Photo: iStock
Photo: iStock

Pay extra tax to buy a house below circle rate

  • The buyer will have to pay tax on the difference between the lower market rate and the circle rate, while the seller will have to pay capital gains tax on it
  • You need to show the notional gains from transacting below the circle rate when filing your income tax return

The real estate market has been going through an unprecedented slowdown. But there is a bright side too: the sorry state of the sector also offers an opportunity for home buyers. Given the stressed conditions in the market, there is a possibility of finding properties below the circle rate, especially in the secondary market, according to experts. Circle rate is the minimum rate of property that the authorities set for a particular area; the property can be registered at this rate in case of a sale or transfer.

It’s a win-win for both buyers and sellers. While buyers get a better deal, investors, who bought multiple properties during the real estate boom and are now stuck with their investments, get an exit route.

“It’s possible to find a property below the circle rate. In some of the areas in Delhi such as Kailash Colony, Hauz Khas, Safdarjung Enclave and Green Park Extension, the circle rate is above the market value of the property, currently," said Dhruv Agarwala, group CEO, Elara Technologies, which owns PropTiger.com, Housing.com and Makaan.com.

However, remember that buying or selling below the circle rate may enhance your tax liability. Here’s how your burden increases and what you can do about it.

Additional burden

For the buyer: According to the provisions of the Income-tax Act, 1961, the difference between the value of the property, as per the circle rate, and the actual cost (transaction cost or market value in case it’s below the circle rate) you pay will be considered as your income and will be taxed as per your income tax slab rate. “There is a deeming provision in the Income-tax Act under Section 56 (2)(x), which states that if the market value of a property is lower than the circle rate, then the difference is taxed as ‘other income’ for the buyer," said Hemal Mehta, partner, Deloitte India, a consultancy firm.

For example, if a person has bought a property for 60 lakh, while the circle price rate is 72 lakh, then the differential of 12 lakh will be considered as the buyer’s “other income" and will get taxed as per the applicable slab rate.

The registration and stamp duty charges will be paid on the basis of the circle rate of the property. In the above example, the buyer will have to pay stamp duty charges on 72 lakh and not on 60 lakh.

For the seller: For the purpose of calculating capital gains for the seller under Section 50C, the circle rate, also known as stamp duty value, will be considered. This will lead to additional tax burden on the seller. In the example, we have taken, the seller of property will have to calculate capital gains on 72 lakh rather than 60 lakh (actual sale price ) after deducting the cost of acquisition.

Exception to the rule: In order to give some relief to those buying or selling below the circle rate, given the prevailing market conditions, the government proposed a few amendments to Sections 56 (2) (x) and 50(C) in 2018’s budget. As per the amendments, there will be no additional tax liability on the buyer or seller if the difference in the stamp duty value (circle rate) and the transaction value is not more than 5%.

Things to remember

The additional burden is essentially on the notional gains you may be making when transacting below the circle rate. However, you still need to show such income and the tax filed against it in your income tax return form, or else you may receive a notice from the tax department. “Ignorance can’t be a defence under income tax laws," said Sudhir Kaushik, chief financial officer, TaxSpanner.com, an online tax filing platform.The penalty can be up to 300% of the tax payable under the provision of non-reporting of income, he added.

If you do get a scrutiny notice, you may request for a valuation report, showing that the actual market price of the property is below the circle rate. If the assessing officer finds the valuation to be indeed lower than the circle rate, he may agree to your request for waiver of additional tax. “The buyer or seller can dispute the stamp duty value of the property and request the assessing officer to refer the valuation to the valuation officer to value the property as the prevailing market value. If the valuation officer submits its report reporting the market value to be lower than the stamp duty value then relief can be given to the buyer or seller to the extent of additional tax liability," said Amit Singhania, partner, tax, Shardul Amarchand Mangaldas & Co, a Delhi-based law firm. Singhania suggested that the buyer or seller can get the valuations done before getting into the deal and file a tax return based on the actual transaction value and separately write a letter to the income tax department along with the valuation report.

The buyer can also try to get the property registered at the transaction value by requesting the registrar. “You can request the registrar through a written application to get the property registered below the circle rates. This will save you the additional cost of stamp duty and registration charges. This may be considered by the income tax officer in case of scrutiny, however the ultimate authority will lie with the assessing officer," said Kaushik.

“There is a technical possibility that the registrar may register your property below the circle rate but it is a time-taking and cumbersome process," said Sachit Mathur, partner, L&L Partners, a Delhi-based law firm .

So when buying property below the circle rate, make sure you factor in the additional tax burden as well.

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