Catching Up: How Close Are Circle Rates To Market Values of Properties

Among many other factors, circles rates of a locality have a huge impact on how much money you have to pay when buying a property. Generally higher than the market rate of a property, circle rates are the lowest permissible rate at which a property can be registered within an Indian state.

What are circle rates?

State governments, which are responsible for deciding these rates, are expected to revise them regularly to make sure that they reflect market price of properties. As circle rates are typically lower than market rates, people tend to understate the value of properties in real estate transactions. When a transaction value is lower, stamp duty, registration charges and capital gains tax, if any, will be lower.

Lying low

Circle rates are lower than market rates for two primary reasons:

1) They are not periodically revised.

2) There is huge variance in the sale prices of various homes of even same specification and size in the same neighborhood. Authorities lack sources to collect such data.

According to Capri Global Limited, a non-banking finance company, circle rate in Mumbai's Worli was Rs 32,293 per sq ft in 2014, while the market rates were Rs 60,000 to Rs 62,000 per sq ft. Similarly, in Delhi's Pitampura, the circle rate was Rs 9,883 per sq ft, while market rates were Rs 11,600 to Rs 13,000 per sq ft. This shows that market rates in Pitampura were about 31.53 per cent higher than circle rates, while they were up to 92 per cent higher in Worli.

Due to a slowdown in the real estate market, some state governments have revised the circle rates. The Aam Aadmi Party-led government in Delhi, for example, recently raised the circle rates for agricultural land in Delhi from Rs 53 lakh for an acre to Rs 1 to Rs 3.5 crore.  T N Ninan of Business Standard estimates that circle rates are now 50-75 per cent higher than market rates.

The pros and cons

When circle rates are lower than market rates, they help the participants save on costs. However, in certain transactions, it could be harmful to the interests of the participants. For example, farmers in Delhi have long maintained that they are paid less when land is acquired, as circle rates are much lower than market rates. Another example shows that while circle rates for residential land in Chennai is Rs 600 per sq ft, market values are much lower. This is one of the major reasons why the velocity of real estate transactions is much lower today. While a higher circle rate will curb property transaction through unaccounted money to a great extent, it may also hinder many socially beneficial real estate transactions.