How this will benefit homebuyers
Abhishek Soni, CEO & founder, Tax2win.in, an ITR filing website explains this with an example. Suppose you buy a house from a developer for Rs 50 lakh. However, the value of the house as per circle rate is Rs 60 lakh. Under income tax laws, if the difference between the actual sale consideration and the circle rate value exceeds 10 per cent, then the seller of the house i.e. the developer will be required to consider the sale at Rs 60 lakh to calculate the profit as per the income tax law.
Further, the house buyer will be required to show the difference i.e. the gain of Rs 10 lakh as ‘Income from other sources’ and pay the tax accordingly. In the above example, the difference between actual sale consideration and circle rate value is 20 per cent (10 lakh divided by 50 lakh X 100). With the new announcement, the difference i.e. Rs 10 lakh will not be considered as income in the home buyer’s hand as the difference is up to 20% only.
Essentially, the home buyer is considered to have got a notional discount or benefit worth Rs 10 lakh which should therefore be shown as ‘income from other sources’.
Hemal Mehta, Partner, Deloitte India says, “It’s a welcome move by Govt giving stimulus to the Developers across India by extending the limit from 10 to 20 percent between the actual sale price and the stamp duty value – this gives a protection to both buyer and seller in the primary sale from the deemed tax which both were liable to pay if the transaction price was lower – due to the market situation developer across the country were forced to sale their residential units at a lower price. This benefit is only given to residential property and not commercial or retail.”
What is circle rate?
A circle rate is the minimum rate per square feet for land or property fixed by the government. The rate varies from circle to circle or area-wise. This circle rate is used for the purpose of calculation of income tax payable on capital gains related to the sale/purchase of houses as per specified rules to ensure that the taxes are not being evaded by declaring lower prices.
However, in case the actual transaction (sale/purchase) has taken place at a price lower than the circle rate then a difference of up to 10% is accepted/allowed under section 43CA of the Income Tax Act. Essentially, this allows the buyers/sellers to pay less tax to the extent that the price of the house is accepted as being below the circle rate. Remember buyers are required to pay stamp duty at the time of registration as well.
The government has now said that prices of such houses will be allowed to be accepted for tax purposes up to 20% below the circle rate up to June 30, 2021. The consequential tax relief will also be allowed to buyers of such houses under section 56(2)(x) of the Act, the finance minister said today.
Last date to avail the benefit
Soni says, “Remember, the government in Budget 2020 announced in February 2020 has hiked this difference to 10 per cent to provide relief to the developers and the home buyers. Thus, once the scheme period expires on June 30, 2021, the differential will be back to 10 per cent from July 1, 2021.”