Higher relief for real estate buyers if circle price exceeds sale price

The Budget offered relief to buyers and sellers in situations where the consideration value (the declared price for a real estate transaction) is less than the circle rate.

Earlier, if the consideration value was less than the circle value by more than 5 per cent, the difference was taxed in the hands of both the buyer and seller. Now, it will be taxed if the difference exceeds 10 per cent. Circle rate is the minimum rate at which a real estate transaction can be registered. This rate is set by the state government's revenue department.  

Real estate markets in various parts of the country have been correcting or have been stagnant for several years. And in areas where the government believes that a large part of the transaction happens in cash, it increases the circle rate, the idea being to prevent tax avoidance.  The government also hikes the circle rate periodically to enhance its revenue. As a result of these trends, in many parts of the country the circle rate has become higher than the market rate. “Increasing the concession from 5 per cent to 10 per cent is a relief for buyers and sellers. More transactions will now escape being taxed,” says Gagan Randev, national director-capital markets and investment services, Colliers International.  

Let us try to understand the implications with an example. Suppose that a sale takes place in an area at Rs 100. Earlier, the buyer and seller were protected if the circle price was Rs 105. Now the protection has been enhanced up to Rs 110. But if the circle price is, say, Rs 150, then this provision is not of any use and those engaged in the transaction will have to pay tax on the circle rate. “The buyer will be taxed on the difference at the marginal income tax rate and the seller will pay capital gains tax,” says Lokesh Shah, Partner, L&L Partners.  

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