Buying real estate is a life-altering decision. Hence, whether you plan to buy your dream home or a dream office, there are a few things that you need to pay attention to. One of them is the circle rate, which is important to maintain transparency and stabilise your real estate buying process.
But what is the circle rate in property, and why should you consider it? Let us find out.
What is circle rate?
The circle rate, also known as the reckoner rate or the guidance value, is the minimum price at which a real estate property can be sold to a buyer. The circle rate is subject to change from time to time, depending on factors like location and market trends. The state government makes the decision on the circle rate and differs for each state in India.
State governments use the circle rate to determine the stamp duty and registration fees of a property, which are usually a percentage of the transaction price. You, as a buyer can use the circle rate to determine the affordability of the property.
What factors affect the circle rate of a real-estate property?
- Location plays a major role because the economic value of a metropolitan area would be considerably higher than that of an area still at a developing stage.
- Property ownership affects the circle rate because a property owned by a real estate developer is more expensive than a government-owned property.
- As the area of the property gets bigger, so does the circle rate of the property.
- Amenities that a locality provides are crucial since they provide convenience to buyers.
- Commercial properties call for a higher circle rate than residential properties due to their high potential returns.
- The real estate market sees its swings from time to time, which also affects the circle rate.
What is the difference between the circle and market rates in real-estate property?
The market rate is the real transaction value of a property determined by the real estate market, unlike the circle rate, meaning the market rate usually tends to be much higher. Market rates are also more volatile compared to circle rates due to fluctuations in demand, economic conditions, and sales in the real estate market.
It is essential to check both market and circle rates before buying a property because the final price of the property is directly affected by the market rate. In contrast, circle rates only affect your registration and stamp duty charges.
What is the importance of circle rates for homebuyers?
Homebuyers need to know what is the circle rate of a property since they provide you with transparency about taxation and registration. Although there is a minimum price for properties, there isn’t an upper limit to what the actual buying price can be, making real estate in India an expensive business.
You should use circle rates to avoid undervaluation and go for properties with a more negligible difference between their circle rate and market rates. This also helps you plan better for home loans.
How does the government calculate stamp duty based on the circle rate?
Stamp duty is a tax you need to pay while buying ownership of a property in India. Let us understand how the government calculates stamp duty with an example:
Suppose you want to buy a home in Maharashtra, where the stamp duty is 5% currently.
Now, if the circle rate of the residential property is Rs 60 lakh, your stamp duty charges round up to Rs. 300,000.
However, if your buying price comes down to Rs 50 lakh, you still have to pay stamp duty charges of Rs 300,000 according to the property's minimum value.
What happens when circle rates are higher than market rates?
On rare occasions, the circle rate is higher than the market rate, which affects your taxes. The Income Tax Department may tax the gap between the circle and market rates as 'other income.' This means you need to pay tax on this difference according to Section 56(2)(x) of the Income Tax Act.
If the gap between the circle rate and the actual selling price of a property surpasses 10% of the circle rate, both the buyer and the seller are required to pay taxes based on the circle rate.
Also Read: What is a Home Loan: Benefits, types & meaning
FAQ
What is the difference between the circle and market rates in real-estate property?
The circle rate is the minimum property price determined by the state government, while the market rate is the actual transaction price determined by the real estate market.
What happens if the market value is less than the circle rate?
If the circle rate is higher, you are taxed for the difference according to Section 56(2)(x) of the Income Tax Act.
How do you calculate the property value based on the circle rate?
Use this formula to calculate your property value: Property value = total area × circle rate.
What is the circle rate of property?
The circle rate is the minimum price of a property, which is decided by the state governments and is used to calculate stamp duty, registration charges, and taxation purposes.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
