Understanding the role of circle rates
A hike brings the official rate closer to market value, but also increases stamp duty and registration fee
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With an aim to bring down the incidence of unaccounted money in property transactions, Delhi government’s Revenue Department increased the circle rates across all categories of colonies in the city by 20% on 22 September. There are eight such categories, A to H, based on the price per sq. metre, with A being the most expensive category. The increased rates have come into effect since 23 September.
Even though almost all major real estate markets across the country are at a standstill, it’s a good time for the government to reduce the gap between property rates set by government agencies and the actual market value at which transactions take place. Experts believe that the increase in Delhi is at par with the market requirement.
What is circle rate?
It is the minimum price at which a property has to be registered in case of its transfer. The rates are determined by state governments and are revised from time to time according to market dynamics. In fact, circle rates differ within cities in the same state, and among various localities of a city. These rates are an indicator of likely prices of properties in various areas. A property has to be registered either on the actual transaction value or the minimum rate set by the government, whichever is higher. In rare cases, where the actual price paid by a buyer is less than the circle rate, the property has to be registered based on the circle rate.
What is its impact?
State governments collect stamp duty and registration charges on the declared value or the circle rate, whichever is higher, on the property being sold or bought. These charges are usually defined as a percentage of the transaction value, and differ across states. For instance, in New Delhi, a woman has to pay 4% stamp duty, while a man has to pay 6%. And if it is jointly purchased in the names of the man and the woman, they will have to pay a stamp duty of 5%.
Besides stamp duty, typically 1% of the value of the property is charged as registration fee (to register the property document or sale deed).
However, since the market rates of properties in India are usually higher than the circle rates defined by authorities, transactions are under-valued to save on these charges. Doing so also helps the seller hide her actual capital gains, and thus save on capital gains tax.
There are, however, repercussions to such actions. The government loses out on revenue collection, and under-reporting paves the way for using black money. Increasing circle rates to bring them closer to market rates is one way of resolving both these issues.
A hike in circle rates may be bad news for those who plan to use black money to purchase property as it reduces the scope to use illegal funds. Also, those who plan to save on stamp duty will have to cough up higher amounts.
For genuine buyers, however, this is good news as the declared rates (the value at which the property’s sale is registered) will be closer to the circle rates. “Reduction in the gap between circle and market rates means that the region becomes less attractive for those who are seeking to offload unaccounted-for funds, and more attractive for genuine buyers,” said Anuj Puri, chairman and country head, Jones Lang LaSalle India.
But, typically in bullish market conditions, sellers usually increase the asking rates proportionally, which does not bode well for genuine buyers. Since land prices also go up when circle rates are increased, builders, too, hike their prices as their cost of land acquisition goes up. This makes houses even more expensive to buy. However, given the present market condition, where sellers are finding it difficult to find buyers at current price levels, it would be difficult to pass on this increase in circle rate to buyers.
Some experts believe that a common increase in circle rate across all areas in a city, as has happened in Delhi, is not relevant. “A significant gap already existed between circle rates and property prices in Delhi’s realty market. With the current increase, this gap has widened further with hardly any alignment with market realities—largely because this rise was factored at a flat rate across the board, without any zonal considerations,” said Anshuman Magazine, chairman and managing director, CBRE South Asia Pvt. Ltd.
It is important to reduce this gap, but the exercise requires the consultation of zonal city planning bodies that are more in tune with the character of a city’s various zones and micro markets, he added.
Mint Money take
Although the upward revision of circle rates in Delhi was expected and long overdue, it has created a disturbance in the already dull real estate market. However, this revision may not have any immediate impact on property prices, as prices in general are governed by market forces—demand and supply.
Moreover, in the secondary market in the city, property rates are way ahead of even these revised rates in many localities.
That being said, upward revision of circle rates has always resulted in a marginal increase in property prices, but the current market situation does not provide any room for sellers to do so.
The upward revision in circle rates will certainly cause official property valuations to rise and thus buyers have to arrange for correspondingly higher stamp duty payable on the registry amount, and sellers may have to pay more capital gains tax.