The budget has announced a minor relief measure that may cheer buyers and sellers of property — no adjustments will be made for transactions in immovable property, as long as the difference between the sale price and circle rate is below 5 per cent.
What is it?
Property transactions, as we all know, require the seller to pay capital gains tax on the sale proceeds and the buyer to shell out stamp duty at the time of registration. But those dealing in property used to evade taxes by declaring a lower sale price for the property on paper while actually inking the deal at a much higher price. States, which lost out on stamp duty due to this practice, introduced circle rates to deal with such evasion. Circle rate is the minimum designated price per sq ft for land or property fixed for a locality, at which transactions have to be registered. Circle rates are also described as guideline values or ready-reckoner rates. They vary with each State and are revised from time to time depending on demand, supply and development of the area. But the rates are not revised often enough to match fluctuations in market prices. This is why circle rates can sometimes be higher or lower than the actual market price. Circle rates are used both by State governments to assess stamp duty and by the Centre to assess property transactions to income tax. It is the rules for the latter which have been changed in the budget.
Why is it important?
If the value of a property based on circle rates for a particular locality is ₹80 lakh and the market price is ₹78 lakh, the buyer pays stamp duty on ₹80 lakh, even though he bought the property for a lower price. The buyer also has to treat the difference between the circle rate and market price (₹2 lakh) as ‘income from other sources’ and pay tax. The seller who is liable to capital gains tax has to calculate his gains based only on circle rates.
Now, the budget has proposed to amend section 50C (capital gains) and section 56 (income from other sources) of the Income Tax Act, so that no adjustment needs to be made if the circle rate value does not exceed 5 per cent of the actual transaction value. So, in the example quoted here, if the buyer paid ₹80 lakh but the circle rate value for the property worked out to ₹85 lakh, then the buyer need not pay income tax on the difference (₹5 lakh). The seller can also calculate his capital gains based on the deal value of ₹80 lakh, instead of ₹85 lakh. But this leeway is only allowed as long as the circle rate value does not exceed 5 per cent of the transaction value. The new rules take effect from assessment year 2019-20.
Why should I care?
In India, market prices for properties have historically ruled much higher than the circle rates. But of late, with the property markets correcting across States, there are localities where the market prices have fallen below the circle rates, especially in Mumbai and Delhi. The change proposed will give a breather to genuine buyers and sellers who face minor deviations between their transaction values and circle rates.
But there are cases where circle rates today hover more than 5 per cent higher than actual prices in a few areas, in which case buyers and sellers may continue to face a higher tax outgo. Also, though the buyer or seller need not pay capital gains or income tax on the excess, stamp duty and registration fee still have to be paid on the higher of the circle rate or transaction value, by the buyer.
The bottomline
The circle rate relaxation is a tiny palliative to bruised sellers.
(The article first appeared in The Hindu BusinessLine.)