February 2, 2018

MUMBAI: The proposal in Union Budget for 2018-19 to allow 5% variation between transaction value and ready reckoner or circle value for computation of capital gains tax for property transactions may not offer a significant tax relief or affect real estate deals, said tax experts.

“Current regime levies tax on the difference between Transaction Value and Circle rate. Budget proposal provides a safe harbor of 5%. Given current value differences, 5% safe harbor may not be enough,” said Bhairav Dalal, Partner - Real Estate Tax, PwC India.

The proposed measure may benefit buyers and sellers in property markets where prices are rational and are not under influence of investors.

Under the present tax regime, seller of the property is expected to pay tax on the circle rate or ready reckoner rate even if the transaction value is lower than the circle rate stipulated by state governments. Buyer in this case is expected to pay tax on the difference in transaction value and the circle rate.

However, with the new proposal, the seller will be paying tax on transaction value as long as it is within the allowed 5% variation. Buyer will not be paying any tax. In case, the difference is more than the permitted 5% deviation then the tax will be computed on the higher of the both.

While transaction values in most cases are above ready reckoner rates, few micro-markets may still have a scenario where transaction value is lower than circle rates. Over the last few years with consistent hike in ready reckoner rates and sluggish property market, the scenario has reversed in key markets.

"The FM announced a 5% deviation from circle rates to remove hardship faced by the Real Estate industry. However, this may not be enough as the actual deviation of circle rates to prevailing market is in many cases as high as 30%, crippling transactions," said Nidhi Seksaria, Partner, Real Estate, BDO India.

Under the current tax regime, the property seller pays long-term capital gains tax of 20% and short-term capital gains tax at 30% depending on holding period. However, the seller receives tax exemption if he reinvests the consideration received in another property.

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Source: realty.economictimes.indiatimes.com