There has been always an issue in the mind of buyer and seller regarding the rate of transaction and confusion regarding whether it is safe to make sale or purchase on circle rate or whether on market rate, which would be attractive more tax benefits.
Circle rates are indeed the speculation prices for both the selling and lease of a commercial real estate / condo / built-up estate. The stamp duty is to be paid on the pre-determined circle rate. Circle Rate has different names according to different states i.e., Ready Reckoner or Guidance Value or Stamp Duty Value; it is the rate on which the stamp duty is to be paid off.
Another concept that is associated with the circle rate is market value of property. Market value of property the value/price the buyer is willing to pay towards a particular property. Though, market value of the property shall not be considered as a final price it may be fluctuated or changed according to the agreement or contract between the seller and the buyer. In the case where the demand for a particular area is high and the supply is comparatively low according to the demand the prices will rise. There is an interdependency and connection between the market rate and circle rate, yet they have a little impact over each other.
The market value is usually often more than the property’s circle rate. It describes two separate consumer views i.e., by the state authorities’ point of perspective and the other describes business expectations. This trend also illustrates why the real estate market is running a stream of black money. There seems to be an anticipation that real estate deals will decrease if the circle rate is a line in line with market valuation. That being said, it is advisable to revise the circle rates once in every quarter or six months in order to lessen the black money influx into the market and to also raise the tax rate to the taxation department of the state.
- Circle Rate – The state government retrieves profits on real estate investments by imposing stamp duties upon the value of the transaction depending on the rate of the circle rate. The cost of the circle rate is the minimum value at which land, built-up homes, condos, or commercial real estate may indeed be sold or transferred. This is the price over which the seller pays the government the stamp duty while registering a house.
Across all over the Indian property market, the circle rates are perpetually much inferior to the actual market rate. This is due to: a) Circle Rate is not in a tradition of being reviewed frequently as to bring them up or down in accordance with the market prices and b) They also don’t depict the authentic barograph of ground veracity.
But in most other areas, particularly ones where real estate prices had risen tremendously during the property boom, there has been a price correction because of a slowdown in the real estate market over last several years.The price correction was just so drastic that perhaps the real estate prices also dropped far below circle rate in certain regions. A circle rate is the Government’s lowest possible real estate rate for designated locations. The circle rate have several depending factors i.e., market value in that particular area, facilities available, infrastructure, location etc.
One could sell an underlying asset just below rate of a circle rate; however the stamp duty would still be imposed at the rate of the circles. Moreover, for both the buyer and the seller the gap between the circle rate and the selling value is taxable.
- Tax Treatment in the hand of seller
According to the section 50 C of Income Tax Act, it provides that even if the value specified in the transfer instrument is less than that of value approved, evaluated or determined by the stamp duty regulators, the valuation as accepted, evaluated or determined by the stamp duty regulators shall be determined for the purposes of determining the capital gains resulting from the acquisition of property or buildings or both.
It states that, if the immovable property is to be sold below the rate of circle than that current rate which is circle rate would be by default considered as market rate and the stamp duty shall be imposed on the existing market circle rate and the tax that is to be imposed on the seller is under capital gain tax.
Nevertheless, purchaser could claim ton Assessing officer that perhaps the fair market value is considerably lower than that of the circle rate, evaluating inspector can direct assessment officer to conduct a property valuation and then if –
- Value determined by the evaluation officer is lower than the rate of circle rate, then that value shall be considered as sales price.
- Value determined by the evaluation officer is higher than the rate of circle rate, then the circle rate will be considered as the sales price.
- Tax Treatment in the hand of buyer
According to Section 56(2) (x) of Income Tax Act, which states that if the property is being purchased at below the circle rate and the accumulated difference between the circle rate and the current market rate is greater than Rs.50000/- than such the amount of difference between the circle rate and the current market rate shall be deemed to be considered as the income in the hands of buyer, and thus that income falls under the taxable category in the hands of buyer and shall be taxed under income from other sources. Nevertheless, if the rate of the circle varies between the date of agreement or the date of registration, the rate of the circle on the date of agreement will indeed be considered as the price of sale. This exemption occurs mostly in situations whereby part / full compensation has been paid in either manner apart from cash on or before the date of a compensation arrangement.
Amendment in the Budget of 2016
The 2016 budget came out with some of the mandatory amendments towards the tax implication onto the circle rate of property.In the case that perhaps the date of the agreement setting the amount of consideration for the sale of the property and the date of registration that isn’t the same, therefore the stamp duty upon the date of the agreement will be selected for the purpose of measuring the full value consideration. This provision shall only be applicable only in the case where the payment of consideration is done by the method of an account payee, cheque or bank draft or an online fund transfer, on or way before the date of agreement towards the transfer of property.
- Impact of the Amendment
Prior to this amendment, if in a case the property is to be sold below the circle rate, then the tax was only levied in the hands of the seller. But now, as the result of the 2016 amendment, now not only there is an rise in the sale price in the hands of the seller, but now the tax will also be levied onto the hands of buyer as well. Thus in this instance, the sale price is increased in the hands of buyer and then to the difference amount resulting from variation between the purchase price and circle rate is added to the income of buyer, and held taxable.
This signifies the government intention of not wanting transaction to be entered into below the circle rate. The government suspects any tax evasion is the property is sold below the circle rate and has therefore introduced this amendment to discourage the tax evasion and levied tax on difference amount.
Amendment in the Budget of 2018
The actual price of all property is sometimes not measured accurately by the Circle Rate/ Ready Reckoner Rate/ Guidance Value and therefore there can be occurrence of the various variations in the estimated price of the property and the actual price of the property while the transaction is been taken place. These variations can occur due to several factors i.e., Shape of property, location of property, infrastructure of property, etc.
Therefore, an adjustment was implemented in Budget 2020 that specifies that if the deviation between the Circle Rate / Guidance Value / Ready Reckoner Rate and the actual transaction price is not any more than 10%, i.e. the above sections. Section 50C and Article 56(2) (x) will not be applicable. In simple words, if the deviation between the both is not more than 10%, then there will be no additional taxation is levied in the hands of buyer neither in the hands of seller.
Recent updates in different states of India
- Madhya Pradesh
The government of Madhya Pradesh declined the guideline rate consistently across the state by 20 per cent on 19-06-19. In an urban area, however, the registration rate has risen from 10.3% to 12.5% and in rural areas by 7.3% to 9.5%. The reforms have little impact on the state’s net revenues. That does not, however, give purchasers any edge because the registration rates have increased.
The Department of Stamps & Registrations, Karnataka, with its final notification significantly hiked up the guidance value/ ready reckoner/ circle rate from previous 5% to the new 25%, with its effect from January 1, 2019. The previous hikes in the rates were observed in March 2017, which ideally shall be increased half-yearly or quarterly. Thus with the increase in the circle rate homes became expensive with an increase in the revenue to the state government.
- Uttar Pradesh
The Uttar Pradesh government has withdrawn the 6 percent surcharge on properties and 25 percent surcharge on shopping complexes throughout Noida and elsewhere in attempt to raise the state government’s revenue. Recently such a decision was taken in July 2019.
Calculation of Circle Rate of Property
The state government are responsible for the assigning of the circle rates for different properties in the state, the circle rate is depend upon the infrastructure, amenities available, property, the locality of the property etc.
Taking an example, In Karnataka, if a particular person need to find out the valuation of the property it is easily accessible through Kaveri online Services, Department of Stamps & Registration (Karnataka Government) it can be measured though entering the registration District, SRO Office, Tulak, Area name, Village and Holi.
Taking another example of Tamil Nadu, There is a method towards the calculation of guidance value by visiting the Registration department, i.e., under Government of Tamil Nadu. One may find out about the circle rate of a property by selecting the particular zone and street name, along with the village name and sub-registrar’s office.
|Area (Locality)||Circle Rate (Per sq. feet)||Market Rate (Per sq. feet)|
|Kolkata (Park Street)||12,000||13,000-18,000|
The Stamp Duty that is to be payable on the circle rate of property have many influences effecting the stamp duty i.e., Type of Property (apartment or independent house or banglow), Usage of Property over-time (commercial or residential property), Status of Property (old or new), Age of Owner (several concession are given to senior citizens in some states), Gender of Owner (some state also provide concession to female owners).
Stamp duty may also be paid underneath the non-judicial stamp paper, in which the parties enter into an agreement and, subsequently, registration at the sub-registrar’s office is obligated in less than 4 months.
|CITY||STAMP DUTY RATE|
High Court Precedent
The High Court in the latest judgement laid down the precedent that the circle rate cannot be the sole criteria for the determination of the value of property. On January 31, 2020 the Hon`ble Delhi High Court has held that under the Section 47 A of Indian Stamp Act, 1899, circle rate not the sole factor when it comes to determining the value of a particular property
The writ petition filed by CTA Apparels questioned an order passed by the Stamps Collector, Delhi Government, establishing a value of the property value as per the rate of the circle. The Single Judge Bench set aside the order, and the case was returned to the Stamp Collector for reassessment. The Collector subsequently appealed to the Delhi High Court Division Bench.
- Brief facts and Arguments
In East Delhi, Samir Dev Sharma (hereinafter referred to as ‘the vendor’) executed a sale deed of a property. As a stamp duty, the Petitioner paid a sum of INR 2, 16, 00,000 and a sum of 36, 00,000 as registration of the said selling deed.
The case was referred to the collector by a registrant authority to determine the price of the property to which the stamp duty was already levied.
Based on the circle rates, the Collector estimated such a property at INR 71,61,59,700 which culminated in a discrepancy of INR 35, 61,59,700 from the price stated in the sale deed.
The Collector said Section 27 and Section 47A of the Indian Stamp Act postulate property valuation is dependent on the established circle, unless the assertion is rebutted.
It was argued that to arrive at the asset value, the collector depended on copies of the sale deeds of surrounding properties.
On the other hand, the Respondent submitted that the circle rates had been premised on plausibility and the accurate market value was to have been established by the Authority concerned according to the Indian Stamp Act, under section 47A.
Circle rate is nothing more than guidance provided to the subservient officer by a high ranking administrative officer
The Collector’s disputation was rejected by the Delhi High Court and further held that circle rate of property is not convincing evidence towards the valuation and shall be considered as a mere guidance for the collector in the act of determining the value of property under Section 47A.
The Court further held that circle rate of property is one of the key factors in determining the value of a particular property, but not the sole factor in the act, and the court also provided a list regarding the same, factors responsible for the valuation of property:
- Nature of property
- Use of property
- Area of the plot or the property in question
- The girth of the road onto which the property is situated
- Neighboring properties nature and their uses
- The need of the hour for the sale of property by the owner
- Existing market variables that are continuously changing from time to time
- Further, the need of the buyer also towards purchasing the property
This procedure is substantial when seen in the light of the Indian government’s push to prevent the prevalence of black money and real estate tax evasion. At the same time , state treasuries create higher tax collection from real estate investments as stamp duties are paid at or near the market rates at a circle rate.In terms of the impact, there seems to be an added burden in terms of increased stamp duties on property investors, culminating in marginally higher acquisition costs and overall cost of ownership.Weeding out of black money in property investment, however, is triggering the market to act more reasonably towards project pricing. This also makes little sense to see the additional financial expenditure as a waste of money, because it potentially increases the investment value of the property, and hence future resale value.Furthermore, higher income tax revenues imply more funding available to support infrastructure development. Seen in this light, a positive process is to bring the circle rates of a region closer to or on par with their prevailing market rates.
Frequently Asked Questions (FAQs)
- What is a circle rate?
- What influences does circle rate make?
- What are the amendment effecting the circle rate?
- Effects of amendment on the circle rate of property?
- What is difference between market value and circle rate of property?
1.Deepshikha Pandey, ‘Circle Rate v. Market Rate’, (SoOLEGAL 27 April, 2018),
<https://www.soolegal.com/roar/circle-rate-vs-market-rate>, 4 July 2020
2.Income Tax-Act, Act 43 of 1961
3.W.P. (C) 3587/2018Rohan Sharma, Circle Rate and Market Rate: what you need to know, THE INDIAN EXPRESS https://indianexpress.com/article/business/business-others/circle-rate-and-market-rate-what-you-need-to-know/
4.Deepshikha Pandey, Circle Rate vs. market Rate, SOOLEGAL https://www.soolegal.com/roar/circle-rate-vs-market-rate
5.Tax on property Transaction below circle rate: Section 50C, Section 56, CHARTERED CLUB, http://www.google.com/amp/s/www.charteredclub.com/tax-on-property-transaction-below-circle-rate-section-50c-sec-56/amp/
6.Shoaib Zaman, Buying a property? Compare circle and market rates for clarity, BUSINESS TODAY, https://m.businesstoday.in/story/buying-property-circle-market-rates-comparison /1/207690.html
7.Bharat Joshi, Praveen Kulkarni, and Bengaluru Realty: 20% hike proposed in guidance value, DECCAN HERALD, https://www.deccanherald.com/city/20-hike-proposed-guidance-691153.html
8.Jyoti Mukul, Government notified rate for land goes down by 20% in Madhya Pradesh, BUSINESSSTANDARD, https://www.businessstandard.com/article/economy-policy/government-notified-rate-for-land-goes-down-by-20-in-madhya-pradesh-119062000747_1.html