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Circle rate, the minimum price of property fixed by the administration, is important to prevent tax evasion. It ensures that buyers and sellers do not manipulate stamp duty and registration fees by showing a lower price
If the circle rate is not fixed, then the buyer and seller can evade taxes by showing the property price as less than the actual one. (News18 Hindi)
Whenever there is talk about buying or selling property in an area, one phrase is often heard – circle rate. This rate reflects the minimum price of the property, which is fixed by the administration. It is subject to change over time depending on various factors like location of the property, market trends among others. The market rate is much higher than the circle rate.
So, what is the importance of circle rate, also known as ‘ready reckoner rate’ or ‘guidance value’, and how does it work? It’s the minimum value at which a property can be registered when being transferred. It’s set by state governments for different areas and localities, and is meant to prevent tax evasion and black money transactions in real estate.
Whenever a property is bought or sold, stamp duty and registration fees have to be paid. If the circle rate is not fixed, then the buyer and seller can evade taxes by showing the price as less than the actual one. Circle rate ensures that the purchase and sale of a property do not happen at a price lower than the minimum fixed price.
For example, let’s assume someone buys 5,000 square feet of land at the rate of Rs 1,500 per square feet, which cost a total of Rs 75 lakh. If the circle rate is not fixed in the area, then the buyer and seller can evade taxes by showing a lower price for the property. This results in the government losing revenue in the form of stamp duty and registration fees. Circle rate is an effective way to prevent such tax evasion.
If a property is registered below the circle rate, the difference between circle rate value and registered value is treated as “income from other sources” for both buyer and seller under Section 56(2)(x) of Income Tax Act. This attracts additional tax liability. The buyer may need to pay stamp duty on the circle rate value regardless of actual purchase price.
Criminal penalties for deliberate undervaluation:
- Prosecution under Section 269SS of Income Tax Act
- Potential fines of up to 3 times the tax sought to be evaded
- In serious cases involving large-scale tax evasion, imprisonment term up to 7 years
- Property registration may be rejected if value is below circle rate
- Back taxes can be demanded with interest
- Investigation by tax authorities into source of funds
- Risk of money laundering charges in severe cases
