Circle Rate and Black Money in Real Estate

It would help if you considered the Circle Rate/DLC rate (District-Level Committee Rate) when buying a property (plot, house/flat/shop). These rates are important to know.

Market Rate

 the seller and buyer of the property decide upon the sale price. This rate depends on the supply and demand for the property. The higher the demand, the more exorbitant the property price will be. Conversely, the lower the demand for the property will result in a lower price. The market rate is high when there is more demand than supply. It also depends on the area’s infrastructure, such as developing markets, schools, hospitals, security, and other facilities.

Circle Rate/ DLC rate

The minimum rate at which a property may be purchased or sold is known as the circle rate. All state governments set it. The circle rates keep property speculation at bay. There are circle rates that vary within a state for different cities. The circle rates that vary within a city depend on the location. The Revenue Department of State Government or Local Development Authority determines the circle rate. Circle rates for agricultural land, commercial property, and residential properties are different.

The Circle Rate can change from time to time. It is useful as the reference rate.

Its primary purpose is to determine stamp duty at the time of registration.

Market rates in India are usually higher than the circle rates. This is because of the following:

1. The market rate, dependent on supply and demand, is not subject to regular review.

2. The control over the circle rate lies with local development authorities or state governments.

3. The circle rate does not reflect the actual price of the property, as it is only applicable to stamp duty consideration. You will have to pay stamp duties according to the circle rate.

Stamp Duty

The stamp duty applied for sale transactions for registration at the office of Sub-Registrar is calculated on a value other than the one mentioned in the sale deed. It could be much higher than the price the seller and buyer agreed to. Although it may sound absurd, this is true.

This is because stamp duty is calculated based on the actual purchase consideration or the higher circle rate. It would help if you inquired at the office of the Sub-Registrar in advance about the current Circle rate/DLC rate of any property you are considering buying.

There are many Sub Registrar offices in India. Each maintains a chart of the circle rate that is prevalent in their area. The chart of circle rates identifies the minimum rate that will be taken into consideration by the Sub-Registrar to charge stamp duty on the property.

Even if the purchase price is less than the circle rates, stamp duty will be due according to the circle rate valuation. According to the Sub Registrar’s Office, the Circle Rate chart contains information about the fair value of the property in both urban and rural areas. The Circle Rate chart includes the valuation system for vacant land and the built portion of the building or flat.

Stamp duty is dependent on the area’s circle rate.

 The Sub Registrar will assess the property based on the facts and conditions. The Sub Registrar may ask the seller or buyer to submit a valuation from an architect to allow a fair assessment of the transferred property.

Section 50C of Income-tax Act 1961 provides that the property seller must disclose the property’s sale price. This is the price determined by the stamp valuation authority to determine the amount of stamp duty due on the transfer of property. If the circle rate is greater than the price in consideration, this is the case. The Circle Rate substitutes for the actual sale consideration in such cases, so the property seller must also pay tax on capital gains.

Example

Let’s take one example. Mr Ravi owned residential home. He sold his property for 100,000 to Mr Mohan and drafted a sale agreement for 50 lakh. A further amount of 50 lakh was received in cash. This is discrete.

The sub-registrar officer discovered that the agreement was lower than the circle rate (Rs 60 Lakh), and he assessed stamp duty at 60 lakh instead. In addition, Section 50C stipulates that Mr Ravi was required to calculate capital gain by taking into account 60 lakh instead of 50 lakh. Capital gains resulted in a higher income tax liability.

Some property buyers are clever enough to purchase property using Power of Attorney and an Agreement to Sell not to come under the scanner.  However, most banks and NBFCs don’t offer loans to buy a property using Power of Attorney.

It is better to purchase the property by having it registered with the Sub Registrar Office and paying stamp duty fees based on the actual purchase price or the prevailing circle rate. Finance (No. Section 50C of the Finance (No. 2) Act of 2009 would apply to Power of Attorney and Agreement to Sale Transactions.

Reserve Price

A local development authority determines the minimum property rate at which an auction can begin to sell government plots. This is known as the reserve price.

Black Money in Real Estate

Who is responsible? Lower Circle Rate

Payment of Stamp duty is  buyers responsibility when purchasing the property. The property is not attractive to investors if the difference between its market rate and the circle rate is lower. Only real buyers will show interest in buying the property for residential use.

A lower circle rate allows the corrupt to turn black money into white money. The government can increase the circle rate to match market rates, resulting in more revenue from capital gains and stamp duty.

The actual property rates per square meter are often higher than the benchmark circles rates in the real world. This is how black money moves between property buyers and sellers. Property sellers and buyers will often show lower values to their properties to avoid paying the stamp duty and registration fee required by the government.