How are property market rates different from circle rates?

Your life goal of owning your dream home can be achieved by securing a home loan with attractive interest rates, such as those offered by IDFC FIRST Bank. To master the art of the home loan process, it's crucial to acquaint yourself with two essential terms – circle rate and market rate.

Taking the time to understand these terms and their implications as a homebuyer can be the key to turning your dream home from a distant aspiration into a tangible reality.

What is the circle rate of a real-estate property?

The circle rate and the market rate play a significant role in determining a property's value in real estate. In order to transfer ownership of a property from one individual to another, the circle rate is an important figure. State governments of India determine this rate based on where the property is located within the state and city.

As time progresses, circle rates may change, reflecting the evolving landscape of cities and neighbourhoods. For instance, a property situated in a well-established locality of a metropolitan city will naturally have a higher circle rate than one in an upcoming area.

It's worth noting that the term "circle rate" varies across states. In Karnataka, it's called the "guideline value," while in Haryana, Punjab, and Uttar Pradesh, it's known as the "district collector rate." In Maharashtra, the term used is the "ready reckoner rate."

How is a property’s circle rate different from its market rate?

Typically, a property's circle rate is indeed lower than its market rate. In contrast to the circle rate, the market rate is not determined by government. Instead, the property's seller establishes the market rate, drawing on their price expectations and market conditions.

Buyers, in turn, can assess their capacity to acquire a property by considering its market rate. This allows them to make informed decisions, gauge the property's worth, and negotiate with the seller to reach a mutually agreeable price.

Can a property’s circle rate be higher than its market rate?

Although such instances are rare, a property's circle rate can also be higher than its market rate. This difference affects the buyer's taxes.

• In such a case, the Income Tax department taxes the difference between the circle rate and the market rate by calling it ‘other income.’ The buyer must pay this tax under Section 56 (2)(x) of the Income Tax Act.

• In a step that benefited buyers and sellers, the Government declared in April 2021 that no additional tax will be levied on buyers if the difference between the circle rate and market rate is less than 10%.

• Taking this further, for a brief period following the coronavirus pandemic, the Government of India took steps to help homeowners afford buying new houses. Under the Atmanirbhar Bharat 3.0 Abhiyaan, the Indian Finance Minister Nirmala Sitharaman unveiled a new stimulus package on 12th November 2020. The Centre raised the difference rate between the circle rate and market rate from 10% to 20%, up from 10% under prior regulations. This rule was in effect until June 2021.

As mentioned earlier in this article, the circle rate of a property is generally lower than its market rate. The two do not affect each other.

How do governments calculate stamp duty based on the circle rate?

Let's explore the calculation of stamp duty based on the circle rate through an example. Stamp duty is a tax levied by the State Government on legal property transactions between buyers and sellers. It serves as evidence of the sale or purchase of a property involving two or more parties.

Imagine Mr. ABC purchasing a real estate property in one of the Haryana Urban Development Authority sectors. The circle rate in this area is ₹5,100 per square foot. With a carpet area of 1,200 square feet, the property's market rate would be around ₹61.2 lakhs.

The Haryana government charges a 5% stamp duty, equaling ₹3.06 lakhs. Additionally, since the market value surpasses the ₹25 lakh limit, Mr. ABC must pay ₹15,000 as registration charges. Thus, to register the purchased property, Mr. ABC must pay a total of ₹64.41 lakhs.

Points to note about market and circle rate

• The circle rate, determined by the State government, is the minimum rate for a property. The market rate, however, is the price decided by the seller.

• The circle rate is generally lower than the market rate.

• The market rate of a property indicates the degree of appreciation of real estate value in an area.

• The circle rate is always higher than the real estate transaction rate.

It is important to understand the circle rate and market rate of a property as a buyer. With this knowledge, you can better assess your affordability, gain a better understanding of your taxes and plan your home loan repayment strategy. It is easier to negotiate a better price and purchase a property when you are aware of these rates.

Disclaimer

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