Priyanka Sambhav
The sales in the real estate market have begun but not picked up. A large chunk of unsold flats remains to be unsold as buyers are maintaining social distancing from new purchases. To push the demand in the real-estate sector and to enable the real-estate developers to liquidate their unsold inventory, the government announced tax relief for residential units valued up to Rs 2 crore.
What’s the move?
The government will spare the home buyers, and builders from the additional tax on purchase and sale of property lower than the government prescribed circle rate. The price difference between the circle rate and the agreement value of the house can have a bigger margin now. Property sold at a price up to 20% lower than the circle rate will not attract additional tax liability. Earlier if the developer sold the property wherein the difference between agreement value and circle rate crossed the threshold of 10%, both the buyer and the seller were taxed. The government has doubled the differential and made it 20%. So now the property sold below 20% of the circle rate will not face increased tax liability. But the price of the property should not be more than Rs 2 Crore, and this is available only till 30 June 2021.
How will this impact the buyer?
If the buyer purchased a house at a rate lower than the government fixed circle rate, the buyer had to pay registration and stamp duty on the circle rate. And as per section 56(2)(x) of the Income Tax Act had to pay tax as income from other sources on the price difference. This was to be paid till now if the difference between the circle rate and sale rate was more than 10%. But now this limit has been extended from 10% to 20%.
Let’s understand this with an example- if the value of a property is Rs 80 lakh and the circle rate of the said property is Rs 1 crore. The difference between the sale consideration and actual price is 25%(the price difference (20lakh)divided by sale price (80lakh) multiplied by 100) i.e., more than 20% therefore, it will be treated as income from other sources and taxed. In case the value of a property is Rs 85 lakh, and circle rate remains to be Rs 1 crore the difference will be less than 20% and therefore will be eligible for tax relief and will not be added to income from other sources. As per the earlier provision, the buyer would have ended up paying stamp duty, and registration charges on the value of Rs 1 crore and the differential value,i.e Rs 15 lakh would have been considered as buyer’s ‘ other income’ and taxed as per the slab rate. But now he/she gets relief on this front.
How will developers benefit?
With the government permitting sales at a rate 20% lower than the circle rate means that developers can sell the property without the liability of Section 43CA of Income-tax Act. When a developer sold a property less than the fixed circle rate of that corresponding area the actual transaction cost was considered for taxation if the price difference crossed 10%. So in case, the actual sale price is Rs 85 Lakh, and the circle rate happens to be Rs 1 crore, even though the developer sold the property at a rate lower than the circle rate the state authorities considered a higher circle rate for all the taxation purposes.
Is it a win-win situation for both buyer & developer?
Experts feel that this government sop will usher a partial benefit. Pankaj Kapoor, founder and Managing Director of Liases Foras says- “The relaxation provided under section 43 CA of IT act by increasing the differential threshold from 10% to 20% in circle rates and agreement value may help in some regions where the circle rates were higher than the prevailing market rate, which according to our study is not too many. In most regions, the circle rates have been lower than the prevailing market rate. However, this provision provides a scope to the developers to reduce prices. We also feel this may also open up the scope of absorbing some black money in real estate.” According to Liases Foras latest report, there are 9.32 lakh unsold units across the top 8 cities, and almost 94% of that is in the less than Rs 2 crore segment.
Developers feel this is a move in the right direction but too little. According to Pankaj Bajaj, President, CREDAI-NCR “This will have only a limited impact on the demand situation. The Rs 2 crore limit largely removes the Mumbai and Delhi markets from the ambit of this relief. Even in other markets, developers have been asking for the removal of this section of the Income Tax Act in entirety, especially as local authorities have an inbuilt incentive to keep circle rates high as Stamp Duty is assessed on circle rates. In many markets and projects, developers want to do distress sales to raise funding for their projects but are prevented because of this presumption of involvement of black money in case the transaction value is less than circle rate.”
With this move now, developers will be more comfortable to sell property lower than the circle rate so expect a dip in prices in selected markets. This could be a good time for property hunting if your pocket allows you as the concession in circle rate and dip in interest rate can give you a good bargain in the real estate market.
