Personal Finance

Buy home below circle rate without tax burden

Anand Kalyanaraman | Updated on November 22, 2020 Published on November 22, 2020

Here’s how the recent increase in threshold for tax concession will help

On November 12, the Finance Minister announced some income-tax relief for home developers and buyers. The differential between the circle rate and the agreement value – to sidestep tax under Section 43CA and Section 56(2)(x) of the Income -Tax Act – was increased from 10 per cent to 20 per cent. The benefit of this increased differential is available for primary sale of residential units of value up to ₹2 crore from November 12, 2020 to June 30, 2021.

What and how?

In general, the government frowns upon property transactions happening at rates below the circle rates (stamp duty value) fixed by it because this could be a way to evade income taxes.

So, it taxes the differential amount, in the hands of both the developer who sells the property at below the circle rate and the buyer who purchases it. Say, the circle rate of a property is ₹100 while the property transaction happens at ₹70. Here, ₹30 will be taxed in the hands of the developer as business income under Section 43CA, and ₹30 will also be taxed in the hands of the property buyer as income from other sources under Section 56(2)(x).

Now, over the years, the government has provided some concessions on this tax – acknowledging that sometimes property transactions do happen below circle rates due to fall in market rates or delay in reducing circle rates. So, in Budget 2018, a safe harbour threshold of 5 per cent was given. That is, if the transaction value was, say ₹100, while the circle rate was up to ₹105, tax would not be applied on the difference.

Then, in Budget 2020, the threshold was increased to 10 per cent. This has now been increased further to 20 per cent. So, if the transaction value is ₹100 while the circle rate is up to ₹120, tax would not be applied on the difference as it is within the 20 per cent of the transaction value.

Here’s another example, if the circle rate of a house is ₹50 lakh and a developer sells it to a buyer at ₹ 40 lakh, the safe harbour threshold of 20 per cent will not be available, as the difference (₹10 lakh) is 25 per cent of the transaction value (₹ 40 lakh). In this case, both the developer and buyer will have to pay tax on the difference of ₹10 lakh.

Had the transaction value been ₹42 lakh and the circle rate ₹50 lakh, the safe harbour threshold of 20 per cent would have been available since the difference (₹8 lakh) – 19 per cent – is within the limit of 20 per cent of transaction value (₹42 lakh). In this case, both the developer and the buyer will not have to pay tax on the difference of ₹8 lakh.

The economic slowdown has pulled down property prices. The increase in threshold from 10 per cent to 20 per cent eases a tax disincentive that could have prevented transactions at market rates much lower than circle rates.

Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, says, “With the increase in circle rate in a few States such as Maharashtra despite zero or negative movement in the market rates, it was challenging for the developers to sell the properties below the circle rates as income-tax rules tax such transactions both in the hands of the buyers and the developers. The threshold increase relief will provide a breather to developers and buyers for the time being.”

If and buts

Note that the increase in differential threshold is only for some property transactions. One, it is only on sale of residential units. It is not available on sale of commercial property or land. Two, it is only on primary sale – that is, from a developer to a buyer. It is not available on re-sale of houses. Three, it is only on sale of houses with value up to ₹2 crore. Four, it is a limited period offer – up to June 30, 2021. After this date, it’s back to the original threshold of 10 per cent.

For the others – sellers and buyers of land, commercial property, costly homes, resale homes, etc –the threshold of 10 per cent continues.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on November 22, 2020
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.