Property Prices in Mumbai Expected to Increase as the Ready-Reckoner Rates Shoot up

In Mumbai, where property prices are already higher in comparison to other markets, a dream home is becoming a rather expensive dream day by day. The sharp rise in the ready-reckoner (RR) rates set by the government is likely to make real estate in Mumbai more expensive.

Last week, the state government increased the ready-recknon werates, with the highest increase being 30-40% in some of the fastest growing suburbs of the city like Worli and Bandra-Kurla Complex. However, the average hike is between 15-20%. Delhi faced a similar situation in September last year, when the circle rates were increased by 20 percent.

To get a better insight on the consequences of this rate increase, let us understand the concept of ready-reckoner rates in detail:

What are Ready-Reckoner Rates?

Published and regulated by the respective state governments, ready-reckoner rates are set to determine the stamp-duty to be paid to the government for a property transaction, residential or commercial. These rates are revised on annual basis. They differ from state to state and can also differ from locality to locality in the same city. Ready-reckoner rates are known as 'circle rates' in Delhi and 'guidance values' in Karnataka. The home buyers have to pay the stamp duty on the ready-reckoner value or on the property's actual value as mentioned in the agreement, whichever is higher.

For example- If the property price mentioned in the agreement is Rs. 75 lac, whereas the ready-reckoner (calculated on carpet area basis) amounts to Rs. 55 lacs, the buyer will have to pay the stamp duty on the property price as it is higher than the RR.

It also has an effect on other taxes like VAT, registration charges and sales tax.

How the Ready-Reckoner Rates affect property prices?

Setting and revising a ready-reckoner rate is important for the governments as a major portion of their revenue comes from stamp duties. An RR rate set for a property by the state government defines its fair value. A ready-reckoner rate, when published by the government, becomes the floor price. And according to the rules of the Income Tax Act, if the property is sold below the ready-reckoner rates, the difference between the selling price and the ready reckoner price is considered as black money. This is why the builders will not sell below this price, nor will the buyers pay less. The differential price is considered as the builder's business income and also added to the income of the buyer. So, if the seller is an individual, he will have to pay capital gains tax on this amount.

In an upward trending market, the real estate prices are higher than the RR rates. However, in regressive situations like what is prevalent nowadays, high RR can be catastrophic. If the builders in Mumbai and other cities try to maintain the existing profit margin, they will have to increase the price of their product. It will further dampen the demand for real estate.Since the property taxes are also calculated on the basis of these market rates, it is a double whammy for property owners.

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