- Date : 24/11/2020
- Read: 3 mins
A safe harbour of 20% will help home buyers and developer save taxes on residential units purchased between November 12, 2020 and June 30, 2021
The Finance Ministry has announced a tax relief on purchase/sale of new residential real estate units that will benefit both homebuyers and real estate developers. Buyers will be able to purchase homes 20% below the circle rate (also known as the ready reckoner rate) without attracting any tax penalties, whereas developers will be able to offload large unsold inventory on account of the economic downturn.
What is circle rate and how does it impact real estate transactions?
The circle rate is the minimum value that the government notifies for real estate transactions, resulting in property registration and stamp duty charges. This is an anti-evasion provision aimed at reducing the cash component/ money laundering in a property transaction and thereby preventing revenue loss for the government.
Hence even if a property is sold below the circle rate, the developer is liable to pay tax on profit basis of the value of flat/ home as determined by the circle rate. Similarly, the stamp duty and registration charges for the buyer are calculated basis the ready reckoner for such as a transaction.
What are the changes?
The real estate prices in many cities have fallen below the prescribed circle rate, hence the government has provided a safe harbour against additional taxes only where the variation between the agreement value and the circle rate is less than 20%. The Finance Act, 2018, prescribed a safe harbour of 5%, which was subsequently increased to 10% under the Finance Act 2020.
This additional leeway will enable developers to liquidate their unsold inventory at prevailing discounted rates (below the circle rate) and pass on the benefit to home buyers by way of affordable housing options.
What is the applicability?
The changes are applicable only on sale of primary residential units (purchased from a developer), for properties not exceeding Rs 2 crore in value. The extension to the safe harbour from 10% to 20% is available for purchase and registration of housing units between November 12, 2020 and June 30, 2021.
Related: What kind of home buyer are you?
What else is expected?
Finance Minister Nirmala Sitharaman has announced an additional allocation of Rs 18,000 crore (over and above the Rs 8000 crore allocated during budget 2020-21) under the Prime Minister Awas Yojana (Urban) that aims at bridging the housing gap by starting work on 12 lakh units and finishing another 18 lakh units, while becoming a driver of economic growth by providing employment opportunities in the construction and real estate sector. Real Estate deals by non-residents under the tax net. Read to know more about it.