Understanding the role of circle rates

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sCircle Rates
Introduction

Circle Rates: With an aim to bring down the incidence of unaccounted money in property transactions, Delhi government’s Revenue Department increased the circle rates across all categories of colonies in the city by 20% on 22 September. There are eight such categories, A to H, based on the price per sq. metre, with A being the most expensive category. The increased rates have come into effect since 23 September.

Even though almost all major real estate markets across the country are at a standstill, it’s a good time for the government to reduce the gap between property rates set by government agencies and the actual market value at which transactions take place. Experts believe that the increase in Delhi is at par with the market requirement.

What is circle rate?

It is the minimum price at which a property has to be registered in case of its transfer. The rates are determined by state governments and are revised from time to time according to market dynamics. In fact, circle rates differ within cities in the same state, and among various localities of a city. These rates are an indicator of likely prices of properties in various areas. A property has to be registered either on the actual transaction value or the minimum rate set by the government. Whichever is higher. In rare cases, where the actual price paid by a buyer is less than the circle rate, the property has to be registered based on the circle rate.

What is its impact?

State governments collects stamp duty and registration charges on the value or the circle rate, whichever is higher, on the property for purchase. For instance, in New Delhi, a woman has to pay 4% stamp duty, while a man has to pay 6%. 

Besides stamp duty, typically 1% of the value of the property is charged as registration fee (to register the property document or sale deed). However, since the market rates of properties in India are usually higher than the circle rates defined by authorities, transactions are under-valued to save on these charges. Doing so also helps the seller hide her actual capital gains, and thus save on capital gains tax.

Increasing circle rates

There are, however, repercussions to such actions. The government loses out on revenue collection, and under-reporting paves the way for using black money. Increasing circle rates to bring them closer to market rates is one way of resolving both these issues. A hike in circle rates may be bad news for those who plan to use black money to purchase property as it reduces the scope to use illegal funds. Also, those who plan to save on stamp duty will have to cough up higher amounts. 

Reduction in the gap

“Reduction in the gap between circle and market rates means that the region becomes less attractive for those who are seeking to offload unaccounted-for funds, and more attractive for genuine buyers,” said Anuj Puri, chairman and country head, Jones Lang LaSalle India. But, typically in bullish market conditions, sellers usually increase the asking rates proportionally, which does not bode well for genuine buyers. 

Conclusion

This makes houses even more expensive to buy. However, given the present market condition, where sellers are finding it difficult to find buyers at current price levels. It would be difficult to pass on this increase in circle rate to buyers. Some experts believe that a common increase in circle rate across all areas in a city, as has happened in Delhi, is not relevant. “A significant gap already existed between circle rates and property prices in Delhi’s realty market. It is important to reduce this gap. 
Source: Live Mint

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