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Posted at: Feb 10, 2018, 1:47 AM; last updated: Feb 10, 2018, 1:47 AM (IST)

Benefit or bluff?

The impact of Budget proposal on Circle Rates will have limited benefit for the buyers and sellers
Benefit or bluff?

Geetu Vaid

One of the Budget proposals that  had a positive response from individual homebuyers last week was the one relating to the circle rates. Terming it as a move to ease “hardships in transactions”, the Finance Minister  had announced in his Budget speech that no additional tax will have to be paid by both parties if the difference between the actual sale price and the fair value (based on the circle rate) of the property did not exceed five per cent. The logic behind this being that the price of properties in the same area, especially in the secondary market, can be driven by factors such as the location and shape of the plot. And due to this some may be sold below the circle rates, while the others may fetch more due to the demand factor. It is this variation that the Finance Minister’s had so magnanimously tried to “ease” out with this move. 

However, an in depth analysis of the proposal leaves no doubt that the monetary gains for the buyers and sellers through this are going to be non-existent or negligible. What it means for a  buyer or seller in monetary terms will be like a dew drop in a blistering desert. Let’s see what this move will actually mean for homebuyers and sellers:

The point of law

As per the current system property transactions invite tax liability even if a property is sold for less than the circle rate. In accordance with Section 50 C of the Income Tax Act, the seller has to pay capital gains tax on the circle rate value (on which stamp duty is decided) even if the actual consideration received is less than the circle rate. Thus, if circle rate for a particular property is Rs 70 lakh and it has been sold for say Rs 66 lakh then at present the seller will have to pay capital gains tax on the differential amount. According to Section 56(2) (vii) of the Income Tax Act, 1961 (with regard to individuals and HUFs ) if the difference between the sale price received and the the stamp duty value is over Rs 50,000 then it will be treated as ‘income from other sources’ and taxed accordingly. 

What the Finance Minister has proposed is that there will be “no adjustment” in case of a five per cent variation between the circle rate and the actual sale price. Thus, till now whatever tax was required to be paid in such cases will not be applicable if the difference is in the range of 5 per cent, hence the “ easing of hardships in transactions”. But it seems to be mere lip service for buyers and sellers. 

The catch, lies in the window of “five per cent” allowed. As five per cent is a very low threshold, especially if one takes into consideration property prices in metros and Tier 1 cities, the number of people actually benefitting from this move will be miniscule. Moreover, this relaxation will have no effect on those buying houses in group housing projects in the primary market as the prices rarely fall in the five per cent range of the circle rates. Agreeing that there will be minimum relief for homebuyers in this, Amit Modi, Director, ABA Corp and Vice President, CREDAI Western UP, says, “There are hardly any projects where the properties are priced at par with the circle rates. And the variation is generally much more than five per cent. So whatever little benefit that can be accrued through this will be limited to very few and that too in the tier II and III cities. Thus, the overall impact of this move will be little on the homebuyers on the whole.”

It is also a fact that the deviation of circle rates and market rates in certain cases is even up to 25-30 per cent. Slowdown and the resultant price correction has made the situation grim in many markets across the country. Closer home let’s take the example of Panchkula where in certain localities if the circle rate of a flat  is   Rs 60 lakh, the market price is Rs 48-50 lakh. Which means a deviation of over 20 per cent. It is pockets like these where the sellers and buyers are not going to get any relief from the FM’s proposal. In metros like Delhi and Mumbai, the deviation is all the more. So, as Bhairav Dalal, Partner - Real Estate Tax, PwC India, puts it, “While providing a safe harbour is a welcome move for property transactions, the margin of 5 per cent may not serve the purpose”.

Circle rate and property registration

  • In layman’s terms circle rate is the benchmark rate decided by the government for properties in a particular area or city below which no property can be registered. Thus, the buyer has to pay stamp duty on this rate, even if the property has been bought for a lesser amount. The seller’s income from capital gain (on which tax has to be paid) is computed on the basis of actual transaction price or circle rate — whichever is higher. 
  • The difference between the actual selling price and the circle rate is treated as “income” in the books of buyer as well as the seller on which tax has to be paid.
  • Capital gain tax for has a flat rate of 20 per cent (for properties held for more than three years) and the stamp duty vasries from state to state and is in the range of 4 to 10 per cent.  


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