Tax implications of circle rate relaxation
Currently, property transactions are never valued below their circle rates. Now, if the sale value is within 5% of its circle rate, the tax department would accept that value
Union Budget 2018 has proposed some relief for those homebuyers and sellers, who are looking forward to buy or sell properties in localities where the circle rate is higher than the market value. The finance minster has proposed that no additional tax will be payable by the sellers and buyers if the difference between the ‘actual sale price of a property’ and its circle rate is not more than 5%. Let’s read how this proposal can help you.
Stamp duty value and the capital gain tax
Due to a lull in the real estate market since last few years, there has been a price correction in many areas, especially those where the property prices had risen exponentially during the property boom.
So severe was the price correction that in some localities, the property prices even went below the circle rate. A circle rate is the minimum property rate defined by the government for specified areas.
Even if a property is sold at below the circle rate, the stamp duty, registration value and the capital gain would be calculated on the circle rate, and not the actual sale price. For instance, in some areas of Delhi, like Maharani Bagh and New Friends Colony, the per square metre circle rate is Rs7.74 lakh, while the prevailing market rate is below Rs6 lakh.
Similarly, even after a few cuts in the circle rates during last couple of years in many parts of Gurugram by the Haryana government, the circle rates are still higher than the market value in a few localities.
In many cases, unfavourable orientation or location of a plot can bring down its price. Such factors do not reflect in the circle rate.
Higher circle rates are a problem for both buyers and sellers. The buyer has to pay stamp duty on registration value, which can’t be lower than the circle rate. Besides that, buyer also has to pay tax on the difference of amount—circle rate less market rate—under section 56(2) of the Income-tax Act, 1961, where circle rate is higher, as it is considered to be a profit for the buyer.
On the other hand, the seller has to calculate capital gain based on the stamp value of the property under section 50C of the Act, irrespective of the fact that he may have sold the property at a price lower than the circle rate. The stamp duty value is taken as the deemed selling price and capital gain will be computed accordingly.
Say, a person sells her property for Rs1 crore and the indexed cost of acquisition is Rs75 lakh. Her capital gain would be Rs25 lakh (Rs1 crore minus Rs75 lakh). But if according to the circle rate the property rate is determined to be Rs1.1 crore, the capital gain would be Rs35 lakh (Rs1.1 crore minus Rs75 lakh). The higher capital gain will mean more capital gains tax for seller. Going ahead with the same example, even if the buyer in the above case is buying the property at Rs1 crore, he has to register the property at Rs1.1 crore and pay the stamp duty accordingly. At the same time, Rs10 lakh (Rs1.1 crore minus Rs1 crore—the difference between the circle rate and buying price), will be considered as ‘income from other source’, and taxed as per the normal slab rate applicable to the person. So, according to the above example, both seller and the buyer are at loss.
To minimise this hardship in the real estate transactions for both buyers and sellers, the finance minister has proposed to amend the section 50C and section 56(2) of the Act. According to the proposed amendments, no adjustment shall be made in a case where the circle rate value does not exceed by 5% of actual transaction value or market value.
“Minor respite is provided to real estate transactions in cities like Delhi-NCR and Mumbai-CBD, where the circle rates are sometimes higher than the actual transaction value, which results in additional tax for both buyers and sellers,” said Ankur Dhawan, chief investment officer, PropTiger.com.
Once the budget proposals are approved and come into effect, if a seller sells a property for Rs1 crore, while according to the circle rate the property’s value is Rs 1.05 crore, she need not calculate capital gains based on the circle rate value of Rs1.05 crore. At the same time, buyers can avoid paying tax on the notional gains of Rs5 lakh.
However, as no amendment has been proposed in the Stamp Duty Act, the buyers are still required to register the property at the circle rate at least and pay the stamp duty accordingly.
Most of the stakeholders in the real estate sector have welcomed the proposals made by the finance mister, but there are many who say that relaxation of 5% is too less.
“The finance minister announced a 5% deviation from circle rates to remove hardships faced by the real estate industry. However, this may not be enough as the actual deviation of circle rates to prevailing market is in many cases as high as 30%, crippling transactions,” said, Nidhi Seksaria, partner, real estate, BDO India, an accounting, tax, and advisory firm.