In an unexpected move, the Maharashtra government has increased the ready reckoner rates by an average of 1.74 per cent across the state, from September 12, 2020. The decision to increase the ready reckoner rates came just a couple of weeks after the announcement from the state government of temporarily reducing stamp duty on registration of housing units by 3 per cent points until December 31, 2020 and by 2 per cent points for the period from January 1, 2021 to March 31, 2021.
Both the supply and the demand side of stakeholders are unhappy with the move. Developers say it will adversely affect the real estate sector, which is already struggling. But what is a ready reckoner rate, why did the Maharashtra government increase this rate and how does it impact you?
What is the ready reckoner rate?
The ready reckoner rate, which is also known as the “circle rate” or “guidance value” in other parts of the country is the minimum rate fixed on per square feet or per square meter of a property by the state government. Even if you sell a house below this rate – because the person is your relative or some close acquaintance – the buyer still has to pay stamp duty and all other administration charges as per the ready reckoner rate. You cannot sell a house at a rate below this rate, at least on the paper. The ready reckoner rate is deemed to be the minimal market rate. But if you sell your house at a rate higher than the ready reckoner rate, then the buyer’s stamp duty and other charges get linked to that rate.
These rates differ based on various factors: whether it’s a residential or commercial property or agricultural land, does it fall in urban area or rural zone, location and so on. The state government revises the rates based on the movement in market rates so that the scope of using illicit money in real estate transactions is reduced and also that the government is able to collect appropriate stamp duty. “Circle rate is required to be monitored and kept at par with market rate on a timely basis for the benefit of all stakeholders. Too low a circle rate and that would impair the pockets of local authorities and the state government. Too high a circle rate would be detrimental to the interest of buyers and sellers in the industry,” says Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP.
What if market rates are higher than circle rates?
Market rates are typically higher than the circle rates across India and Maharashtra is not an exception. According to a recent analysis of the actual transaction values and circle rates of properties in the Mumbai Metropolitan Region (MMR) by Propstack, a real estate intelligence firm, 63 per cent of the transactions that took place at a rate of 20 per cent over the ready reckoner rates. The study and its findings were based on 38,000 sale transactions in the MMR for the period April 2019 to March 2020.
In a situation where the market value is higher than the ready reckoner rate, an appropriate increase in the circle tariff is justifiable. Also, in the case of Maharashtra, despite an increase in ready reckoner rates, buyers will remain at an advantage given the substantial decrease in stamp duty, provided the buyer doesn’t pay in cash to exhaust unaccounted wealth and save on stamp duty.
Let's say, someone planned to buy a property of value Rs 1 crore as per the ready reckoner rate in August, while the market rate of the property was Rs 1.2 crore. Both parties agreed on Rs 1 crore as the value to be declared and that the buyer will pay Rs 20 lakh in cash. At that time the buyer was supposed to pay stamp duty of Rs 5 lakh (5 per cent of the declared property value) to register the property.
After the cut in stamp duty to 2 percent, the buyer now has to pay a stamp duty of Rs 2 lakh, assuming the ready reckoner rate still remains at Rs 1 crore. That’s a saving of Rs 3 lakh for the buyer, just due to the stamp duty cut.
If he buys the same property after an increase in circle rate of, say, 2 per cent, he will have to declare a minimum of Rs 1.02 crore as the transaction value. The homebuyer will still pay Rs 1.2 crore as purchase price, but will only be able to pay Rs 18 lakh in cash. In this case, his new cost of stamp duty would be Rs 2.04 lakh (2 per cent of the increased circle rate of Rs 1.02 crore). That is a marginal increase in stamp duty of Rs 4,000.
Remember, the buyer had to pay Rs 5 lakh as stamp duty earlier. So, he will still save a substantial amount. However, for the seller, the capital gains increase by Rs 2 lakh, which will attract tax.
Where market rate is lower than circle rate
The real problem occurs when the market rate is lower than the circle rate. “About 8 per cent of the transactions happen below the ready reckoner rates,” the Propstack analysis states. An increase in circle rate in such areas can further add to the plight of both buyers and sellers. This is because “there is higher burden of payment of stamp duty by the buyer/seller due to circle rate being higher than the market rate. From the tax standpoint, buying or selling a property below the circle rate would create an additional burden on buyers under Section 56(2)(x) and sellers under Section 50C of the Income-tax Act, 1961,” says Amit Maheshwari, Tax Partner, AKM Global.
“Under these provisions, if the deal value is less than the circle rate, the difference will be treated as the income of the buyer. It will be "other income" and "capital gains" for the seller,” adds Maheshwari. To calculate capital gains, the stamp duty value has to be taken as the deemed selling price. However, “if the difference between the circle rate and the transaction value is not more than 5 per cent of the transaction amount, it shall be ignored,” he added.
So, the marginal increase in the circle rate in Maharashtra will not have much of an impact on most transactions as the reduced stamp duty rate will still help buyers save substantial sums.
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