Moneycontrol Be a Pro
Get App
Last Updated : | Source:

Budget 2018: Five percent circle rate variation proposal to have minimal impact on property transactions

The ideal way of removing the anomaly could have been to have a mechanism to recalibrate the circle rate system in a way that the difference between circle rate and average market rate is negligible

Vandana Ramnani @vandanaramnani1

Budget 2018 has proposed to address the anomaly under Section 43 CA to tax real estate transactions at their real value rather than the value arrived at by applying artificially higher circle rates. This, say experts, may not have any significant impact on the real estate transactions.

Currently, the seller of a property pays tax on the circle rate even if the transaction value of the property is lower than the circle rate. The buyer pays tax on the difference in the property transaction value and the circle rate. Budget 2018 has proposed that if the circle rate does not exceed five percent of transaction value, no adjustment is required towards the capital gains on a real estate transaction.

In many real estate markets, this anomaly has led to ready to move in residential stocks piling up and even a correction in market values. It has also led to drop in the number of registries. However, experts say that the five percent limit will have marginal impact on the property market.

For example, if the market value of a property is Rs 10.5 lakh and the circle rate is Rs 10 lakh, the seller was expected to pay capital gains tax on the difference, i.e., Rs 50,000. Under the new proposal, he may not have to pay any tax as this is an adjustment which is within the 5 percent limit. In case it is more than 5 percent, the current rules will apply.

Experts say this will have a marginal impact. Emphasis should instead be on implementing a system wherein there is not much difference between the circle rate and the market rate.

“As a specific measure, the 5 percent leeway in terms of taxability of difference between transaction value and stamp duty value vis-à-vis transfer of real estate property is a welcome move, however, the impact of the same may be minimal,” says Neeraj Bansal, Partner and Head - Building, Construction and Real Estate, KPMG in India.

Currently, while taxing income from capital gains, business profits and other sources in respect of transactions in immovable property, the consideration or circle rate value, whichever is higher, is adopted and the difference is counted as income both in the hands of the purchaser and seller.

According to Joe Verghese, managing director, Colliers International India, in recent years, due to consistent hikes in circle rates, in spite of a slow property market, the scenario has reversed in many micro markets where circle rates have become much higher than the rates at which transactions are closing. Further, sometimes, this variation can occur with respect to different properties in the same area because of a variety of factors including the shape of the plot and location.

“In order to minimize hardship in real estate transaction, the budget proposes that no adjustment shall be made in a case where the circle rate value does not exceed 5 percent of the consideration. In our opinion, it will provide a small benefit and will not really impact property markets/prices. The ideal way of removing this anomaly is to have a market mechanism to recalibrate the circle rate system in such a way that the difference between the circle rate and the average market rate (over 6 months) is negligible,” he adds.

“It will help in terms of some extra savings if there is parity between the market rates and the ready-reckoner rates. Cities which are not under the heavy influence of real estate investors and where prices are rational may benefit from this announcement,” says Anuj Puri, Chairman – ANAROCK Property Consultants.

The Great Diwali Discount!
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .
First Published on Feb 1, 2018 07:24 pm
Follow us on
Available On
PCI DSS Compliant