All you need to know about circle rate


Also known as collector rate or guidance value, circle rate is the price below which a property cannot be registered in the government’s records

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.

 

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 home buyer 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 rates

 

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.

 

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.

For example, the circle rate for HUDA Sector 42, 43 in Gurgaon is Rs 50,000 per sq yard. At Sectors 104, 105, 106, 109, 110, 110A, 111, 112, 113 and 114, a land of similar size would be available for Rs 30,000 per sq yard.

In Greater Noida’s Alpha 1, the circle rate is Rs 32,000 per sq metre. In Techzone, on the other hand, the circle rate is only Rs 23,100 per sq metre.

See also: New Delhi circle rates

 

What are market rates and how are they different from circle rates?

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

  • Under Section 56 (2)(x) of the Income Tax Act, the difference is taxed as ‘other income’ for the buyer, if the market value of the property is lower than its circle rate value. The seller, too, will have to pay capital gains tax on the circle rate of the property.
  • Amid an over five-year long slowdown, the government decided to offer some support to buyers and sellers in the Union Budget 2020. The centre decided that no additional tax liability will arise, in transactions where the differential between the market value of the property and the circle rate is lower than 10%. The new provision will come into effect on April 1, 2021.
  • In a bid to provide an additional boost to the economy, as well as home buyers, following the impact of the Coronavirus pandemic, 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.

 

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 sq ft. Considering that the house has a carpet area of 1,000 sq ft and the prevalent circle rates, she would have to register the property for Rs 51 lakhs. 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 lakhs. 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 lakhs.

 

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

  • Before you start negotiating on a price quoted by the seller, find out about the circle rate and the prevalent market rate of the property. Keep the transaction as close to the circle rate, as possible.
  • While this may not happen often, under-reporting could land you in trouble. In your best interest, register the property for the actual amount you have paid for it.
  • It would be best not to engage with sellers who are looking to make unaccounted money through the deal.
  • Banks will fund only a part of the transaction value at which you are going to register your property. You will have to reveal the true nature of the transaction if the bank is involved.
  • Market rates are indicative of the potential of a property and the area in which it is located. Before selecting a property or writing if off, studying the market trend is quite important.
  • In some areas, the circle rates may be higher than the market rates. If you were to buy in a locality like that, you would have to pay the stamp duty and the registration charge, based on the circle rate and not the actual price.

 

Latest news updates on circle rates

Delhi may increase circle rates

The Delhi government has started the process to revise the circle rates of properties in the national capital across categories. The move is aimed at increasing the revenue earned by the union territory government, at a time when earnings have taken a severe hit, because of the impact of the second wave of the Coronavirus pandemic. If the move to revise circle rates in the city does take place, rates of properties in the national capital may increase significantly. Circle rates were last revised in Delhi in 2014. In Delhi, circle rates are classified in to eight categories, from A to H, based on the area where the property is located.

Noida to revise circle rates

After a high level meeting of the officials concerned, on March 16, 2021, the Noida administration is likely to revise the circle rates. If a positive outcome on circle rates has to come out of the meeting, the reduced rates will be applicable from April 1, 2021. Recall here that the Noida housing market is under severe pressure, because of the Coronavirus-induced slowdown. A reduction in circle rates might be helpful in reviving buyer sentiments in this region, which has been at the receiving end of a negative publicity because of long project delays and various instances of builder insolvencies.

“In view of the impact of the COVID-19 pandemic on the real estate sector, there is a need to reduce the circle rates. It is time the government should also reduce the stamp duty fee from 5% to 2%,” said Subodh Kumar, secretary of the Confederation of Real Estate Developers Association of India (CREDAI).

Delhi slashes circle rates by 20%

The Delhi government, on February 5, 2021, announced a flat 20% reduction in circle rates, across various categories of properties. The reduced circle rates will remain in effect till September 30, 2021 and will be applicable on all types of properties, including residential, commercial and industrial.  The slashed rates will also be applicable on all eight categories of properties in Delhi, including A (the priciest type), B, C, D, E, F, G and H (the most affordable type).

“The decision by the Delhi government comes at the right time, when the industry is recovering from the tumultuous impact of the pandemic. The reduction in circle rates will make things more affordable and should increase the number of transactions. The decision of the Delhi government may also prompt other states to take similar steps in the near future, as a booster to the real estate industry,” says Achal Raina, COO, Raheja Developers.

According to global property brokerage giant Sotheby’s International Realty, the Delhi government’s move to reduce circle rates has resulted in a spike in the number of inquiries for independent floors and bungalows in the posh areas of south Delhi, including Maharani Bagh, Panchsheel Park and New Friends Colony.

 

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.

 

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