deepshikha
circle rate vs. market rate
deepshikha pandey 27 Apr 2018

circle rate vs. market rate

There has always been question in the mind of buyer and seller to decide the rate of transaction and confusion on deciding whether to make sale or purchase on market rate or circle rate, which would be giving more tax benefits.

So, for the clarity of your confusion we are providing here detailed explanation about circle rate and market rate and what are the tax implications on either rate.

Circle rate-  The state government collects revenue on real estate transactions by levying stamp duty on the transaction value based on the circle rate. The circle rate 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.

Across all property markets in India, the circle rates are invariably much lower than the actual market rates. This is because: a) Circle rates are not reviewed regularly to bring them in line with the market prices and b) They do not represent the actual barometer of ground realities.

But Due to a lull in the real estate market since last few years, there has been a price correction in many areas, especially those where the property prices had risen exponentially during the property boom.

So severe was the price correction that in some localities, the property prices even went below the circle rate. A circle rate is the minimum property rate defined by the government for specified areas.

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. For instance, in some areas of Delhi, like Maharani Bagh and New Friends Colony, the per square metre circle rate is Rs7.74 lakh, while the prevailing market rate is below Rs6 lakh.

One may sell an immovable property lower than the circle rate, but the stamp duty will still be levied on the circle rate. However, the difference in the circle rate and sales value becomes taxable for both the buyer and the seller.

 

TAX TREATMENT IH THE HAND OF SELLER-

As per sec 50C of income tax act if property is sold below circle rate than that circle rate would be treated as market value and stamp duty shall be leviable on the circle rate and tax on seller shall be imposed under capital gain tax on the circle rate.

However, taxpayer can claim ton Assessing officer that the fair market value is genuinely lower than the circle rate, assessing officer may valuation officer to conduct a valuation of the property and if –

·         Value ascertained by valuation officer is lower than circle rate same would be taken as sale price.

·         Value ascertained by valuation officer is higher than circle rate, circle rate would be taken as sale price.

Note in any case sale price for purpose of capital gain tax can only be decreased.

TAX TREATMENT IN THE HAND OF BUYER-

As per sec 56(2) (vii) of the Income tax act if property is purchased below the circle rate and the difference between circle rate and market rate is more than Rs. 50000/- than that difference between circle rate and market rate shall be treated as income in the hand of buyer and shall be taxable in the hand of buyer under income from other sources.

However, reference to assessing officer shall be made in the same manner as under sec 50C.

Amendment as per budget 2016-

Where the date of registration and date of fixing amount of consideration are not same, than circle on the date of agreement would be taken for the purpose of computing full value of consideration.

The provision shall be applicable only if amount of full/part consideration has been paid by the mode other than cash on or before the Agreement.

Amendment as per budget 2018-

After the amendment if in case the difference between circle rate and actual transaction value is not more than 5% than provision of sec 50C and 56(2)(vii) shall not be applicable.

Example-

Mr. A purchased a property from Mr. B for Rs. 50 Lakhs and circle rate in that area id Rs. 60 Lakhs.

Tax treatment in the hand of Mr. A that circle rate i.e. Rs. 60 Lakhs would be deemed as sale price and taxable in his hands under capital gains.

Tax treatment in the hand of Mr. B would be that difference between circle rate and market price i.e. Rs. 10 lakhs would be deemed as his income and shall be taxable under income from other sources.

Conclusion-

In my opinion the buyer will be at loss if he/she agrees to buy (makes agreement of) at a value below the circle rate because of the operation of Section 56(2)(x)(b). According to the said section if the circle rate exceeds the purchase consideration by more than Rs. 50,000 then, the difference between the circle rate and the Purchase Consideration will be treated as Income from Other .

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