Circle Rate, Market-Rate, and Tax Implications — All You Need to Know

Real estate is one of the most important pillars of the Indian economy. Also, the real estate industry supports many other industries and is a major job-creator. In the interest of the economy, the good performance of this industry is vital.

Governments, both at the central and state level, are trying hard to boost demand in the real estate sector by different policy measures. These measures have already started bearing fruit.

To further help the homebuyers and support the industry, the central government announced a relaxation of the differential between the circle rate and the market rate up to 20% (it was 10% earlier). The relaxation of 20 percent will be applicable till June 30, 2021, for only the primary sale of residential units of value up to Rs 2 crore.

It is expected that the new policy will help reduce the tax liability of the buyers and sellers and help boost demand.

Tax Implications of the Policy

If the circle rate is more than market value, then, the buyer will be liable to pay tax on the difference under the head ‘income from other sources’,  under Section 56 (2)(x) of the Income Tax Act. The seller, too, will have to pay capital gains tax on the circle rate of the property.

As per the provisions of Budget 2020, no additional tax will be applicable, if the market value is less than the circle rate by up to 10%. This is now further increased to 20%.

What are Circle Rates and How They Vary

Circle rates, also called ready-reckoner rates, are the transaction rates for a property below which a property cannot be registered. Circle rates are fixed by state governments as land and property are state subjects in India.

To legally own a property, it is mandatory to register it in the buyer’s name. State governments charge stamp duty and registration charges based on the circle rate in the relevant area.

Circle rates are notified by the government and vary from locality to locality even in a city. This depends on the prevailing ‘market rate’ and the state of infrastructure development in a particular area. 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. Circle rates are guiding towards the locality’s attractiveness to the homebuyers.

How the Circle Rate Differs from Market Rate

Market rates, on the other hand, are actual property transaction prices in a particular locality that are acceptable to both the buyer and the seller. Market rates vary from locality to locality, project to project, building to building, even floor to floor.

Market rates are generally more volatile than the corresponding circle rates as they are not revised as regularly as the market rates change. The market rate is also a good determinant of the value of the location, project, and even the builder’s reputation.

However, any property must be registered in the government’s records at the prevailing circle rate irrespective of the ‘market rate’ or the actual price paid for it. The registration charge and the stamp duty are calculated on the basis of the circle rate.

Homebuyers Should Note both Circle and Market Rates

Before considering purchasing any property, homebuyers should note both the circle and the market rates to assess the growth potential of a property. Analysing the market trend in prices is very important to estimate the future price appreciation potential of a property.

Market rates can be quite volatile based on new infrastructure development in a particular area. For example, an announcement of Metro rail connectivity can push up the prices of properties near the proposed Metro corridor. However, circle rates are generally not revised immediately and can follow market rates with a lag.

The best way to understand the best investment option in properties is to consult a professional property advisor organization with a citywide footprint, and a long track record.

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