What are circle rates, how are they calculated and more importantly, how do they affect you? Here’s everything you need to know.
Circle rates are property benchmarks set by the government to determine minimum property prices in various locations. The circle rate is different in every state, with each city and each locality being designated independent benchmarks. Circle rates within a locality usually pivot on several considerations. Once a circle rate has been established for a particular locality, no property in that locality can be transacted below this benchmark. The circle rate is the minimum price used to calculate stamp duty charges and registration fees on a property transaction.
The institution of circle rates helps the government ensure adherence to stamp duty payments and minimise disputes with regard to the undervaluation of sale agreements. It is the prerogative of all state governments to release area-wise circle rates on an annual basis.
Circle Rates Vis-a-Vis Market Rates
Circle rates are normally pegged below the prevailing market rates in a specific location. They are regularly reviewed and revalued, to make them as consistent as possible with market rates. In light of the fact that most real estate transactions are done privately, circle rates become imperative in assuring the government a minimum revenue via stamp duty and registration.
The Impact of Circle Rates On Real Estate Transactions
While circle rates establish a minimum threshold for property transactions in an area, they do not specify a price ceiling. This often serves to create a yawning gap between circle and market rates. Most properties take the market rate of an area into consideration. However, since stamp duty and registration fees are derived from the circle rate, the government faces a persistent problem of revenue loss stemming from the difference between circle and market rates. Rarely, when properties are sold at rates below the circle rate, the stamp duty and registration fees are still calculated at the circle rate. In this light, the authorities find it beneficial to periodically review and revise circle rates to align them with market rates in every area. This goes a long way in cultivating a culture of transparency in the realty sector and safeguarding future government revenues.
Legislative Amendments for Property Transactions
Last year, the budget proposed to amend sections 50C and 56 of the Income Tax Act, to allow for zero adjustments if the circle rate value is within 5% of the transaction value. For example, if a property is sold for Rs. 80 Lakh, but the corresponding circle rate is Rs. 85 Lakh, the buyer is exempt from paying the income tax difference on the differential of Rs. 5 Lakh. For the seller, capital gains for the transaction will also suitably be calculated on Rs. 80 Lakh and not Rs. 85 Lakh. However, this provision applies only in cases where the circle rate sits in a 5% window over the transaction value. For properties that show a difference of greater than 5%, the buyer and seller could be significantly shortchanged on stamp duty and registration.
The Significance of Circle Rates
Circle rates in an area can serve as a financial compass for prospective home buyers. Considering that property market rates have traditionally ruled much higher than circle rates, it is wise for hopeful homeowners to choose properties where the delta between the two rates is minimal, especially in cases where the purchase is being funded by a home loan.