In Re-Defining Circle Rates Lies The Mantra Of Clean Realty

Sandeep Khosla, 28, bought a flat in Delhi for Rs 70 lakh, officially valuing it at Rs 40 lakh. This one sentence is enough to give us an impression that the man here was trying to park his "black" money into real estate. Our tendency to readily believe that things are just bad and ugly hardly fails us. But, we are wrong in our assumption in this case.

Khosla is an IT professional, who has been working only for three years, and has been able to, by applying severe austerity measures, save only enough money to pay the earnest money for a decent house in a decent locality of the national capital. The rest will be financed by the bank. He was firm he wanted a house in Delhi, and that made all the difference. Again, do not presume property in Delhi "has" to be costlier than property in Noida or Gurgaon; yes, it is the national capital. But, to begin with, not many of us would like to buy old and dilapidated houses, which are way costlier than their true worth. Delhi has not seen many new constructions for past few decades now. Infact, the only prevalent real estate market here is resale. Unlike Noida or Gurgaon, where one has a wide range of under-construction properties to invest in, where the scope for "using" unaccounted money is much less, you have to be ready with a substantial "black" money component even if you do not have it. 

If you asked them, most white-collar workers would tell you they did not have much choice to keep the transaction all white; property transactions in India by their very nature force you to use "black" money. While the general perception is that buyers greatly benefit from transactions done using unaccounted money, there is a category which, in fact, suffers for the fault of the wrong ones. Khosla is of that category. Whatever amount we assume he saved by paying less as stamp duty was not worth it at all. The difference between the registered value and the real value had to be paid to the seller all in cash. So, he sought help from his family and friends, promising them to return the money at a later stage. Somehow, the transaction realised, and in no time at all, this law-abiding citizen has turned into a fraud and a tax evader. 

Behind all his agony lies the word circle rate. 

For beginners, circle rates are government-fixed benchmarks below which a property cannot be sold. State governments are responsible for setting and revising (something that hardly ever happens) these rates. Further, these rates vary from city to city, locality to locality and area to area. But, property, as a matter of fact, is not sold based on circle rates; it is only registered using this benchmark. This helps buyers to save on stamp duty and seller to save on capital gains tax. It is the prevalent market rates that you have to pay to own the property. For instance, there is a difference of 100 per cent between the market value and circle rates of properties in Mumbai. In Delhi, the difference is estimated to be in the range of 30-35 per cent. In other cities, the difference is estimated in the range of 20-40 per cent.

In a scenario like this, recent steps by the government to curb the use of unaccounted money in property transactions would only yield limited results, and only in the short term. Prime Minister Narendra Modi's demonetisation drive, for instance, will not be able to stop the generation of black money and its usage in real estate transactions unless states decide to revise circle rates and bring them closer to market rates. 

Also read

How Circle Rates Impact Property Prices

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