This article is written by Anusha Rao, pursuing a Certificate Course in Real Estate Laws from LawSikho.com. Here she discusses “What is Circle Rate of Property and How does it work”.

Introduction

Investing in real estate is one of the safest and easiest options available to buyers and investors, with minimum hassle and lesser procedural requirements when compared to other forms of equity. However, this sector too has its own jargons and semantics- what is circle rate of the property, how it will affect your investment, what is market value, what is Khata, etc. This article will specifically deal with what circle rate of the property is, how is it calculated, what is the legal reasoning behind circle rate of property and what are the amendments brought in through budgets towards changes in the circle rate of the property.

Circle rates are the speculative prices at which a commercial property/an apartment/a built-up house is sold or transferred. This rate is set by the state government’s revenue department. The rates are merely speculative and can differ from one locality to another. Although in most cities properties are sold above the circle rate, in some cases, the property might be sold at the prescribed circle rates.  

The stamp duty has to be paid on this pre-decided circle rate. In some states, this rate is also called as Ready Reckoner or Guidance Value (eg: Karnataka) or stamp duty value, i.e, the rate on which the stamp duty is to be paid. This circle rate depends on factors such as the market value in the area, infrastructure, facilities available, etc. The Government of Delhi, for example, has divided the city into 8 categories- Category A to H. Category A is the most expensive and posh area and Category B consists of the property with the lowest value. 

The market value of a property is the price which a buyer is willing to pay towards a property. It may not be the final price and may fluctuate according to the agreement between the seller and the buyer. Where the supply is low and the demand for a particular area, the prices will be high. Even though the market value and circle rate are inter-dependent and connected, the two have little impact over one another. Usually, the market value is always than the circle rate of the property. This explains two different perceptions of the market i.e., from the point of view of the state authorities and the other explains the expectations of the market. This phenomena also explains why there is a flow of black money in the real estate sector. 

There is an apprehension that the real estate transactions might reduce if the circle rate is a line in line with the market value. However, in order to decrease the black money input into the sector and also to increase the rate of tax to the state’s revenue department, it is advisable to revise the circle rates every quarter or six months once. 

According to section 50C of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), if the circle rate of a property is, for instance, 90 lakhs and the market value is 87 lakhs, the buyer has to pay stamp duty on the circle rate i.e., 90 lakhs, even though he bought the property for a lower rate. The seller, on the other hand, should treat the difference between the circle rate and market price (3 lakhs) as ‘income from other sources’ and pay tax. He is liable to calculate the capital gains tax based on the circle rate. However, the taxpayer may approach the Assessing Officer claiming that the fair market value is genuinely lower than the circle rate. The officer may request the valuation officer to conduct the valuation of the said property. If-

• The value ascertained is lower than the circle rate, then such value is deemed to be the sale price.
• The value ascertained is higher than the circle rate, then the circle rate is deemed to be the sale price.

2016 Amendment

The 2016 budget brought out some necessary changes in the tax implications on circle rate of the property. In a case where the date of agreement fixing the amount of consideration for a transfer of property and date of registration are not the same, then the stamp duty on the date of the agreement may be taken for the purpose of calculating full value consideration. This provision will apply only when the consideration is paid by the way of an account payee cheque or bank draft or online transfer, on or before the date of agreement of transfer of the property. 

As per section 56(2)(x) of the Act, if a buyer purchases a property below circle rate, then the difference, if more than Rs 50,000 would be taxable under the head of ‘income from other sources’ under this provision. However, if there is a difference in the circle rate from the date of agreement to the date of registration, then the price on the date of agreement shall be taken as the sale price. This exception shall apply on in cases where the consideration is paid any mode other than cash, on or before the date of the agreement. A reference to the Assessing officer for change in the value of the circle rate can also be made, just as under Section 50C.

This amendment denotes that tax is payable not only by the seller (now through capital gains- Section 50C) but also by the buyer (difference in the circle rate and actual price- taxable as ‘income under other sources, Section 56(2)(x)). There is double taxation- on the buyer and seller. 

2018 Amendment 

The budget proposed that when there is a variation between the circle rate and the actual rate of the property, and such variation is not more than 5%, then sections 50C and 56(2)(x) would not apply. In simple words, there would be no additional tax on the parties involved. This step becomes important for genuine transactions and thus would reduce the burden on the parties and will no longer be required to go to the valuation officer for every change in the circle rate.

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Recent Changes 

1. Madhya Pradesh 

The Madhya Pradesh government on 19-06-19 reduced the guideline rate uniformly across the state by 20%. However, the registration rate in an urban area has increased from 10.3% to 12.5% and in rural areas from 7.3% to 9.5%. The changes do not affect the net revenue to the state. However, this does not give any advantage to the homebuyers since the registration rates have increased.

2. Karnataka

The Department of stamps & Registrations, Karnataka, through its final notification, increased hiked the guidance value from 5% to 25%, with effect from January 1, 2019. The previous hike was effected in March 2017, which ideally should be every 6 months or one year once. Thus, with the increase in the circle rate, homes would be expensive with an increase in the revenue to the State Government. 

3. Uttar Pradesh

The Uttar Pradesh government, across Noida and other places have removed the 6% surcharge on properties and 25% surcharge on shopping malls, in order to increase the revenue to the state government. This decision was taken recently in July 2019.                                                                                                       

How to Calculate the Circle Rate of Property

1. State governments assign the circle rates of each property, depending upon the type of property, amenities available, area, etc. 
2. In Karnataka, for example, one can visit the Kaveri Online Services, Department of Stamps and Registrations, Government of Karnataka and find out the valuation of the property by entering the Registration District, SRO office, Area name, Taluk, village and Hobli. 
3. In Tamil Nadu, the guidance value can be calculated by visiting the Registration Department, Government of Tamil Nadu. One can find out the circle rate by selecting a particular zone and street name, along with the village name and the sub-registrar’s office.

Source- Capri Global Capital

The stamp duty payable on the circle rate of property depends on various factors such as status of the property (whether old or new), Location of property (urban, rural, metropolitan, suburban etc), Age of owner (discounts are given to senior citizens in some states), gender of owner (some states give concessions to female owners), usage of property (commercial or residential property), type of property (apartment or independent house etc). 

Stamp duty can be paid under the non-judicial stamp paper, where the parties will enter into an agreement and consequently within 4 months, it is required to be registered at the sub-registrar’s office. Stamp duty can also be paid under the franking method, where the agreement would be entered into in a plain or a printed paper, and the same is submitted to a bank which processes the documents through a franking machine. Lastly, an e-stamping can also be done and the fees can be paid through RTGS/NEFT online. 

Source: Registration Departments of respective state governments and housing.com

Sources

1. Tax on property Transaction below circle rate: Section 50C, Section 56, CHARTERED CLUB, http://www.google.com/amp/s/www.charteredclub.com/tax-on-property-transaction-below-circle-rate-section-50c-sec-56/amp/. 
2. Shoaib Zaman, Buying a property? Compare circle and market rates for clarity, BUSINESS TODAY, https://m.businesstoday.in/story/buying-property-circle-market-rates-comparison /1/207690.html. 
3. ANI, circle rates of commercial and residential properties slashed in Noida, ECONOMIC TIMES, https://economictimes.indiatimes.com/industry/services/property-/-cstruction/circle-rates-of-commercial-and-residential-properties-slashed-in-noida/articleshow/70375967.cms?from=mdr. 
4. Bharat Joshi, Praveen Kulkarni, Bengaluru Realty: 20% hike proposed in guidance value, DECCAN HERALD, https://www.deccanherald.com/city/20-hike-proposed-guidance-691153.html. 
5. Jyoti Mukul, Government notified rate for land goes down by 20% in Madhya Pradesh, BUSINESS STANDARD, https://www.business-standard.com/article/economy-policy/government-notified-rate-for-land-goes-down-by-20-in-madhya-pradesh-119062000747_1.html
6. Housing.com and Registration Departments of respective state governments.

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