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Budget’s Circle Rate Move: Will Buyers Benefit?

Adhil Shetty

As the finance minister passed on some of the wishes of the realty sector, the announcement of tax relief for both buyers and sellers is likely to inject positivity in the realty market.

Budget’s Circle Rate Move: Will Buyers Benefit?

The real estate sector like all others was waiting for some big-ticket announcements this budget. On top of the list were possible measures to offer industry status to the sector as one of the premier job creation sectors. As the finance minister passed on some of the wishes of the realty sector, the announcement of tax relief for both buyers and sellers is likely to inject positivity in the realty market especially in premier locations where there has been a considerable difference in buying and selling rates compared to the circle rates.

Understanding Circle Rates And Sale Rate Discrepancy

As per the Budget 2018 announcement, properties will now be valued as per the actual sale or purchase rate provided if there is a 5% or lower difference between the rates and the property circle rates. The circle rates which are fixed by respective state governments is the minimum value for sale and purchase of real estate including land and plots for any particular area. Since the state government generates revenue by levying a stamp duty on the transaction value as per the circle rates, it is an effective revenue-generating tool for the government.

With prices dropping on account of various parameters, sometimes actual sale or purchase rates are quite lower than the stipulated circle rates. Also, two properties in the same locality may have different rates on account of the location of the plot and other parameters.

Real Estate Buys- Pre and Post Budget

The current regulation means the stamp duty for any such sale-purchase will be levied as per the prevailing circle rate irrespective of the sale rate.

Earlier for the buyer, the difference was added to his income and taxed under ‘income from other sources’ field.  For the seller, the capital gains tax calculations were done on the basis of the circle rate. What’s more? The difference between the two was taxable for both buyers and sellers.

With the new budget proposals, the buyer will not need to pay any additional tax in the event of price variation of purchase rate and circle rate of up to 5 percent. Similarly, for the sellers, the capital gains tax calculations would be done as per the actual selling cost and not the circle rate.

If, however, the difference between the selling price and circle rate is more than 5%, the older regulations would continue to be in place and both buyer and seller will not be liable for any tax benefits.

High Price Correction Areas to Benefit The Most

The biggest beneficiaries of the latest budget’s announcement are likely to be buyers and sellers in areas which have seen massive price correction over the years. For example, in many markets including in uptown metropolitans, the circle rates continue to be higher than the prevailing market rates. The current regulations meant both buyers and sellers were at a disadvantage when it came to taxation. The new regulations applicable to all sales from April 1, 2019, will remove any such tax discrepancy or double taxation dilemma for buyers and sellers.

The finance minister in his budget speech further underlined the fact that price variations can occur for two properties in the same area on account of various essentials like sizing, location, direction etc. and genuine transactions between buyers and sellers had no option but to pay a higher circle rate.  The 5% disparity between the prices is likely to help many such genuine buyers and sellers helping them save money on stamp duty as well as tax outgo.

Although there were no big-ticket announcements for the real estate sector this budget, the tax relief for buyers and sellers allowing valuation up to 5% below circle rates allows significant savings for both capital gains tax and stamp duty charges. The rest will depend on respective state government’s approaches as stamp duty along with miscellaneous land-related taxes is determined by them.

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