The Government of India recently announced certain tax-relief measures for the home buyers and the real estate developers. With such a move, the Government hopes to give a push to the real estate demand in the country.
Stamp Duty, Circle Rate, and the Income Tax Problem
The real estate industry is struggling with high unsold inventory. At the same time, the buyers find the real estate unaffordable.
Moreover, when you buy a house, there are many other costs involved in addition to the payment you make to the seller. For instance, you must pay stamp duty for registering your property. And the stamp duty is calculated as a percentage of the circle rate (or transaction value, whichever is higher). Circle rate (Ready reckoner rate) is the minimum rate per square feet fixed by the respective state government.
Now, the stamp duty on real estate transactions is a major source of revenue for the local development authorities and the state government. To increase such revenues, the state government can increase the stamp duty or the circle rates. Clearly, with governments in perennial need for money, there will be upward pressure on circle rates. Moreover, real estate prices are dynamic. Circle rates aren’t as much. It can happen that the circle rates are much higher than the market rates. Hence, even though you may buy the property at a lower price, but you will still have to pay stamp duty on a much higher price.
To provide relief, over the past few months, many state governments reduced the stamp duty rates in their states to boost real estate sales. However, if the circle rates are left untouched (remain high), it poses an income tax problem for both the buyer and the seller.
What Is the Income Tax Problem?
There are two parties to any transaction: the buyer and the seller.
From the Perspective of the Developer (or Any Seller)
Section 43CA specifies the deemed consideration for the sale of property for the purposes of taxation. As per the current provisions, if the circle rate of the property exceeds the consideration received (transaction value) by more than 10%, then the circle rate is deemed the transaction value. Let’s say you buy a residential real estate for Rs 70 lacs. The circle rate for the property is Rs 80 lacs. Stamp duty shall be paid on Rs 80 lacs. Were the circle rate of the property only up to Rs 77 lacs (70 lacs + 10% of 70 lacs), the deemed consideration shall be Rs 70 lacs only. However, since Rs 80 lacs exceeds the transaction value by more than 10% of 70 lacs, Rs 80 lacs shall be considered the consideration received. In a way, for the developer, it is as if it sold the property for Rs 80 lacs. So, the developer received Rs 70 lacs, but the Government taxes it considering it received Rs 80 lacs. A disincentive for the developer to sell far below the circle rates.
From the Perspective of the Buyer
Section 56(2)(x) defines the impact on buyers if they buy the property below circle rates. Continuing with the same example, you bought the property for Rs 70 lacs. Circle rate was Rs 80 lacs. Were the circle rate of the property up to Rs 77 lacs (70 lacs + 10% of 70 lacs), everything is fine. In this case, the circle rate exceeds the transaction value by more than 10%. Hence, this difference of Rs 10 lacs will be added to your income and taxed at applicable slab rate. Huge tax hit, isn’t it?
What Is the New Tax Relief?
The threshold (excess of circle rate over the transaction value) goes up from 10% to 20%. Hence, the circle rate of the property shall be considered the consideration value (for the builder) only if the circle rate exceeds the transaction value by over 20%. Similarly, for the buyer, the excess of circle rate over the transaction won’t be considered your income until the circle rate is more than 20% of the transaction value.
However, there are conditions attached to this relief.
The Eligibility Criteria
- You must buy the property in the primary market. i.e., you must buy the property directly from the developer. Secondary market purchases are not eligible for relief.
- The relief is only for residential real estate. There is no such relief for commercial real estate transactions.
- The transaction must happen between November 12, 2020 and June 30, 2021. After June 30, 2021, the threshold reverts to 10%.
- The value of the property shall not be more than Rs 2 crores.
Continuing with the above example of Rs 70 lacs of transaction value and Rs 80 lacs of stamp duty value, a difference of Rs 10 lacs.
For the builder
Since the circle rate (Rs 80 lacs) does not exceed agreement or transaction value (Rs 70 lacs) by more than 20%, Rs 70 lacs shall be deemed the consideration received (and not Rs 80 lacs). Major tax-savings for the builder. A deterrent for selling below circle rates taken away.
For you (the buyer)
Similarly, for you, since the difference of Rs 10 lacs is less than 20% of the transaction value, this excess won’t be added to your income. A huge tax-relief for you too. Note you will still have to pay stamp duty on the circle rate (Rs 80 lacs). This relief (reduction in circle rates) can only be provided by the state governments. The Central Government can’t do much here.
In my opinion, it is a welcome move for both the buyers and sellers (developers). While the developers may have other disincentives to not reduce the prices, this relief coupled with the prevailing low interest rates and the stamp duty cuts may be a shot in the arm for the real estate industry.
Ministry of Finance: Press Release