Whether you’re a first-time homebuyer or a first-time real estate investor, to make informed real estate investment decision, it is important to know and understand related technical ambiguities and jargons. One of the jargons that prospective homebuyers and real estate investors must understand is “Circle Rate”. While a lot of us might have an idea of what it is but here we will dig a little deeper into the analogy.
What is Circle Rate?
Circe rate is the minimum price at which a real estate property is transferred from one owner to another. These rates are administered by State Governments and are subject to change from time to time. Circle rate not only vary across cities but also across localities. Circle rate of an area with good transportation network, market, schools, hospitals and other amenities will be higher than the circle rate of a developing area. So, the value of a property or land located in Sector 50 Noida may be different from the value of a property or land located in Sector 18 Noida.
A few other terms that are commonly used in other Indian states to refer “Circle rates” include:
- “Ready Reckoner Rates” – this term is used in Maharashtra
- “Collector Rates” or “District Collector Rates” – this term is commonly used in Haryana, Punjab and Uttar Pradesh
- “Guideline Value” – this term is used Karnataka
What is the difference between Circle Rate and Market Rate?
Before purchasing a property, it is important for buyers to know the difference between market rate and circle rate.
Market rate is the price that a buyer pays for a property and is the real value of such an asset for a transaction between a buyer and a seller. Market rates are decided based on the seller’s expectation of price and the buyer’s propensity to pay. It is a price range arrived at by demand and supply looking at actual transaction rates in a place. A location with low supply but high demand will certainly ask for higher rates when compared to other areas.
Circle rates and market rates have limited impact on each other. The circle rate is always lower than the market rate but a noticeably higher variance between them shows a lag and is the prime reason for black money transactions in the Indian real estate domain.
What is the Importance of Circle Rates for Homebuyers?
As the real estate market in India is opaque and doesn’t provide correct price index, setting circle rates in an area helps individuals to keep a tab on the speculation of property prices. Due to these circle rates, homebuyers get an idea of the actual cost of purchasing a property.
Since circle rates in India are not revised from time to time, it often falls short in front of the actual market rates. Therefore, circle rates act just an indicator of the current market condition and are not the actual cost of the property.
Also, no transactions can take place below the circle rates.
Circle rate also helps in limiting black money. Because of circle rates no property can be under-valued just to avoid paying higher taxes. Hence, circle rate is also an indicator of the fair property rates in an area.
These rates act as an indicator of property prices in a particular area. A buyer needs to register the property on the actual transaction value or the prescribed circle rate, whichever is higher. Usually, market rate is higher than the circle rates.
Some cities clearly show a huge difference between circle rates and market rates which show the perception of authority and a trail for black money to flow in real estate transactions. Buyers should check the gap between circle rate and market rate as a lower gap is always beneficial for those who are getting the finances through a home loan. Since the sales deed is closer to circle rates, the approved loan amount of the property will be more realistic for buyers.
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What happens when circle rates are higher than market rates?
Though it is unusual that circle rates are higher than market rates, but if any of such cases arises, a buyer has three options-
1) To declare market value is equivalent to circle rate- This can be risky for the buyers as it can bring up the transaction in the eyes of Income Tax official. For example, if the market rate is Rs 70 lakh while the circle rate is Rs 1 crore. Since you are declaring the sale deed for Rs 1 crore, there are chances that IT department can send you the notice on the remaining Rs 30 lakh that can be assumed as the cash component.
2) Pay stamp duty and registration charges on circle rate- Paying stamp duty and registration cost on circle rates can cause huge financial losses. For instance, for a property with a circle rate of Rs 1 crore where the stamp duty is being charged 6 per cent on an average and another 1 per cent as registration charges, a buyer will pay almost Rs 2 lakh extra as compared to what is chargeable for Rs 70 lakh property.
3) Appeal to sub-registrar to charge him as per market rate
A home buyer can also request the sub-registrar which will refer the matter to Deputy Commissioner (Valuation) to allow him to pay the charges at market rate rather than circle rates. This is a time-taking process and if the property is bought on home loan then banks usually don’t prefer delays in sales deed registration.
At the time when real estate market was growing in India, the gap between circle rates and market rates was also increasing. This was happening because the speed at which market rates were increasing was more than the speed at which the government could revise the circle rates. Resultantly, despite high market rates, the properties were being registered at low circle rates to save on levies such as stamp duty.
But, as the growth in the real estate market stopped, in many areas, the gap between circle rates and actual rates decreased. In some of the other areas, the government increased circle rates despite low demand, causing circle rate to surpass market rate. This gap between market rate and circle rate has severely impacted the interests of both sellers and buyers. Due to this difference, a buyer is not bound to pay high stamp duty and a seller is bound to pay more capital gains tax.
Circle rates not only vary across cities in a same state but also among different areas of a city.
Tax implication if the market rate is lower than the circle rate
Under Section 56 (2)(x) of the Income Tax Act, the difference is taxed as ‘other income’ for the buyer, if the market value of the property is lower than its circle rate value. The seller, too, will have to pay capital gains tax on the circle rate of the property.
Amid an over five-year long slowdown, the government decided to offer some support to buyers and sellers in the Union Budget 2020. The centre decided that no additional tax liability will arise, in transactions where the differential between the market value of the property and the circle rate is lower than 10%. The new provision will come into effect on April 1, 2021.
In a bid to provide an additional boost to the economy, as well as home buyers, following the impact of the Coronavirus pandemic, union finance minister Nirmala Sitharaman, on November 12, 2020, announced a new stimulus package under Atmanirbhar Bharat 3.0. In the latest package, the centre has decided to increase the differential rate between the circle rate and the agreement value from 10% to 20%. This is will be applicable till June 30, 2021, for only primary sale of residential units of value up to Rs 2 crores.
Stamp duty calculation based on circle rate
Suppose Uma Rani has bought a flat in a HUDA sector, where the applicable circle rate in Gurgaon is currently Rs 5,100 per sq ft. Considering that the house has a carpet area of 1,000 sq ft and the prevalent circle rates, she would have to register the property for Rs 51 lakhs. Now, the Haryana government will charge 5% as stamp duty on this amount, since the property is being registered in the name of a woman. This brings the stamp duty amount to Rs 2.55 lakhs. She will also have to pay an additional Rs 15,000 as the registration charge. This way, the overall cost of the property would total up to Rs 53.70 lakhs.
Stamp Duty and Registration Charges in Other Cities
|Stamp Duty in Delhi||Stamp Duty in Pune|
|Stamp Duty in Bangalore||Stamp Duty in Mumbai|
Word of caution
- Before you start negotiating on a price quoted by the seller, find out about the circle rate and the prevalent market rate of the property. Keep the transaction as close to the circle rate, as possible.
- While this may not happen often, under-reporting could land you in trouble. In your best interest, register the property for the actual amount you have paid for it.
- It would be best not to engage with sellers who are looking to make unaccounted money through the deal.
- Banks will fund only a part of the transaction value at which you are going to register your property. You will have to reveal the true nature of the transaction if the bank is involved.
- Market rates are indicative of the potential of a property and the area in which it is located. Before selecting a property or writing if off, studying the market trend is quite important.
In some areas, the circle rates may be higher than the market rates. If you were to buy in a locality like that, you would have to pay the stamp duty and the registration charge, based on the circle rate and not the actual price.