Tax liability on properties sold below circle rate relaxed further
2 min read . Updated: 01 Feb 2020, 08:39 PM IST- In some markets value of the property has gone below circle rate
- New provision will come into effect from 1st April 2021
The real estate market is going through a slump. Prices have corrected across most of the markets or have remained stagnated for the past 4-5 years. In some markets the price corrections have been so severe that the market value of the property has gone below the circle rate. Recognizing the problem, the Finance Minister has provided some relief for homebuyers and sellers in Union Budget 2020, by proposing no additional tax liability arising out of a transaction where the differential in the actual transaction value of the property and circle rate is lower than 10 per cent. The new provision will come into effect from April 1st 2021.
Till last year the benefit was available only in case of the properties where the differential between the actual transaction value and circle rate was up to five per cent. These transactions resulted into additional tax liability for both the buyer as well as seller.
As per Section 56 (2)(x) of the act, if the market value of a property is lower than the circle rate, then the difference is taxed as ‘other income’ for the buyer. While the seller of the property will have to pay capital gains tax on the circle rate of the property.
“The proposal to increase the tax relief, in case of difference between the lower market rate and higher circle rate, from 5% to 10% will help the secondary market. This is expected to give some benefit to the secondary transactions in upmarket locations," said Abhilash Pillai, Partner, Cyril Amarchand Mangaldas.
In some of the upmarket locations such as New Friends Colony of Delhi, the market rate is lower than the circle rate.
In case of a property transaction, even if a property is sold at below the circle rate, the stamp duty, registration value and the capital gain would be calculated on the circle rate, and not the actual sale price.
Circle rate is the minimum rate of property that the authorities set for a particular area; the property can be registered at this rate in case of a sale or transfer. Authorities keep revising these rates to align them to the market prices.
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