai, 5% in rural areas) plus 1% registration fee (capped at Rs 30,000).

Karnataka: 5% stamp duty for properties above Rs 45 lakh, 3% for Rs 21–45 lakh, 2% for below Rs 20 lakh, plus 1% registration fee.

Delhi: 6% stamp duty for men, 4% for women, plus 1% registration fee.

Uttar Pradesh: 7% stamp duty plus 1% registration fee (capped at Rs 20,000).

Tamil Nadu: 7% stamp duty plus 1% registration fee.

Rajasthan: 5% stamp duty (4% for women, 3% for SC/ST), plus 1% registration fee.

Punjab: 7% stamp duty (5% for women) plus 1% registration fee.

Haryana: 7% stamp duty (5% in urban areas for women) plus 1% registration fee (capped at Rs 15,000).

Telangana: 5% stamp duty plus 0.5% registration fee.

Andhra Pradesh: 5% stamp duty plus 1% registration fee.

West Bengal: 7% stamp duty (6% in rural areas) plus 1% registration fee.

Kerala: 8% stamp duty plus 2% registration fee.

Madhya Pradesh: 7.5% stamp duty plus 1% registration fee.

Bihar: 6% stamp duty plus 2% registration fee.

Impact: High stamp duty (e.g., 8% in Kerala, 7% in Tamil Nadu) and registration fees (0.5–2%) inflate transaction costs, encouraging unaccounted cash payments to under-report property values. For example, in Kerala, a Rs 1 crore property incurs Rs 8 lakh stamp duty and Rs 2 lakh registration fee, pushing parties to report lower values.

GST on Property Transactions: Status

Residential Properties: Under-construction residential properties attract 1% GST (without input tax credit) for affordable housing up to Rs 45 lakh and 60 sqm carpet area in metro cities and 5% GST (without input tax credit) for non-affordable housing.

Commercial Properties: 12% GST with input tax credit.

Exemptions: Completed properties with an Occupancy Certificate (OC) and land transactions (including agricultural, gauchar and non-agricultural land) are exempt from GST under Schedule III of the CGST Act, 2017.

Impact: To avoid 1% GST, sale deeds for affordable residential properties are done below the limit of Rs. 45 lakh. Exemptions for land create loopholes for unaccounted cash transactions, particularly in the land sector, including agricultural land.

(Subsuming applicable stamp duty for land deals into the GST system would streamline the deals into the mainstream economy.)

Capital Gains Tax: Status

LTCG tax on real estate (properties held for over 2 years) is 12.5% without indexation benefits, down from 20% with indexation.

This applies to residential, commercial, industrial, agricultural, gauchar and non-agricultural land transactions.

The tax is levied on the profit (sale price minus purchase price and allowable expenses) when a property is sold after a holding period of at least 24 months.

For individuals and Hindu Undivided Families (HUFs), exemptions are available under Sections 54, 54EC and 54F of the Income Tax Act, 1961 if gains are reinvested in specified assets (e.g., residential property or bonds).

Short-term capital gains tax is applied as per the income tax slabs for capital gains on properties held less than 24 months.

Impact:

Encourages Unaccounted Cash Transactions: 12.5% LTCG tax, combined with high stamp duty (e.g., 8% in Kerala) and registration charges, significantly increases the tax burden on property sales. For instance, a Rs 1 crore gain on a property sale incurs Rs 12.5 lakh in LTCG tax, prompting sellers to under-report the sale value (e.g., reporting Rs 50 lakh to reduce tax liability) and accept the balance in unaccounted cash, fuelling black money generation and circulation.

Benami Transactions: High LTCG tax encourages holding properties under benami proxy names to avoid tax liability entirely, as the true owner can transfer ownership without triggering a taxable event. This is particularly prevalent in high-value land transactions, including agricultural and non-agricultural land.

Owners and intermediaries prefer to hold assets as it is, without any productivity, to avoid LTCG tax till the final sale to the final buyer, prolonging on-record holding time.

Tax evasion-generated black money is continuously parked in real estate by real estate stakeholders (including land “sharks”), as a store of unaccounted wealth, leading to reduced market liquidity. This results in land hoarding.

Removal of indexation benefits in 2024 may have increased the effective tax burden, especially for long-held properties, as inflation is no longer factored into the cost base. This discourages legitimate investors and encourages tax evasion through unaccounted cash deals or benami holdings. On the other hand, the indexation facility was misused to report losses on record while actually siphoning huge gains through unaccounted cash payments.

Agricultural land sales by farmers are often exempt from LTCG tax if the land is outside urban limits (as per Section 2(14) of the Income Tax Act, 1961), but converted non-agricultural land attracts 12.5% LTCG tax. This differentiation encourages under-reporting of conversion status or sales values to claim exemptions, contributing to black money.

High LTCG tax stifles real estate market dynamism, reduces formal transactions, and hampers wealth creation, particularly for commercial and industrial properties that drive economic growth.

It also discourages reinvestment of gains into productive assets, limiting the sector’s contribution to GDP. The real estate sector’s multiplier effect on 300+ allied industries is constrained when transactions remain informal due to tax avoidance.

In states with high property appreciation (e.g., Maharashtra, Delhi), LTCG tax significantly impacts sellers, as gains are larger, increasing the incentive for under-reporting. For example, in Mumbai, where property prices have risen 5–10% annually, a Rs 2 crore gain could incur Rs 25 lakh in LTCG tax, pushing sellers toward unaccounted cash transactions.

Small investors and farmers selling agricultural or converted land face a high tax burden, discouraging formal sales. This is particularly acute for farmers converting land for development, as the 12.5% LTCG tax, combined with conversion fees and stamp duty, reduces their net proceeds, encouraging unaccounted cash transactions.

3. Measures to Eradicate the Black Economy in Real Estate:

To eliminate black money, particularly in land transactions (including agricultural, gauchar and non-agricultural land), the following measures address taxation, transparency and enforcement while promoting wealth creation:

Subsuming stamp duty into GST:

Suggestion: Subsuming stamp duty into GST would create a unified "One Nation, One Indirect Tax" framework, replacing state-specific stamp duties with a standardised GST rate for all real estate transactions, including land, agricultural land, gauchar land and fees for conversions to non-agricultural land can also be subsumed into GST. A low GST rate (e.g., 1) would reduce the tax burden and encourage formal transactions.

Benefits:

Uniformity: Eliminates varying stamp duty rates across states (e.g., 4.9% in Gujarat vs. 8% in Kerala), simplifying compliance and reducing tax evasion.

Transparency: A single GST rate with mandatory digital filing appended along with a registration system formalises transactions, curbing unaccounted cash transactions in real estate, including agricultural land.

Revenue Neutrality: States could be compensated through the GST Council, ensuring no revenue loss to the states for an initial fixed period.

Ease of Doing Business: A unified tax reduces administrative complexity, attracts investment, and aligns with India’s economic reforms.

Challenges: States may resist as stamp duty is a significant revenue source (e.g., Maharashtra collects over Rs 30,000 crore annually). Strong coordination via the GST Council and a phased implementation may be required.

Suggestion: Pilot a low GST rate (1%) for real estate transactions, including agricultural, gauchar and non-agricultural land conversions, in select states, integrating stamp duty, and evaluate its impact on compliance and black money reduction.

A unified GST framework formalises the real estate sector, reduces black money, and enhances ease of doing business.

Subsuming applicable stamp duty for land deals into the GST system would streamline the deals into the mainstream economy.

Strengthening GST Compliance:

A 2024 survey showed 90% of citizens support mandatory GST receipts for real estate services.

Suggestion: Enforce stricter GST audits for builders, subcontractors and ancillary services. Mandate digital payments for transactions above Rs 50,000, including agricultural, gauchar and non-agricultural land deals.

Impact: This would curb unaccounted cash transactions and bring taxable income into the formal economy.

Reducing LTCG Tax:

Suggestion: Lower LTCG tax to 5 % or preferably still less for commercial, industrial, agricultural, and non-agricultural land.

Exemptions for Productive Assets: Exempt LTCG tax for commercial/industrial properties used for entrepreneurial activities, aligning with wealth creation goals. Extend exemptions under Section 54EC to include more productive investment options for reinvesting gains.

Digital Reporting: Mandate digital reporting of all real estate sales with Aadhaar and PAN-linked transactions to track LTCG tax compliance and deter under-reporting. Integrate with land record databases like Bhu-Aadhaar for real-time monitoring.

Differential Tax Rates: Introduce tiered LTCG tax rates based on property type and use and subsequent use (e.g. 1% for commercial/industrial, 5% for residential, 0% for agricultural land held by farmers), incentivising formal transactions in productive sectors.

Impact: Lowering LTCG tax would increase market liquidity, formalise transactions, reduce benami holdings, encourage reinvestment, boost the real estate sector’s contribution to GDP and curb black money circulation.

Taxing Unsold Inventory:

Builders hoard unsold stock of land and build up properties to inflate prices, often using black money.

Suggestion: Tax any income from unsold inventory as “income from house property” uniformly and monitor price manipulation.

Impact: This would discourage hoarding and reduce black money-driven inflation in asset pricing.