Union Budget 2018: Circle rate announcement to boost real estate transaction

In order to minimise hardship in real estate transaction, Finance Minister Arun Jaitley has proposed that no adjustment shall be made in a case where the circle rate value does not exceed 5 percent of the consideration.

While presenting the Union 2018-19 Jaitley said, “Currently, while taxing income from capital gains, business profits and other sources in respect of transactions in immovable property, the consideration or circle rate value, whichever is higher, is adopted and the difference is counted as income both in the hands of the purchaser and seller. Sometimes, this variation can occur in respect of different properties in the same area because of a variety of factors including shape of the plot and location.”

Experts believe that the announcement on circle rate would reduce hardship to sellers as they would not be compelled to pay higher capital gains tax if the difference is within 5 percent of circle rates.

Talking to Zee Media, Sunil Tyagi, real estate expert and senior partner at ZEUS Law said that FM Jaitley has tried to address the problem faced by the buyers and sellers regarding additional tax payable by them, where the circle rates of immovable property were more than the market rates.

“However, the issue of payment of stamp duty might still continue, since it is a state subject, and till state governments allow any relief, stamp duty will be levied on the circle rate value or the sale value, which ever is higher,” he added.

At present for calculating capital gain tax and stamp duty in respect of immovable property transactions, the sale value or circle rate value, whichever is higher, is taken into consideration.

Where the sale value is less than the circle rate value, the resultant difference between the two rates was counted as income in hands of both buyers and sellers and accordingly taxed in both their hands. Further, stamp duty is also levied on the circle rate value even if the sale value is less.

Jaitley's announcement implies that even in cases where sale value of the property is below the circle rate value, but the difference is not more than 5 percent, then capital gain tax would be calculated on the basis of the sale value (after taking into consideration indexation etc.), Tyagi said.

Here's a comparison between pre-Budget and post-Budget scenario and how it impacts realty sales

For example: ‘A’ (Seller) sells his property to ‘B’ (Buyer) for a value of Rs 60 lakh, but the circle rate value of the property is Rs 63 lakh.

What was the scenario pre-Budget?

Even though the sale value is Rs 3 lakh less than the circle rate value

(a) stamp duty would be calculated on Rs 63 lakhs

(b) the difference of Rs 3 lakhs would be added as income in the hands of A and capital gain tax will be calculated on Rs 63 lakhs and Rs 3 lakh would also be added as income from other sources in the hands of B and accordingly taxed.

Post Budget Scenario

After relief allowed in the 2018 Budget, in the above case though stamp duty would be calculated on Rs 63 lakhs, but the difference of Rs.3 Lakhs would not be added as income in the hands of A and B. For calculation of capital gain tax, value of Rs 60 lakh would be taken into consideration.