Government increases differential between circle rates and agreement value to 20%

The move is also likely to help developers, as they can now offer their property at a lower rate than the prevailing circle rate, to monetise their idle assets.

In a bid to provide an additional boost to the economy, as well as the home buyers, union finance minister Nirmala Sitharaman, on November 12, 2020, announced a new stimulus package under Atmanirbhar Bharat 3.0. In the latest package, the centre has decided to increase the differential rate between the circle rate and the agreement value from 10% to 20%. This is will be applicable till June 30, 2021, for only primary sale of residential units of value up to Rs 2 crores.

In Budget 2020, the government had announced an increase in the threshold limit for the difference between the transaction value and the circle rate to 10%, from the previous 5% level.

According to the industry experts, the government’s move will provide relief on capital gains tax for the sector as a whole, on property valuations which are up to 20% below the circle rate, as against the earlier provision of 10%.

Commenting on the FM’s announcement, Niranjan Hiranandani, national president of NAREDCO and MD of the Hiranandani Group, said: “A differential of above 10% between the circle rates and agreement value, translates into tax penalties under Section 43CA of the Income Tax Act. This has been a major stumbling block for price rationalization. This pinches, especially when it comes to liquidating unsold inventory. Industry bodies like NAREDCO have been pointing out the urgency with which this needs to be sorted out and the finance minister, in a limited-period offer (up to June 30, 2021), has enhanced this differential from 10% to 20%. This is welcome. However, the FM also mentioned a cap on the flat value, to be eligible for this – Rs 2 crores. This will result in most projects in metro cities not being able to take advantage of the relaxation.” The ideal situation, according to Hiranandani, would have been one where this relaxation would be applicable to commercial real estate transactions, as well. Real estate as an industry and end-users, both, would benefit if these two suggestions can be incorporated, he said.

Earlier, following the Budget, Nimish Gupta, FRICS – MD, south Asia, RICS, pointed out that the announcements in the Budget would provide some respite to property buyers, in cases where the gap between the circle rate and the market rate was disproportionately high.

  • “Before Budget 2020, any gap over 5% would be added to the buyer’s income and would be liable to tax at nominal rates. Now, the same has been enhanced to 10%, which would encourage transaction activity in property markets,” explains Gupta.
  • The move is also likely to help developers, as they can now offer their property at a lower rate than the prevailing circle rate, to monetise their idle assets. This will help them to clear their existing inventory, to generate liquidity for their other projects.

However, it is essential to note that property prices and trends are not uniform across the country. Some cities are witnessing good growth and appreciation in prices while others are witnessing prolonged stagnation in demand and corrections in property rates. With country-wide lockdown due to Covid-19, real estate was one of the worth affected sectors in the country. With this, the government may also consider a mechanism, to extend this beyond June 2021 or opt for location-based relaxation to allow more than 20% relaxation, to revive the market. Circle rates also need to be revised in a more realistic way, to address the issues related to the fall in property rates.

Circle rate relaxation to bring relief to buyers and sellers

State governments generally revise the circle rates of properties at regular intervals. This is done, to discourage the evasion of stamp duty and registration fees by sellers and buyers, by mentioning a lower property price than the actual prevailing market rate. Certain restrictions discourage sellers and buyers from entering into transactions below the circle rate/ guideline value. However, due to the slowdown in the real estate sector, property prices have not increased across various cities in India. Consequently, developers may be unable to clear their inventory by selling their properties at a discount that brings the prices below the circle rates. While the government has allowed some relaxation between the circle rate and the market rate, it is not sufficient for the revival of the realty sector in the prevailing situation. So, the government has proposed to increase this relaxation in Budget 2020.


What if circle rate is more than market value?

The existing rule stipulates that the transaction value of the property should not be less than the circle rate by more than 5%, else the difference is considered as income and would result in an additional tax burden for the buyer and seller. For example, if you bought a property worth Rs 30 lakhs but the circle rate was Rs 35 lakhs, then, the difference of Rs 5 lakhs, would be considered as other income in the buyer’s hands and it would be taxed accordingly. The registration charges and stamp duty would also be paid at the applicable circle rate. From the seller’s point of view, as the property is registered at the applicable circle rate, he has to pay a higher capital gains tax. However, the buyer and seller do not need to pay any excess fee, if the difference between the transaction value and circle rate is below the stipulated 5% level.


What is circle rate limit?

Budget 2020: Circle rate relaxation to bring relief to buyers and sellers


What are circle rates?

To avoid evasion of stamp duty through the undervaluation of property transactions, all state governments publish area-wise rates of properties, on a yearly basis, known as Circle Rates or Ready Reckoner rates or Guideline Values.

How is stamp duty calculated?

The stamp duty is generally fixed as a percentage of whichever is higher – the circle rate/guideline value or the market value as mentioned in the agreement.

Can I sell my property below circle rate?

An owner can sell his/her property at a rate below the circle rate/guideline value but the stamp duty will still be payable on the basis of the circle rate.

What are the tax implications if the circle rate is more than market value?

If the circle rate of the property is higher than the value mentioned in the agreement by more than 20%, the circle rate is deemed to be the sale consideration. This difference is taxed as capital gains in the hands of the seller and as income from other sources in the hands of the buyer.


Update on July 5, 2019:

Finance minister Nirmala Sitharaman, on July 5, 2019, while presenting the Union Budget 2019-20, announced that the government is proposing additional tax deduction of Rs 1.50 lakh on interest paid on home loans for affordable housing (purchase of house up to Rs 45 lakhs) taken up to March 31, 2020.

To widen the tax net, the government has proposed to introduce 5% TDS on all payments made by individuals to contractors or professionals, in excess of Rs 50 lakhs a year. Currently, there is no requirement for an individual or Hindu Undivided Family (HUF) to deduct tax at source, on payments made to a resident contractor or professional when it is for personal use, or if the individual or HUF is not subjected to audit for his business or profession. “It is proposed to insert a new provision, making it obligatory for such individual or HUF to deduct tax at source, at the rate of 5%, if the annual payment made to a contractor or professional exceeds Rs 50 lakhs,” said the Budget document. The budget also proposed to tax gifts, in the form of money or property situated in India, by residents to non-residents. Sitharaman proposed to tax such gifts from on or after July 5, 2019.

Read the important highlights of Union Budget 2019 here.

The FM also proposed to raise the annual turnover limit from Rs 250 crores to Rs 400 crores, for availing a lower corporate tax rate of 25%. The proposal would cover 99.3 per cent of the companies operating in the country, she said. Sitharaman also proposed in the Budget 2019-20 that filing of income tax return will be mandatory for people depositing more than Rs 1 crore in current account, spending over Rs 1 lakh towards electricity bill payment and Rs 2 lakhs on foreign travel, in a year.


Budget 2019 highlights: What did home buyers and the real estate sector gain

We examine some of the important announcements in the interim budget 2019 and its expected impact on the real estate sector and home buyers

February 2, 2019: The government of India has presented the interim budget 2019, addressing several long-standing issues of the real estate sector. There were big expectations from the government in an election year, even though the budget was an interim one. The government has made some big announcements that will provide significant relief to the common people, including the home buyers.

Income tax rebate for income up to Rs five lakhs per annum

The government announced a tax exemption on individual income of up to Rs five lakhs, translating into ‘zero’ tax, for people falling in the applicable tax slab. If the person further invests in tax saving investment under Section 80 (C), then, the tax-free income will increase to Rs 6.5 lakhs. Similarly, the tax benefit under Section 24, 80 (D), 80 CCD can easily take the tax-free income beyond Rs 7.5 lakhs. This is seen mainly as a game-changing move by the government for the realty sector and the home buyers.

“The proposal to give tax rebate for income up to Rs five lakhs, will help in increasing the home buyer’s budget and can provide a big boost to the demand for housing. The budget gives more disposable income in the hand of the residential real estate buyer, encouraging them to push their budgets up for new homes, while also providing tax incentives for investing in a second home. It should result in an increased demand in the residential market. Hence, from a real estate perspective, Colliers International India gives the budget 2019, a 7/10,” said Joe Verghese, managing director, Colliers International India.

Emphasis on infrastructure growth

The government has announced Rs 19,000 crores towards Sadak Yojna and come up with a future vision that envisage boosting of social and physical infrastructure. “Housing under PMAY and increase of infrastructure development, in the budget, are positive steps towards real estate affordability and accessibility, because these two initiatives would enable more people to buy their homes in the city, as well as the outskirts,” says Pankaj Jain, MD, Realistic Realtors.

See also: Budget 2019: 3 main tax benefits for property owners

Extension of the benefit under 80 IBA by one year

The government has announced an extension of the benefit under Section 80 IBA by another year, i.e., till 2020. The move will benefit the developers and new affordable home buyers and help in achieving the ‘Housing for All’ vision.

Reinvestment of capital gains in two houses

The announcement, to allow reinvestment of capital gains in two homes, is expected to boost investment in residential real estate. As per the budget, capital gains has been extended to investment in two residential houses, for an individual having capital gains up to Rs two crores. The move can create more demand and also make the realty market more attractive.

Increasing the period for taxing notional rent on unsold inventory, from one year to two years

Unsold inventory is a problem for developers and notional rent on such inventory further adds to their woes. At present, the notional rent is levied, if the unsold inventory is at least one year old. In Budget 2019, the period has been increased to two years, which will give huge relief to realty players.

“This is a welcome move and will benefit the housing sector, as currently, there are more than 6.73 lakh unsold units across the top seven cities,” explains Anuj Puri, chairman of ANAROCK Property Consultants.

TDS on rental income increased from Rs 1.8 lakhs to Rs 2.4 lakhs

“There will now be no tax on house rents up to Rs 2.4 lakhs, from the previous limit of Rs 1.8 lakhs. This can attract more investors to buy second homes, for earning rental income,” Puri adds.

Increase in standard deduction for salaried people

Increase in standard deduction for salaried people, from Rs 40,000 to Rs 50,000, will result in higher disposable incomes. Therefore, it would translate into improvement in home loan EMI repayment capacity.

This budget has broken the trend of avoiding major announcements in interim budgets, point out analysts. Nevertheless, there are a few areas that have not been touched and are expected to be covered in the full-fledged budget after the general elections. Some key expectations that remained unfulfilled, include an increase in the Section 80 (C) benefit for home loan borrowers, single-window system for clearances, inclusion of stamp duty in GST, etc.


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