New announcements by FM, income tax relief for property owners

In a press conference held by the Union Finance Minister Nirmala Sitharaman on 12th November 2020, a stimulus in a total of Rs 29 lakh crore amount was provided to give a boost to the Indian economy.

Amidst several announcements to provide stimulus, the government has announced an income tax relief for house buyers and real estate developers to boost the real estate market to keep the same afloat. 

As per the relief announced, the acceptable difference amount between the circle rate and agreement value of sale has now been increased from 10% to 20% for calculating profits of real estate developers or builders, and tax liability in the hands of a buyer.

Conditions for availing the benefit are as below:

  • Primary purchase of the residential unit by first-time homeowners.
  • The purchase of residential house property up to Rs 2 crore.
  • Acceptable differential rate of 20% valid till 30th June 2021.

The Circle rate is the minimum value of the house property as fixed by the state government or local authorities following the rate prevalent in that particular locality/area. The reason for considering the circle rate by the government is to avoid tax evasion and unfair tax practices at the time of sale and purchase of immovable property by builders or developers. 

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Currently, as per section 43CA of the Income Tax Act, to calculate the profits where the actual amount of sale is less than the Circle rate, a shortfall up to only 10% is acceptable. If the variation of price between Circle rate and agreement rate is more than 10%, then ‘circle rate’ will be considered as the value of sale consideration for income tax. Also, this difference is considered as notional gain and taxable under the head ‘Other sources’ in the hands of the buyer under anti-abuse provision 56(2)(x).

In the recent announcement made, the government has now provided relief by allowing it to accept the actual sale consideration for cases where the shortfall is up to 20% of the circle rate. 

Consequential relief up to 20% to buyers of these units will also be available. 

Let us understand this with an illustration. 

Mr Udit bought a house of Rs 80 lakh from a developer. The value of the house as per the circle rate is Rs 95 lakh. Now while calculating tax as per the current provision, actual sale value can be considered if it differs by 10% of circle price. As the difference between circle rate and the actual rate is more than 10%, the circle rate will be considered as sale consideration, i.e. Rs 95 lakh. 

Furthermore, Mr Udit, as a buyer, will be required to report the difference of Rs 15 lakh as ‘Other sources’ income and pay tax as per individual tax slab. 

However, as per the new announcement, the variation acceptable has been increased to 20% instead of 10% for all transactions till 30th June 2021. 

Hence, in the above scenario, as the difference between circle rate and actual sale agreement is less than 20%, Rs 80 lakh will only be considered as sale consideration for the calculation of the profits of the developer as per the new relief announced by the government. 

This is a massive relief for the developers and buyers, as people will not have to pay taxes on notional/deemed profits in these trying times when the actual prices of the houses are low due to the market situation. 

The move is aimed at boosting demand for residential real estate by providing relief to home buyers and real estate developers.

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