Circle Rate and Market Rate: Everything you Need to Know

As an investor or a first-time homeowner, real estate can turn out to be a great investment that offers you many tax breaks. ‘Circle rate’ and ‘market rate’ are two such terms that you may have heard your broker use from time to time. Circle rate is a very important term that you must understand as a property buyer. It is a major norm used to assess the value of a property that is revised periodically and varies for each area.

Circle rate is the minimum price at which a commercial property, ready house, apartment, or plot can be registered for sale. There can be different circle rates in varying localities of the same city. The circle rate works effectively towards keeping a check on the speculation that surrounds property prices.

Here are some important points about the Circle Rate:

• The minimum rate or price is decided by the local development authorities or the state government

• The primary purpose of deciding on a circle rate is to ensure that every area is listed against the correct price index

• A circle rate is indicative of the property price

• It is typically lower than the market rate

• It is always higher than the real estate transaction rate

The market rate is the rate that the buyer pays to the seller at the time of obtaining property ownership. This price is the final rate decided mutually between the two parties, i.e the buyer and the seller.

For the purpose of giving an example, let us say that Rajiv is looking to sell his home in a prime location in Mumbai. He will consider the high demand for the location, easy proximity to places around the city, and other such factors when putting a price value against his home. When a buyer has the propensity to pay against Rajiv’s expectations, a sale takes place. The rate that is put down on the sale agreement document and exchanged between the two parties is the ‘market rate’.

Here are some important points about the Market Rate:

• Market rate is directly proportional to the demand and supply in the area.

• It is based on the price expectation of the seller.

• Buyers use it as a directive when reviewing their purchasing capability.

• Market rate indicates the degree of appreciation of real estate value in an area.

Circle rate is lower than the market rate in most instances, and the two have a limited impact on each other. When the circle rate and the market rate vary greatly, it is an evident lag in the value perception within the real estate market. This variance is also one of the major causes of black money transactions within the market.

It is essential to stay updated on the circle rate and market rate when dealing with real estate. Knowing these two rates before finalising a property can reduce a lot of financial hassles. It will help determine your buying capability while also indicating the degree of appreciation for the location. Most importantly, it is also quite helpful for acquiring a home loan. A house loan is offered based on the sales deed. A smaller gap between the circle rate and the market rate will be beneficial to the buyer.

The following example will help you understand how stamp duty is calculated on the circle rate:

Let us suppose that a certain Arshi Mehta purchases a flat in one of the Haryana Urban Development Authority (HUDA) sectors, where people are charged a total of ₹5,100 per square feet as circle rate. The house in question has a carpet area of 1,200 square feet so she will be charged a total of ₹61.2 Lakhs. Keep in mind that the Haryana government will charge 5% by way of stamp duty. This means that the total payable stamp duty will amount to a total of ₹3.06 Lakhs. Additionally, she must pay ₹15,000 as registration charges, since the property’s market value is above ₹25 Lakhs. This means that Arshi will have to pay a total of ₹64.41 Lakhs while registering the purchased property.

• As per Section 56 (2)(x) of the Income Tax Act, 1961, the difference in question will be taxed as ‘other income’ for the buyer in the event of the property’s market rate being lower than the circle rate value. The seller will also need to pay a certain amount as capital gains tax on the property’s circle rate.

• In the middle of a five-year-long slump period in the real estate market, the Centre decided to offer additional support to buyers and sellers alike. They did so by declaring that no additional tax liability will arise if the difference between the circle rate and the market value of the property is less than 10%. The new provisions came into effect on April 1, 2021.

• In order to provide homebuyers as well as the ailing Indian economy a boost in the aftermath of the coronavirus pandemic, Union Finance Minister Nirmala Sitharaman announced a new stimulus package under the Atma Nirbhar Bharat 3.0 Abhiyaan on November 12, 2020. As part of the package, the Centre has decided to widen the differential rate between the agreement value as well as the circle rate to 20%, up from 10% under the previous norms. The same was applicable till June 30, 2021, solely on the primary sale of residential units that have a price tag of over ₹2 Crores.

• Before you start negotiating the seller-quoted price, it would be prudent of you to find out the circle rates and the property’s market rate as well. It is advised that one must keep the transaction cost as close to the circle rate as possible.

• While a scenario like this one may not arise often, under-reporting of a property’s value could basically mean that you might be inviting legal trouble. Hence, you must register the property for the actual amount that you pay for it. Additionally, it would be best if you do not engage with sellers who are looking to make money which cannot be explained through the deal.

• It must be noted that the banks will only fund a part of the registration value. You would be asked to reveal the true nature of the transaction if a bank is involved.

• Market rates indicate a property’s potential and the kind of area that it is located in. Hence, before selecting a property or even writing if off, it is very important for you to study the local market trend.

• In certain areas, the market rates might just be lower than the circle rates. If you were to buy a property in a posh locality, for example, you would have to pay the stamp duty and registration charges on the basis of the circle rate and not the actual price.