In the realm of real estate and property transactions, different legal instruments aid in the lawful creation, transfer, and extinction of ownership. One such important, basic, and less-commonly-known document is the exchange deed. Whereas sale deeds are universally understood and applied, exchange deeds are handy when two parties want to transfer properties under a sale. This blog will be a conceptual explanation of the exchange deed, its components, advantages, use in construction, procedure of registration, and stamp duty involved.
What is an Exchange Deed?
An exchange deed is a legal contract where two parties exchange properties. This differs from the regular sale of property, where money is exchanged for the rights to the property. Here, you exchange property rights for those of another property. In some cases, when one property is of greater value, a nominal sum of money (called “boot money”) can exchange hands to equalise the valuations.
Consider it a barter for land, particularly houses or commercial spaces. It is lawful under the Transfer of Property Act, 1882. A deed of exchange must also be registered as any other property document. Registration completes the transfer of ownership between the two parties.
Components of a deed exchange
The deed of exchange must be clear and well-drafted to avoid conflict in the future. Typically, the following are included:
- Date of Agreement: The date on which the exchange is agreed upon.
- Details of Parties: Full names, addresses, and identities of both parties.
- Property Descriptions: Complete details of both properties, including location, size, survey numbers, and any encumbrances that exist.
- Declaration of Exchange: A statement which clearly states that this transaction is an exchange and not a sale.
- Consideration Clause: Is there any money paid as consideration to equalise the values? This clause states it.
- Warranties and Indemnities: The properties are free of legal encumbrances.
- Signatures and Witnesses: Both parties sign the deed, and the signatures are attested by two witnesses.
- Stamp Duty and Registration Clause: The parties state that the stamp duty has been paid and that the deed will be registered.
Benefits of Deed Exchange
An exchange deed provides a few advantages in, say, land exchange scenarios when a direct sale is not considered very suitable:
- Cost Effective: Lesser amounts of cash get transacted. This may also in some cases help reduce the capital gains tax liability if exemptions exist.
- Acquisition of Land Made Easy: Especially, for a developer or an institution, land can be obtained by way of an exchange for non-essential parcels of land.
- Capital Gain’s Exemption: There can be an exemption on capital gains gained from a property exchanged under sections 54 and 54F of the Income Tax Act, if the capital gains are invested in another residential property.
- Legal Protection: Since it is a registered document, it offers a safeguard to the bearer by way of legal protection and ownership evidence.
How is an Exchange Deed Used in Construction Projects?
Land acquisition forms a critical yet challenging aspect of construction and infrastructure development. Exchange deeds are mostly used by:
- Real Estate Developers: They exchange centrally located properties for plots in new development areas.
- Government Authorities: They avoid any major exchange of money for the relocation of public utilities or institutions.
- Builders and Contractors: They exchange land parcels with owners for constructed flats or shares in the project.
Such deeds expedite the carrying out of the projects, cut costs, and improve the utilisation of land with very little cash transaction. In the case of joint development, cluster redevelopment, and township planning, these deeds find very good applications.
Steps to Register the Deed of Exchange of Property
Registration of an exchange deed initiates ownership transfer. Stepwise procedure for registration:
- Drafting the Deed: The deed should be drawn up with all legal and property details.
- Stamping: The stamping has to be done by paying the stamp duty as per the respective state rates on the property that is of higher value between the two.
- Execution: The deed must be signed by the parties in the presence of two witnesses.
- Submission for Registration: The deed should be presented for registration before the sub-registrar of the area within whose jurisdiction the property is situated along with the photocopy of the ID of the parties, property papers, tax receipts, and so on.
- Verification by Sub-Registrar: The sub-registrar scrutinises the deed, identifies the parties, and examines the duty payments.
- Registration Certificate: After all formalities are met, the deed is duly registered with copies of the registered deed returned to both parties.
Stamp Duty Implications on the Deed of Exchange of Property
Stamp duty, one of the priciest expenses in any transaction, is not the same as for a deed of gift or a sale deed. An exchange deed, though, attracts stamp duty on the property whose market value is higher than the two being exchanged.
For example, the rates in Tamil Nadu are:
- Stamp Duty- 7% of higher-valued property
- Registration Fee: 4% of the same
They are applicable even if the exchange is between family members and third parties. Rates may differ from one state to another, but the main concept remains the same. It is always advisable to be sure about the application by consulting the local authorities or an attorney.
Anyhow, capital gains tax implications may be considered depending on the holding period of the property. The property, if held for more than twenty-four months, becomes a subject of long-term capital gains, which are exempted under Section 54, 54F, or 54EC.
Conclusion
The exchange deed is a very flexible and legally accepted mode of transfer that suits individual owners as well as developers. In an exchange deed, there are indeed two parties swapping lands; as such, exchange deeds can facilitate land acquisition and land utilization when exchange deeds are used in place of cash transactions. Once executed and duly registered, an exchange deed acts as a sale deed and offers legal protections, and in addition, it allows strategic and financial considerations.
Whether you are a builder, seeking to facilitate land acquisition, or a man interested in exchanging his old property for something better placed, one ought to know and employ the exchange deed.