Circle Rate vs Market Rate: What Every Homebuyer Should Know

Real Estate

Table of contents

Introduction
Definitions
Key differences
Factors of influence
Decoding the purpose
Taxing details
Calculating circle rate
Conclusion
FAQ

Buying a house is not just the fulfilment of a long-cherished dream. It’s also one of the most significant investments you will ever make. So, it’s essential for every home buyer to have a clear idea about the value of their property. For a proper understanding of property value, one must also be well-acquainted with basic real estate terminology. In this blog, let us take a detailed look at Circle Rate vs Market Rate and also the various factors affecting Circle Rate.

What they mean

Circle rate:

The circle rate is also known as the ready reckoner rate, guidance value, or collector rate. They refer to the minimum price decided by the government for property transactions in a particular area. Circle rates ensure that every property sold fetches a minimum price, and, usually, property transactions below this value are not eligible for registration.

Market rate:

As the term implies, this refers to the actual price negotiated between a buyer and a seller in a property transaction. Generally, market rates are higher than circle rates because they reflect real-time demand and market conditions.

Points of difference

The circle rate is set by the local government or the revenue department and varies from place to place. On the other hand, the market rate is determined by individuals. While influenced by many factors, the price at which a particular property is sold or bought is decided between the seller and the buyer.

The circle rate is basically used to calculate the stamp duty and property registration fees, which are specific percentages and vary from state to state. The market rate is the actual transaction value, and the property is always registered on whichever is higher: the circle rate or market rate. If the market value is higher, stamp duty is calculated based on it. If the market value is lower, stamp duty is calculated based on the circle rate.

The circle rate ensures that there’s no undervaluation of a property during a transaction. It is also a strong source of revenue for the government. Negotiation skills play a strong role in the actual transaction value, with the buyer and seller trying to strike a profitable deal.

Since its purpose is to determine a minimum price for property transactions, circle rates are usually lower than market rates. On the other hand, since the real transaction value is influenced by market dynamics, it is almost always higher than the circle rate.

The circle rate is steadier and is reviewed from time to time. The market rate changes more frequently, as market conditions are susceptible to sudden variations.

Let’s take a quick look at this table:

Circle rate	Market rate
Determined by the local government or the revenue department	Decided by the buyer and the seller
Used to calculate the stamp duty and registration fees	Reflects the actual value determined by market conditions
Purposes include ensuring there’s no undervaluation and also earning revenue for the government	Both the buyer and the seller try to strike a profitable deal
Usually lower than the market rate	Usually higher than the circle rate
Reviewed from time to time	Susceptible to more frequent changes because of varying market conditions

Circle rate: The deciding factors

The circle rate is determined by the local government—municipal/panchayat authorities, etc. —or by regulatory bodies such as the revenue department. Let us take a look at the factors affecting the circle rate.

Locality:

Just as property rates vary depending on the type of locality, circle rates also differ. Properties located in prime areas, those in proximity to social amenities, and those enjoying easy accessibility come with higher circle rates.

Type of property:

Depending on the property category—commercial, residential, industrial, or agricultural—the circle rate also varies. Commercial properties command the highest circle rate, followed by residential ones. Agricultural property ranks lowest on the list, and its circle rates increase only when it is converted for urban use.

Periodic market review:

Though not as frequently as it influences the market rate, market conditions do influence circle rates. If a locality develops suddenly due to infrastructure development — for example, an airport or an expressway — its circle rate will also be revised. Other factors, like a change in government policies and inflation, will also impact circle rates.

Age matters:

Age is not just a number when determining the circle rate of a property. Older properties, which require more maintenance and upkeep, command lower rates compared to newer properties that boast an array of amenities and are well-maintained.

Circle rates: The purpose

So, why has the government established circle rates? Let us take a closer look at the main reasons.

Robust source of revenue:

Registration fees and stamp duty are some of the most important sources of revenue for the government. Since every property has to be registered at the circle rate or market rate, it enables the government to receive a fixed share from every transaction.

More transparency, less tax evasion:

Circle rates ensure that no property can be undervalued, thus making transactions more transparent. Also, the fact that no property can be registered at a value below the circle rate of a particular locality makes it impossible to evade tax.

A standard reference:

Imagine a scenario where there is no circle rate. Sellers can overvalue their property, while buyers will undervalue it. A standard rate fixed by the government ensures that there’s no gross exaggeration or understatement of any property.

Determines loan availability:

When approving loans, banks and other financial institutions use circle rates to assess the minimum value of a property.

Helps with financial planning:

Stamp duty and registration fees cost a significant amount. When buying a property, understanding the circle rate will help you determine the minimum amount you will have to pay in this regard, and plan accordingly.

Tax implications

Here’s looking at the taxation laws in connection with the circle rate and market rate.

Scenario 1: Circle rate is higher than the market rate.

If the circle rate is higher than the market rate, which seldom happens, Section 56(2)(x) of the Income Tax Act,1961, is applicable. However, this is not applicable if the difference between the sale price and the circle rate is less than or equal to ₹ 50,000 or 10% of the sale price. For example, you have bought a property for ₹90 lakh, while its circle rate is ₹1 crore. The difference — ₹10 lakh — is around 11.11 per cent of the actual sale price (₹90 lakh). Since it exceeds 10 per cent, it is treated as “income from other sources”, and the buyer will be taxed according to their income tax slab rate. The seller, on their part, will have to pay capital gains tax.

Scenario 2: Circle rate is lower than the market rate.

This is the most likely scenario when buying a property in India. In this case, the tax is levied on the higher amount (in this case, the market rate). As per Section 194-IA of the Income Tax Act, a 1 per cent TDS is payable by the buyer for any property worth more than ₹50 lakh.

How to figure it out

Want to calculate your circle rate? Here’s how to check the circle rate online:

To begin with, visit the official website of the Registration and Stamps Department or the State Revenue Department. For example, if you are in Karnataka, visit Kaveri Online Services, which is the portal of the state Department of Stamps and Registration.
Click on ‘Ready Reckoner Rates’, ‘Circle Rates’, ‘Guideline Value’, or ‘Guidance Value’.
Select your district, city, locality or ward from the menu.
Choose your property type (residential, commercial, agricultural, etc.).
Enter the required details, if asked for.
The portal will display the latest circle rate per square foot or square metre.

Conclusion

It’s important to know the circle rate meaning in real estate, as it ensures compliance with tax laws and avoids legal complications. It also helps you secure loans faster and gives you a clear idea about the amount you’ll need to pay as stamp duty. Meanwhile, if you are planning to buy a property in Bangalore, read this blog to understand how the city’s Premium Floor Area Ratio Policy will benefit you.

FAQs

1. What are the factors determining the market rate of a property?

Some of the most important factors that impact property valuation in India are the location and locality. Factors like infrastructure, accessibility, and proximity to social amenities are crucial. The type and size of the property, its age, amenities, and Vastu compliance also matter. Legal clearances and ownership type are other vital aspects. Freehold properties do tend to cost more than leasehold properties, as they give full ownership rights. Above all, the overall state of the economy affects real estate values.

2. What is the difference between the market rate and the agreement rate?

The market rate is the actual price paid for a property, as negotiated between the seller and the buyer. The agreement rate, as the term denotes, is the rate shown on the sale deed. This could be the same or less than the market rate.

3. What are the stamp duty and registration fees for property transactions in Karnataka?

Karnataka has a uniform registration fee of one per cent (of the property value). Stamp duty charges, however, vary. It is five per cent for properties valued above ₹45 lakh, three per cent for properties valued between ₹20 lakh and ₹45 lakh, and two per cent for properties valued below ₹20 lakh.

Sources:

Circle Rate vs Market Rate: Everything You Need to Know