Why Is Circle Rate Important For Home Buyers

Real estate market is led by two kinds of costs- market rate and circle rate. Circle rates are also known as guidance value and ready reckoner rates in other states. While the market rate is dependent on demand and supply, circle rates are decided by the government authorities. Though both of these costs are independent of each other but authorities, time to time keep on updating the circle rates to match up with the market. Like market rate, circle rates are different in different cities and states. Here's Propguide digging in deep into circle rates analogy-

What are circle rates?

Circle rates can be defined as the minimum price at which any real estate asset has to be registered when being transferred. These rates are set by the state government and undergo revision from time to time. These rates act as an indicator of property prices in a particular area. A buyer needs to register the property on the actual transaction value or the prescribed circle rate, whichever is higher. Usually, market rate is higher than the circle rates.

Why are circle rates important for home buyers?

Circle rates are used as a tool to keep a check on artificial speculation in property prices as there is no price index to govern the real estate prices in India. Though these rates are updated at regular intervals to keep it in line with market rates, however, these are always less than the price commanded by the market.  In short, circle rates are just the indicative prices and not the actual prices that can give buyers the perspective of actual cost of buying property.

Apart from this, no transactions can take place below circle rates. Some cities clearly show a huge difference between circle rates and market rates which show the perception of authority and a trail for black money to flow in real estate transactions. Buyers should check the gap between circle rate and market rate as a lower gap is always beneficial for those who are getting the finances through a home loan. Since the sales deed is closer to circle rates, the approved loan amount of the property will be more realistic for buyers.

What if circle rates are higher than the market rates?

Though it is unusual that circle rates are higher than market rates, but if any of such cases arises, a buyer has three options-

1)      To declare market value is equivalent to circle rate- This can be risky for the buyers as it can bring up the transaction in the eyes of Income Tax official. For instance, if the market rate is Rs 70 lakh while the circle rate is Rs 1 crore. Since you are declaring the sale deed for Rs 1 crore, there are chances that IT department can send you the notice on the remaining Rs 30 lakh that can be assumed as the cash component.

2)      Pay stamp duty and registration charges on circle rate- Paying stamp duty and registration cost on circle rates can cause huge financial losses. For instance, for a property with a circle rate of Rs 1 crore where the stamp duty is being charged 6 per cent on an average and another 1 per cent as registration charges, a buyer will pay almost Rs 2 lakh extra as compared to what is chargeable for Rs 70 lakh property.

3)      Appeal to sub-registrar to charge him as per market rate

A home buyer can also request the sub-registrar which will refer the matter to Deputy Commissioner (Valuation) to allow him to pay the charges at market rate rather than circle rates. This is a time-taking process and if the property is bought on home loan then banks usually don't prefer delays in sales deed registration.