The new Union Budget is set to reduce sellers and buyers’ agony over the gap between market rate and circle rate. This article examines its impact on the realty in big cities.
The Union Budget 2018-2019 was announced recently, and amidst all the major announcements, one stood out for Indian realty: properties could now be valued at 5% below circle rates for computing stamp duty and capital gains tax. You could use this tax relief when buying a flat in Mumbai or another Indian city.
What is the circle rate and market rate?
Before we discuss how this announcement affects your decision to buy property in Mumbai, let’s understand what ‘circle rate’ is.
The circle rateis the minimum price value that the State Government sets for the sale or transfer of a property, land or commercial space. The circle rate also determines how much stamp duty you will pay on the sale when you register the sale transaction. Naturally, the higher the circle rate, the higher will be the stamp duty payable on the transaction by both parties (buyer and seller).
However, very few transactions actually take place basis the circle rate. In fact, most transactions are decided on the basis of ‘market rates’. The market rateis a fluid concept, and it is determined by the average square foot price of the last highest sale in a locality.
How does the gap between the two affect buyers and sellers?
There are two ways in which a gap between the circle rate and the market rate affect both buyers and sellers.
The first factor is, a stagnation in realty prices. When there is a slump in the realty market, prices tend to spiral downwards – to the extent that a property in Mumbai may be sold at a price lower than that of the circle rate. However, even if you buy a flat in Mumbai for, say Rs 50 lakh when the circle rate is Rs 55 lakh, you will still pay stamp duty on the circle rate and not on the market rate. The wider the gap, the more capital gains tax you end up paying.
The second factor is a buoyant realty market. In this case, your sale agreement would state the circle rate as the transaction rate for a flat for sale in Mumbai. But the actual transaction might be much higher. In this case, the difference is normally paid for in cash, which you need not show in the sale agreement. This gap does not affect both parties significantly, since they are paying the stamp duty on the circle rate anyway.
This is why the Budget’s 5% variation matters
Current Income Tax laws dictate that the difference between transaction value and circle rate is taxed. With the budget administering only a 5% variation between the two, it will be a big tax relief for both buyers and sellers. But there are two points to note in this context:
- The proposed amendment is to take effect from April 1, 2019, and the assessment will be applicable in the FY 2019-2020. So if you buy a flat in Mumbai this year, these amendments do not apply to you.
- There will be no adjustment if the variation between stamp duty value and sale consideration exceeds 5% of the sale consideration.
Keywords: Flats for sale in Mumbai, Property in Mumbai, Buy flat in Mumbai