Those entering the real estate market would invariably hear about the term circle rate and its various other synonyms since real estate purchase transactions are based on this value. In this article we would discuss in detail every aspect of circle rates and how it impacts your property purchase.
What are circle rates?
Land is a state subject in India. District administrations are responsible for fixing a standard rate for land and other properties across the cities, below which a transaction cannot be registered. As cities are vast and the value of one area may be quite different from the value of another, the circle rates vary from locality to locality.
Various names are used across India, to denote circle rates. In Maharashtra, circle rates are known as ready reckoner rates. In Haryana, Punjab and Uttar Pradesh, circle rates are also known as collector rates or district collector rates. In Karnataka, circle rates are often referred to as guidance value.
Key facts about circle rate
Basic property value
These are the basic minimum value used to calculate stamp duty and registration fee.
Difference in rates
Circle rates differ from city to city. Within a city, circle rates differ from area to area. Circle rates also differ based on type of property. Rates are higher for commercial properties while lower for residential ones.
Subject to change
City administration has the right to change circle rates as and when they deem fit. They are typically revised once a year.
The need for circle rates
Government bodies have to generate income in order to function and carry out the activities they are responsible for. This is primarily achieved, by levying taxes on various services that they provide to citizens. Among these sources of revenue generation, services pertaining to property and related transactions are the most prominent ones. In this context, we talk about circle rates and the impact it has on your property purchase decision.
To legally own a property, a homebuyer has to visit the local sub-registrar’s office and get it registered in his name. To provide this service, the office charges a stamp duty and a registration charge from the buyer. These two duties are the biggest sources of income for local authorities and the state.
However, since each transaction is unique in some way or the other, the local authority has to apply varying yardsticks, to calculate the stamp duty and registration charges, at the time of property registration. This is when circle rates come into the picture.
Circle rate in top cities in India in 2024
Why do circle rates vary within a city?
Not only do circle rates vary from city to city in a state but also vary from locality to locality, from project to project and from building to building, depending on the exact location of the property. Circle rates in a well-established locality having metro rail connectivity, for example, will be much higher than that in an upcoming locality with no metro rail connectivity. Among other things, the circle rate of an area is reflective of its success as a real estate hotspot, as well and would invariably be higher in more coveted residential spots.
See also: New Delhi circle rates
Circle rate versus market rate
While determining the circle rates for a city, the district administration takes into account the prevalent rates at which properties are sold in a particular market. These actual rates are known as the ‘market rate’ of the property and authorities are expected to keep the circle rate for an area as close to the market rate as possible. Market rate is basically the price the seller could ask for his property and the buyers would be willing to pay. In cases where the market rates of property spike, because of speculation, authorities try to keep that in check, by way of keeping the circle rate lower.
To meet these twin targets, district administrations are supposed to revise the circle rates periodically. In high-intensity housing markets of Gurgaon, Noida and Mumbai, for instance, the district administrations may revise the circle rates at a higher frequency than other cities. However, even in these cases, the revision is made twice in a year, at most. As new infrastructure developments immediately push market prices of a property upwards, late revisions often result in wide gaps between the circle rate and the market rates of a property. As circle rates are not revised as regularly as the market value of properties change, one can see wide gaps between the two across India’s major property markets.
This could be better explained though an example. As soon as the Centre’s decision to select Jewar in Greater Noida as the site for the National Capital Region’s second airport project became public, land values in the village and around its spiked overnight. If a farmer was selling his land for Rs 4 lakhs to Rs 5 lakhs per bigha in the past, rates have now touched Rs 20 lakhs to Rs 25 lakhs a bigha. (A bigha of land measures 843 sq metres.)
Incidentally, circle rates in Greater Noida, where this region is situated and falls under the Yamuna Expressway Industrial Development Authority (YEIDA), have not been revised since 2015. In fact, the YEIDA, in 2018, launched a plot-based scheme along the area, where plots were sold at Rs 15,600 per sq metre. This results in the district administration suffering losses and also encourages the use of unaccounted money (more commonly referred to as black money) in real estate.
Even though the transacting parties are expected to register a property on the higher of the actual transaction value or the minimum rate set by the government, buyers and sellers have no incentive to report the right number. While it is a rarity, the property has to be registered based on the circle rate, if the actual price paid by a buyer is less than the guidance value. In Delhi’s New Friends Colony, for example, the market rate is lower than the circle rate.
Tax implication if the market rate is lower than the circle rate
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Stamp duty calculation based on circle rate
Suppose Uma Rani has bought a flat in a HUDA sector, where the applicable circle rate in Gurgaon is currently Rs 5,100 per sqft. Considering that the house has a carpet area of 1,000 sqft and the prevalent circle rates, she would have to register the property for Rs 51 lakh. Now, the Haryana government will charge 5% as stamp duty on this amount, since the property is being registered in the name of a woman. This brings the stamp duty amount to Rs 2.55 lakh. She will also have to pay an additional Rs 15,000 as the registration charge. This way, the overall cost of the property would total up to Rs 53.70 lakh.
Use of unaccounted / black money in real estate
When circle rates are lower than the market rate of a property, this encourages the buyer, as well as the seller, to engage in illegal activities. Even though the buyer would pay the seller the money that the latter is asking for, he would agree to get the transaction registered at the circle rate. This is because the buyer is responsible for paying the stamp duty and registration charges from his pocket. By showing a lower transaction value, the buyer is able to save here. The seller, on the other hand, is able to save on capital gains taxes arising out of the transaction. A lower transaction value would mean a lower capital gains tax outgo. Under this arrangement, the buyer often arranges and pays the differential money in cash. This way, there is no official record of this money and hence the title ‘black money’.
Example:
Suppose that Ram is buying a property from Shyam for Rs 80 lakhs, because that is the market value of the property. However, both of them have agreed to register the property at Rs 60 lakhs, because that is the minimum amount they are liable to pay, based on the circle rate calculation. Since this property is in Delhi, Ram will have to pay 6% + 1% as stamp duty and registration charge in Delhi on the transaction. By registration the property at Rs 60 lakhs, Ram would pay Rs 3.60 lakhs as stamp duty and Rs 60,000 as the registration charge. If Ram were to register the property for its real value – Rs 80 lakhs – he would be liable to pay Rs 4.80 lakhs as stamp duty and Rs 80,000 as the registration charge.
For Shayam, who bought the property five years back for Rs 40 lakhs, the investment has double. However, his total capital gains would be counted at only Rs 20 lakhs (if the sale transaction value is considered as Rs 60 lakhs) and taxed at 20%, according to the current long-term capital gains tax rate. This would mean a tax payment of Rs 4 lakhs. If the property was registered at its real value, Shyam would be liable to pay Rs 8 lakhs as LTCG tax. Owing to this under-reporting of the transaction, the government would lose out on the same amount that Ram and Shaym gain.
In a system rife with such practices, real estate loses its affordability and becomes a tool to park unaccounted money. This is why the government introduced the Benami Transactions (Prohibition) Amendment Act, 2016, to control illegal practices in India’s real estate. As the gap between the market and guidance value of properties reduces, more genuine buyers would enter real estate.
“Even genuine buyers fall prey to such arrangements, in the expectation of saving on stamp duty and registration charge payments. Since they do not really have any black money, they are actually forced to turn their white money into black, to compete the transaction. Irregular revision of circle rates does the entire system more harm than is visible at the outset,” says Prabhanshu Mishra, a Lucknow-based advocate.
Word of caution for buyers
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Housing.com View point
Knowing the circle rate of property in an area where you are planning to invest is crucial since all calculations pertaining to the property will be based on this basic minimum price. Also keep in mind that actual rates might be a lot higher since circle rates are the minimum value of the property while market rates can be a lot higher.
FAQs
What is a circle rate in property?
Circle rate is the price per unit area that is affixed by government authorities for land or property in a locality, below which property transactions cannot be registered.
What if circle rate is more than market value?
If the circle rate is more than market value, then, both, the buyer and the seller will be liable to pay tax on the difference under the heads ‘income from other sources’ and ‘capital gains’, respectively. As per the provisions of Budget 2020, no tax will be applicable, if the market value is less than the circle rate by up to 10%.
How is agreement value calculated?
Agreement value refers to the value that is mentioned in the sale deed.
