The revenue of Indian Government is generated from taxes levied throughout the Country on various financial transactions. Direct Tax (Corporate tax and personal income Tax) which accounted for 51.30% of total revenues till the financial year 2016-2017 (i.e., before introduction of GST). The number has increased post GST.
Income tax Act, 1961 levies income tax on transaction involving immovable properties. If the purchase and sale of immovable property occurs at fair values, the GOI gets fair and reasonable revenue. GOI is mainly concerned when the values of the transactions are misreported or any provisions of the Act are misused by the taxpayers to curb the income tax payable. One of such way for taxpayers is to curb paying the income tax, is to misreport the value of purchase of immovable property. Over the last few years, real estate sector has observed significant downfall. Infrastructure is a picture of growth for any country. Thus, this downfall has been a matter of serious attention for the Government of India. Real estate sector has suffered a lot due to demonetization in 2016, immediate introduction of GST in 2017 and applicability of RERA to real estates. These major events have impact on reduction of disposable income of consumers in India. Reduction in disposable income reduces investment outflow. After these years, Government has provided various bounce-back provisions to boast real estate market.
- Gist of Real Estate Sector
- Law of Income Tax for Real Estates
- What is Circle Rate? How are they Calculated?
- What is Circle Rate in Delhi?
- What is a Market Rate?
- Why is it important to know the circle rate?
- What if circle rates are higher than the market rates?
- Difference between Circle Rate and Agreement Rate?
- Amendment by Finance Act 2020
- Amendment by AtmaNirbhar 3.0
- Circle rate relaxation to bring relief to buyers and sellers
- Financial Implications
Gist of Real Estate Sector
Before 1950, this sector was niche and underdeveloped. The industry observed boom when oil & gas prices rose and this sector further boomed due to easy availability of credit. However, this bubble burst after 1970s when massive levels of liquidity caused inflation. In 1993, liberalization & globalization gave a support to this sector.
The sector observed massive growth during the period 2005 to 2012 leading to piling up of housing inventory. Even if there are higher levels of activities in this sector, India still faces massive shortage of “affordable houses” in India. Thus, in 2015, Government of India came up with 100% FDI approval for townships and settlement development projects, plus provided nod to 100 Smart City projects in the country. Additionally, Government of India allocated $ 3.72 billion for housing and urban development
Real estate sector is said to be the second largest sector for employment after Agriculture sector. The sector is divided into 4 categories namely, Commercial, Housing, Retail & Hospitality. Whenever one visits a hotel or a premise, the visual image of the area attracts the attention. Infrastructure is therefore a portray of growth in a country.
Law of Income Tax for Real Estates
Section 43CA of Income Tax Act, 1961 states the provisions for real estate transactions. In case of immovable property held as stock in trade, the Stamp duty value (circle rate) shall be deemed to be the sales consideration if the actual sales consideration is lower than the value as the stamp duty records. Imagine a situation where you receive Rs. 50 lacs against sale of a flat and you are taxed assuming the sales consideration is Rs. 54 lacs. If you feel the pinch of Rs. 4 lacs, this is what Section 43CA is about.
Similarly, section 56(2)(x) is made for buyers who purchase flat at price lower than circle rate. The provisions of the Income Tax Act consider the lower selling price as “inadequate consideration” if the difference is greater than Rs. 50,000. Such inadequate consideration is treated as “Other Income” of the buyer and taxed accordingly.
Now, why would the Government make such law? Lower sales price leads to lower taxable income. If a property worth Rs. 65 lacs (fair value) is sold at a lower price of say Rs. 50 lacs (agreement value), the person may have received the difference in the form of Black Money (hard cash or any other tangible benefit of said worth). Government gets capital gains tax as per sales consideration. Lower sales consideration leaks the revenue of Government. Thus, the said provision is inserted by Income Tax Act, 1961.
What if a genuine case exists wherein the fair value of the property in that locality is actually lower than the stamp records? In this case, Section 50C of the Income Tax Act allows the assessee (taxable person) to transfer his case to the Valuation Officer, who will then enquire on the fair value of the property. However, this route was a hurdle for growth of real estate sector. The prices of real estate sector are not managed in a regulated manner. This sector is unorganized and therefore prices do differ as per individual preferences, locality, structure and many more factors. Observing the hardship faced by the sector, the Finance Act 2018 allowed a deviation of 5% from the Stamp Duty value. This means, if the value of the property as per stamp record is higher (up to 105% of actual sales consideration), the lower sales consideration will be accepted as “full value of consideration”. Still the sector did not boom much till 2020.
What is Circle Rate? How are they Calculated?
Circle rate is price determined by local municipal authorities or Government of the respective state and this is termed as the minimum price for sale of the property in the area. A single city may have different circle rates for its distinct localities. Circle rate helps to identify the speculation of the prices of property over the period of time. However, the circle rates are not revised frequently by the Government. Circle rates cannot be treated as an appropriate index for real estate since these are not in-line with the market rates. Thus, today circle rate is just an indication of market situation for the said property in the said locality.
Various factors affect the calculation of circle rate. Some of these factors include the type of property, the expected use of the property for residential purpose or commercial purpose of both, vicinity of the property, age of the property, amenities alongside the property, historical importance, etc. Circle rates are usually higher for commercial properties. One may also visit the office of registrar or sub-registrar website for enquiry on the circle rates.
What is Circle Rate in Delhi?
The Delhi has recently announced revision in circle rates from Rs. 53 lakhs per acre to range bound of Rs. 2.25 crore to Rs. 5 crores per acres for agriculture land.
The Government of Delhi has divided entire city in to 8 categories for the purpose of Circle rate calculations. It starts with Category A, wherein the area is most expensive and it ends with Category H for least expensive areas. The complete list of categories is attached separately (Please refer the excel sheet).
Circle rate for Residential plots are as follows:
|Category||Land Cost (per Sq Mtr.)||Construction Cost (per Sq Mtr.)|
|Category A||₹ 7,74,000||₹ 21,960|
|Category B||₹ 2,46,000||₹ 17,400|
|Category C||₹ 1,60,000||₹ 13,920|
|Category D||₹ 1,28,000||₹ 11,160|
|Category E||₹70,080||₹ 9,360|
|Category F||₹56,640||₹ 8,220|
|Category G||₹46,200||₹ 6,960|
|Category H||₹23,280||₹ 3,480|
Circle rate for flats are as follows:
|Area||DDA, Society Flats||Private Builders Flats|
|Up to 30 sq mtr||₹50,400||₹55,440|
|30-50 sq mtr||₹54,480||₹62,652|
|50-100 sq mtr||₹66,240||₹79,488|
|More than 100 sq mtr||₹76,200||₹95,250|
|Multi Storey Apartments||₹87,840||₹1,10,000|
Presently the stamp duty is as follows:
|Male & Female Joints Owners||5%|
What is a Market Rate?
Market rate is the agreement value or the real value at which the transaction is entered into between a buyer and a seller. This is based on the independent demand & supply forces capped by the buyer’s propensity to pay the price. The rate is agreed at the price the buyer is willing to pay and the seller is willing to accept at. In case a locality has lower supply of property with huge demand, naturally the prices will be high. However, reverse case is also possible.
Why is it important to know the circle rate?
The buyer is required to pay the stamp duty and registration charges of the property to be purchased. Since the circle rates are rarely revised, there is huge difference between circle rates and agreement value (real transaction value). In case the circle rate is lower than market value, the Government gets stamp revenue on the actual price of the transaction.
Stamp duty is levied on stamp duty value or the actual transaction price whichever is higher. So, Government ensures that it never loses on its revenue. The real estate buyer is at loss due to higher transaction price even if the actual transaction is lower. Further, it affects the capital gains tax of the seller since higher amount is deemed as sales consideration. Thus, it is essential for a person to know the circle rates before finalizing the deal of a property.
What if circle rates are higher than the market rates?
- In such case, the buyer is required to pay stamp duty and registration charges based on the circle rate (higher than agreement value).
- The value of property in the books of the seller would stay undervalued as compared to stamp records.
- The cost of purchase will increase for the buyer.
- The seller would be charged capital gains tax taking the base of circle rate.
- The seller can appeal the tax official to refer his case to Valuation Officer under section 50C of the Income Tax Act for computation of fair value of the property.
- The buyer can appeal to the sub-registrar requesting the official person to consider market rate instead of circle rate for stamp duty charges. However, this is a real time-consuming process. The buyer may face issue from bankers in case of delay in sales deed registration.
Difference between Circle Rate and Agreement Rate?
It is a general accepted fact that market rates will never be lower than the circle rates. Circle rate is the rate as per municipal records or opinion price of municipal authority. However, market rates (agreement value) are determined by market forces of demand and supply and the final negotiation between the buyer and seller. This price may vary according to the actual circumstance of the case.
It is believed that in case the gap between circle rate and agreement value is reduced, the genuine buyers with legitimate money will enter the market and accounted money increases. It would also reduce the incidence of black money transactions getting populated in the real estate sector.
Amendment by Finance Act 2020
Actual sales consideration (i.e. agreement value) can be lower than the value as per stamp records (i.e. Circle rate). The Stamp duty values of the government records are not updated frequently in line with market fluctuations. This has led to hardships faced by the home buyers leading to reduced growth of the real estate sector. So as to give boast to the sector, the Finance bill 2020 as announced by Finance Minister Nirmala Sitharaman on February 1, 2020, increased the breathing space between stamp duty value and agreement. As per the bill, the actual sales consideration shall be considered as full value of consideration even if the value as per stamp records exceed up to 110% of the actual sales consideration.
Amendment by AtmaNirbhar 3.0
Covid-19 has affected the lives of many around the world. The real estate sector has also received a big hit for reduced transaction and lower momentum. Atmanirbhar Bharat Stimulus is aimed as assisting the residents to revive from the economic slowdown caused due to Covid-19. So as to extend the relief provided by Finance Act 2020 (pre-COVID-19 scenario), the Finance Minister on November 12, 2020 announced a new stimulus package so as to push the demand in the real estate sector. So as to help the real-estate developers to sale-off their long outstanding inventory, the safe harbor is further increased from 10% to 20% for transactions until June 30, 2021.
Real estate sector was facing hardships in last 5 years due to overall business down turn in the economy. The inventory of real estate developers was lying unsold for a long term. The sector was worst affected after Covid-19. Now, the safe harbor is increased to 20%. This means that even if the circle rate is up to 120% of the actual sales consideration, the actual sales consideration would be used for computing the tax on the transactions. This also provides relief to home buyers. However, this relaxation is available only till June 30, 2021. Further, this relaxation applies only for sale of primary residential units which have a value up to Rs. 2 crores. This limiting value will not benefit for flats in major metro cities.
Consequently, the buyers would be benefited from reducing the tax liability under section 56(2)(x) which considers the difference between circle rate and lower agreement value as income of the buyer and considers the tax under the head other Income.
Circle rate relaxation to bring relief to buyers and sellers
- Property prices and its trend in India is not identical and it differs from one location to another, from one city to another and from one state to another. Some of the active State Governments like Delhi, have recently revised the circle rate to bring in line with the market rates.
- Due to reduced transactions in real estate sector pumped by Covid-19 restrictions, the property prices have tumble downed to below circle rates. This was bound to happen due to reduced demand in the country. The demand is reduced due to lower disposal income in the hands of the residents.
- At such reduced prices, the property developers would no where be interested in selling the inventory at lower value and getting taxed at higher circle rates.
- After increasing the safe harbor from 5% to 10% and from 10% to 20%, the buyers and seller are relief. Such relief will increase the demand in the primary sale of residential units. However, no such increased relief is available for commercial units.
- Furthermore, the RBI has reduced the repo rate which has impact on the reduced home loan interest rate for the buyers.
- As an impact after such announcement, the country’s hottest property market, Mumbai has observed 8-year high amounting to 67% increase in property registrations. (Source: Economic Times dated December 09, 2020).
Further as per new letter in Times of India dated December 20, 2020, property registrations in 3-months period from September 2020 to November 2020 has crossed 4-year high. The total registrations recorded are 7,96,617 during the 3-months period. On a single day (December 18, 2020), the state has witnessed 17,308 registrations.
- Let’s consider an example wherein Jayant Builders have inventory to the tune of Rs. 500 crores consisting of 400 flats valued at $ 1.25 crore per flat. Say these flats are residential units and are therefore eligible for the benefit of reduced circle rates. Say, the stamp duty value per property is $ 1.40 crores. The taxable business income of the builder would be as follows:
Particulars After reduction of circle rate Before reduction of circle rate Agreement Value per Property 1,25,00,000 1,25,00,000 Circle Rate per property 1,40,00,000 1,40,00,000 Difference 15,00,000 15,00,000 Difference (% of Agreement Value) 12% 12% Assumed Sales Consideration per property 1,25,00,000 1,40,00,000 Number of Flats 400 400 Total Sales Consideration 5,00,00,00,000 5,60,00,00,000 Business Income increased due to Circle Rate (Rs. 15 lacs * 400 flats) 60,00,00,000
So, the builder would have suffered a tax on additional business of Rs. 60 crores.
- Considering the similar thing from buyer’s perspective, section 56(2)(x) applied wherein inadequate consideration is taxed under the head “other income”. Say the individual comes under tax bracket of 30%, its implications are as follows:
Particulars After reduction of circle rate Before reduction of circle rate Agreement Value per Property 1,25,00,000 1,25,00,000 Circle Rate per property 1,40,00,000 1,40,00,000 Difference 15,00,000 15,00,000 Difference (% of Agreement Value) 12% 12% Treated as Other Income – 15,00,000 Tax Implication @ 30% 4,50,000
- Due to reduced interest rate, the EMI outflow (applicable for home buyer) has also reduced considering the following details:
Particulars After reduction of circle rate Before reduction of circle rate Loan Amount 1,25,00,000 1,25,00,000 Rate of interest 6.5% 6.5% Loan Period(Years) 20 20 Loan Periods(Months) 240 240 EMI ₹93,197 ₹1,16,516
Thus, home loan buyer can now save on at least Rs. 23,000 on reduced EMI outflow per month