Everything you want to know about the circular rate and the market rate

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It often happens that people with financial knowledge prefer to invest in real estate over stocks, perhaps because the former is much easier to understand. That said, real estate also has its own technical ambiguities and jargons. For example, you must have heard your real estate broker talk about the increase in the circle rate? You may know this will negatively impact your budget, but it’s important to understand the differences between the market rate and the circular rate so that you can make an informed decision.

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What is a circle rate?

The circular rate is the minimum price at which the sale or allotment of land, built-up house, apartment or commercial property can take place. This rate / price is decided by the local development authorities or the state government. There may be different circle rates for different localities within the same city. The objective of setting circle rates is to curb speculation on property prices because the property market is opaque and often does not offer a correct price index.

As circular rates are not revised regularly to keep them in line with market rates, it is found that circular rates are invariably lower than actual market rates. Therefore, the circular rate is only an indication of the state of the market and is not the actual price of the property.

What is a market rate?

The market rate is the price that a buyer pays for a property and the actual value of such an asset for a transaction between a buyer and a seller. Market rates are decided based on the seller’s price expectations and the buyer’s willingness to pay. This is a price range determined by demand and supply based on the actual transaction rates in a location. A location with low supply but high demand will certainly require higher rates compared to other areas.

Circular rates and market rates have a limited impact on each other. The circle rate is always lower than the market rate, but a significantly higher spread between them shows a lag and is the main reason for black money transactions in Indian real estate.

Why is it important to know?

Usually when a property is sold, stamp duty and registration fees are paid by the buyer. It has often been contested that a higher circle rate results in a lower transaction rate. As the gap between the circular rate and the market rate narrows, more and more genuine buyers with legitimate money are starting to enter the market. Although in such a scenario the speed of transaction decreases, less black money is parked in real estate assets.

Revising the circular rates every 3 months or once every six months will keep the market rate and the circular rate more aligned with each other. At the same time, the state government will also increase the collection of taxes on real estate transactions, as stamp duty is paid on a circular rate which is in line with market rates.

However, this will affect real estate buyers with an additional burden as they will have to spend more on higher stamp duties resulting in slightly higher transaction prices and an overall cost of ownership. But real estate gurus believe that revising circular rates will help eliminate black money invested in real estate and move market prices in a more rational and positive direction.

It is therefore extremely important for a buyer to know both the market rates and the circular rates before finalizing a property. Knowing the market rate would help you determine your buying ability and also indicate the degree of appreciation in a given area. Since loans are made on the basis of a bill of sale which is closer to the circular rate, a smaller spread between the circular rate and the market rate will be beneficial.


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