Home buyers and sellers of Indian real estate market got some relief when the finance minister announced the Union Budget 2018 and proposed that a property can be valued up to 5% below its circle rate.
Budget 2018 has proposed a tax relief for buyers and sellers of property by allowing it to be valued at up to 5% below circle rates for calculation of stamp duty and capital gains tax. Which means, if someone is buying or selling properties in localities where the circle rate is higher than the market value then no additional tax will be payable by the sellers and buyers if the difference between the ‘actual sale price of a property’ and its circle rate is not more than 5%.
The finance minister presenting the Budget 2018 announced that no adjustment shall be made in respect of transactions in immovable property, where the circle Rate value does not exceed 5 percent of the consideration.
Sometimes, in respect of similar properties in the same area because of a variety of factors, including the shape of the plot, location or an unfavorable orientation of a plot can bring down its price, though these factors do not reflect in the circle rate.
In order to minimize hardship in case of genuine transactions in the real estate sector, it is proposed to provide that no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration is not more than five percent of the sale consideration.
What is circle rate?
A circle rate is the minimum property rate defined by the government for specified areas. It is the minimum value at which sale or transfer of plots, built-up houses, apartments or commercial property can take place. It is the price at which the buyer pays stamp duty to the government while getting a property registered.
The state government collects revenue on real estate transactions by levying stamp duty on the transaction value based on the circle rate.
Even if a property is sold at below the circle rate, the stamp duty, registration value, and the capital gain would be calculated on the circle rate, and not the actual sale price.
So, how this proposal actually helps the home buyers and sellers:
Stamp duty value and the capital gain tax
Of late, the real estate prices have been languishing and often the properties have been sold at a value much below the circle rate fixed by the government.
Yes, an immovable property can be sold at a value lower than the circle rate, but the stamp duty will still be levied on the circle rate.
Also, with sluggish Indian real estate market since the last couple of years, there has been a price correction in many areas, especially in the areas where the property prices had risen exponentially during the property boom.
This price correction of property market was so massive in some localities that, the property prices even went below the circle rate. For example, in Gurugram, the Haryana Government made a few cuts in the last couple of years, yet the circle rates are still higher than the market value in a few localities.
In last few years, the circle rates were increased in the major cities and had become more than the market rates which fell due to the sluggish market. This resulted in a gap between the two rates, which was counted as income in hands of both buyer and seller.
For both property buyers and property sellers, higher circle rates are a problem because the difference in the circle rate and sales value becomes taxable for both the buyer and the seller.
At present, while taxing income from capital gains (section 50C), business profits (section 43CA) and other sources (section 56) arising out of transactions in immovable property, the sale consideration or stamp duty value, whichever is higher is adopted. The difference is taxed as income both in the hands of the purchaser and the seller.
The buyer has to pay stamp duty on registration value, which can’t be lower than the circle rate. Besides that, the buyer also has to pay tax on the difference of amount—circle rate less market rate—under section 56(2) of the Income-tax Act, 1961, where circle rate is higher, as it is considered to be a profit for the buyer.
On the other hand, the seller has to calculate capital gain based on the stamp value of the property under section 50C of the Act, irrespective of the fact that he may have sold the property at a price lower than the circle rate. The stamp duty value is taken as the deemed selling price and capital gain will be computed accordingly.
Let’s try understanding this by an example:
Roshni sells her property for Rs. 1 crore and the indexed cost of acquisition is Rs. 75 lakh.
Here, the capital gain for Roshni would be Rs25,00,000/- (Rs. 1,00,00,000 – Rs. 75,00,000). However, if according to the circle rate the property rate is determined to be Rs1.1 crore, the capital gain would be Rs. 35,00,000/- (Rs. 1,10,00,000 – Rs. 75,00,000).
The higher capital gain the more capital gains tax will be there for the seller.
Going ahead with the same example, even if the buyer in the above case is buying the property at Rs1 crore, he/she has to register the property at Rs1.1 crore and pay the stamp duty accordingly.
At the same time, Rs10 lakh (Rs1,10,00,000 – 1,00,00,000—the difference between the circle rate and buying price), will be considered as ‘income from another source’, and taxed as per the normal slab rate applicable to the person. So, according to the above example, both seller and the buyer are at loss.
To minimize this hardship in the real estate transactions for both buyers and sellers, the finance minister has proposed to amend the section 50C and section 56(2) of the Act. According to the proposed amendments, no adjustment shall be made in a case where the circle rate value does not exceed by 5% of actual transaction value or market value.
Once the budget proposals are approved and come into effect, if a seller sells a property for Rs1 crore, while according to the circle rate the property’s value is Rs 1.05 crore, she need not calculate capital gains based on the circle rate value of Rs1.05 crore. At the same time, buyers can avoid paying tax on the notional gains of Rs. 5 lakh.
However, as no amendment has been proposed in the Stamp Duty Act, the buyers are still required to register the property at the circle rate at least and pay the stamp duty accordingly.
These amendments will take effect from April 1st, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment year.