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In order to boost demand for residential real estate, finance minister Nirmala Sitharaman on Thursday announced tax relief for home buyers and developers buying or selling below the circle rate by up to 20%.

Selling or buying property below the circle rate—by more than 10%— leads to increased tax liability for both developers as well as homebuyers. The FM has now announced that a homebuyer will not have to pay additional tax if the actual transaction value is below the circle rate by up to 20%. Currently, the relief is provided in case the differential is up to 10%. The same relief has also been provided to the developers, who have to pay tax as per the circle rates if the differential is more than 10%.

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.

The relief will only be available on properties valued up to 2 crore and those bought in the primary market from a developer. Further, the benefit is only available for residential units bought between the date of announcement and 30 June 2021.

Experts believe this may incentivize developers to bring down the prices. “This move could provide an impetus to developers for selling inventory stuck with them, hence, benefitting the homebuyers. States like Maharashtra have increased circle rates despite the prices not going up, making it difficult for the developer to reduce prices," said Mani Rangarajan, group COO of real estate portals Housing.com, Makaan.com and PropTiger.com.

“By increasing the limit from 10% to 20%, the government has given oxygen to developers to sell residential units in primary deals without attracting deemed taxation in the hands of both the parties—buyers and sellers," said Hemal Mehta, partner, Deloitte India, a consultancy firm.

Lower tax burden

Given the economic slowdown and the stress in the real estate sector, it is expected that the actual property prices may be lower than the circle rates in certain locations.

But currently when a property is sold below the circle rate, it leads to additional tax liability for the homebuyers as well as the seller.

In case a property is sold below the circle rate, the differential in price is added to the income of the buyer as per Section 56 (2)(x) of the Income-tax Act, 1961.

“Section 56(2)(x) relates to a deeming benefit which a buyer enjoys—which is in excess of 10% of the stamp duty value of the residential property as compared to the actual deal value—is taxable as income from other sources in the hands of the buyer. By extending the margin from 10% to 20% for primary residential units, the government has given a push to generate liquidity in the hands of developers to sell their residential stock and complete other pending projects," said Mehta.

For example, if a person buys a property for 50 lakh, while the circle price rate is 62 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 62 lakh and not on 50 lakh.

The seller has to pay tax on the circle rate, which is taken as the sale price instead of the actual transaction cost. Therefore, the seller or the developer will have to compute tax liability based on 62 lakh instead of 50 lakh.

This has now changed. In the above example, there will be no additional tax liability for the buyer or the developer.

Much-needed push

Experts believe that the announcement will provide the much-needed push to the real estate sector which has already started showing some recovery as people have started buying houses. As per Proptiger data, residential home sales aggregated to 35,132 units in the July-September quarter, an increase of 85% over the previous quarter. “The announcement will help in further recovery of the real estate sector. However, it would have been better if the government had included commercial properties as well as properties priced higher than 2 crore," said Niranjan Hiranandani, president, National Real Estate Development Council.

“It is step in the right direction but for bigger metropolis, it would have had a bigger impact if the value of houses to avail this benefit were increased to 4 crore," said Daksha Baxi, head, international tax, Cyril Amarchand Mangaldas, a tax consultancy firm.

The announcement adds to the benefit the recent cut in stamp duty rates by some states, including Maharashtra, provided. Uttar Pradesh Real Estate Regulatory Authority has also written to the government to consider stamp duty cuts. If some more states reduce stamp duty, the two measures will boost the sector.

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