We look at the existing rule pertaining to property transactions where the consideration value is below the circle rate, the proposed modifications in Budget 2020 and how this can help property buyers, sellers and the industry.
State governments generally revise the circle rates of properties at regular intervals. This is done, to discourage the evasion of stamp duty and registration fees by sellers and buyers, by mentioning a lower property price than the actual prevailing market rate. Certain restrictions discourage sellers and buyers from entering into transactions below the circle rate. However, due to the slowdown in the real estate sector, property prices have not increased across various cities in India. Consequently, developers may be unable to clear their inventory by selling their properties at a discount that brings the prices below the circle rates. While the government has allowed some relaxation between the circle rate and the market rate, it is not sufficient for the revival of the realty sector in the prevailing situation. So, the government has proposed to increase this relaxation in Budget 2020.
The existing rule stipulates that the transaction value of the property should not be less than the circle rate by more than 5%, else the difference is considered as income and would result in an additional tax burden for the buyer and seller. For example, if you bought a property worth Rs 30 lakhs but the circle rate was Rs 35 lakhs, then, the difference of Rs 5 lakhs, would be considered as other income in the buyer’s hands and it would be taxed accordingly. The registration charges and stamp duty would also be paid at the applicable circle rate. From the seller’s point of view, as the property is registered at the applicable circle rate, he has to pay a higher capital gains tax. However, the buyer and seller do not need to pay any excess fee, if the difference between the transaction value and circle rate is below the stipulated 5% level.
In Budget 2020, the government has proposed to increase the threshold limit for the difference between the transaction value and the circle rate to 10%, from the current 5% level. According to Shubham Jain, group head and senior vice-president, corporate ratings, ICRA Ltd, the government’s move will provide relief on capital gains tax for the sector as a whole, on property valuations which are up to 10% below the circle rate, as against the earlier provision of 5%. Nimish Gupta, FRICS – MD, south Asia, RICS, points out that the announcements in the Budget will provide some respite to property buyers, in cases where the gap between the circle rate and the market rate is disproportionately high.
“Earlier, any gap over 5% would be added to the buyer’s income and would be liable to tax at nominal rates. Now, the same has been enhanced to 10%, which would encourage transaction activity in property markets,” explains Gupta.
The proposal is also likely to help developers, as they can now offer their property at a lower rate than the prevailing circle rate, to monetise their idle assets. This will help them to clear their existing inventory, to generate liquidity for their other projects.
However, it is essential to note that property prices and trends are not uniform across the country. Some cities are witnessing good growth and appreciation in prices while others are witnessing prolonged stagnation in demand and corrections in property rates. So, the government could also consider a mechanism, for location-based relaxation to allow more than 10% relaxation, to revive the market. Circle rates also need to be revised in a more realistic way, to address the issues related to the fall in property rates.