Circle Rate – Tax relief Explained

On Thursday, the finance minister, announced tax relief for home buyers and developers buying or selling below the circle rate by up to 20%. This move is expected to boost demand for residential real estate. The relief will only be available on properties valued up to ₹2 crore and those bought in the primary market from a developer. But what is “circle rate”, and how come this is not that known among us.

Circle rate is the minimum rate of property that the government authorities have set for a particular area; the property can be registered at this rate in case of a sale or transfer.

To understand the concept and the applicable tax laws under Circle rate, let us first understand a simple buy sell transaction. When you purchase a flat from a developer, you need to pay applicable stamp duty and registration charges to the Government based on the value of the deal. Say the flat is of 50L – so you may think that all stamp and registration will be on 50L. Not always. There is a rate that the government has fixed which is considered as the fair market rate. Hence, if you think that you can pay less stamp duty and fees by quoting the property to be say 20L, you can’t. That is because, if the government says that based on fair value of properties prices, the price should be 52L, then the difference between your quote and the government price is more than 10%. So your taxes and stamp duty will be then determined to be that of 52L and not 20L – this is to discourage black market sale.

In case a property is sold below the circle rate, the differential in price is added to the income of the buyer as per Section 56 (2)(x) of the Income-tax Act, 1961.

“Section 56(2)(x) relates to a deeming benefit which a buyer enjoys—which is in excess of 10% of the stamp duty value of the residential property as compared to the actual deal value—is taxable as income from other sources in the hands of the buyer.”

Also, it is worth mentioning that apart from stamp duty based on the circle price, the differential amount will be taxed in the hands of the buyer at the applicable slab rate. So if you fall in the 30% bracket, the 32L difference will be taxed that 30%!

Since the current real estate market is gloomy, the extra 10% will certainly help developers reduce the prices of their inventory.

So now in the above example – a transaction of upto 20% of 52L ie 10.4L will be eligible for no extra tax or charge on stamp duty. This is a significant move to help the ailing real estate space.

Experts believe that the announcement will provide the much-needed push to the real estate sector which has already started showing some recovery as people have started buying houses. As per Proptiger data, residential home sales aggregated to 35,132 units in the July-September quarter, an increase of 85% over the previous quarter. “The announcement will help in further recovery of the real estate sector. However, it would have been better if the government had included commercial properties as well as properties priced higher than ₹2 crore,” said Niranjan Hiranandani, president, National Real Estate Development Council.

from Mint – dated 14-11-2020

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