Out of Touch with Realty: The Tale of Union Budget & Circle Rate Reforms

[By Samridhi]

The author is a student at Law Centre-1, Faculty of Law, University of Delhi.

The Union Budget 2021-22 has brought with itself a further increase in the safe harbour limit provided to the real estate in instances where a sale is affected under the value which, as per Section 43CA and Section 50C, is ‘adopted, assessed or assessable by any authority of a State Government’ in order to pay the assigned stamp duty on the sale. Such a value ‘adopted, assessed or assessable’ is also known as circle rate or guideline rate. This is the Government’s third attempt to boost the real estate sector. The first such increase in the safe harbour was enacted by Finance Act 2018 by providing a safe limit of 5% through the amendments of Section 43CA and Section 50C. Finance Act 2020 increased it to 10% and the Finance Act 2021 has increased it further to 20%.

Though the real estate sector is joyous at this gift from the Central Government but the celebration remains short-lived as the abovementioned safe harbour limit will only last until June 2021. The Government’s explanation behind bringing forth such increases is to provide an incentive to the middle class to invest in the real estate sector, hence, the cap of Rs. 2 crores have been imposed. But in such circumstances, it remains pertinent to analyse whether such amendments will truly bring forth the change expected in the short span of time or will it remain an empty promise.


Section 43CA was brought forth by Finance Act, 2013, in effect since April 1, 2014. It provided that if an immovable property is sold below the circle rate for the purposes of stamp duty valuation, then the sale will be considered to be at the circle rate for computation of income under ‘Profits and gains of business or profession’.

On the other hand, Section 50C was enacted through Finance Act, 2002, and in effect since April 1, 2003. This section provides a legal fiction whereby if an immovable property is sold below the circle rate then for the purposes of stamp duty valuation, the circle rate will be deemed to be the value of the sale.

Both the sections were enacted by the government with an agenda of curbing the involvement of black money in the real estate sector, which continued to be in circulation through practices such as undervaluation of property and to seek an increase in revenue collection from the real estate sector. Given the volatile and diverse nature of the real estate sector, the State Governments were given the liberty to decide on the valuation of the property for the purposes of arriving at the circle rate, which is the minimum rate at which the property must be sold in a given area. This liberty has been exploited by the State Governments to invent their own formulas through Valuation Officer for deciding the circle rate and the ‘fair market value’, which remains the current market value for a property. This practice provided a huge disparity between the ‘fair market value’, decided by a Valuation Officer to be the actual market rate, and the ‘assessed value’. In some areas, the circle rate far exceeded the actual market rate while in some areas the circle rate remained far below the actual market rate. Though the liberty given to the State Governments was done in an attempt to accommodate the volatility of the real estate sector but the practice of reviewing such rates at a period of 3 to 5 years has led to the stagnancy of the real estate sector. Thus, in an attempt to energize the sector that the government initiated the reform in 2018 by providing a ‘safe harbour limit’. The limit denotes the breathing space to the sector as it provides them the much-needed elbow space to negotiate with the buyers.


But the sections remain riddled with several other ailments which have led to an increase in litigation and undue hardships.

A sale of immovable property involves a factual matrix that remains unique to each and every case. This uniqueness finds no accommodation in the provisions. It is a usual circumstance in our country where for the purposes of marriage or to relieve the debt on a family, the property is sold at any rate available to the seller. This provides the seller with a double whammy, as not only he is forced to sell the property at a lower price but, as per Section 43CA, he also bears the burden of being taxed for the differential sum between the circle rate and the transaction amount that he never earned. While Section 56(2)(x), which was enacted through Finance Act 2017, provides the same burden on the buyer, where the tax is levied on the notional value when the immovable property is acquired on a price below the fair market value price.

The rigidity of the sections was noted by the Delhi High Court in CTA Apparels Pvt. Ltd. v. Govt. of NCT of Delhi Collector of Stamps, where the High Court stated that the circle rate is only a guidance and not the sole factor for determining the value of the property.

Moreover, the circulation of black money in the real estate sector has not been curbed by these reforms/ This is due to the huge disparity in the market rate and the circle rate. For instance in the case of Delhi, the rates in areas such as Panchsheel Park, Vasant Vihar, et al remain below the circle rate and in other areas the rates remain far above the circle rate. The State governments such as Delhi & Maharashtra are beginning to take steps to help provide some leeway to the real estate sector by bringing in much-needed reforms through reduction of the circle rate or reduction in stamp duty value. This disparity in the prices in the same State only provides further evidence to the fact that the reforms have been inefficient and redundant. This may have been one of the factors that might have motivated the Ansal Housing & Construction Ltd. to challenge the constitutional validity of Section 43CA.[i]

It is to be noted that the Government had aimed these reforms to incentivize the ‘homebuyers’. But the homebuyers are not incentivized by a 20% reform in the prices of the land only. The Government needs to take into account the surrounding factors involving the cost that will be incurred by the homebuyers in order to bring that ‘home’ into a reality through the use of cement, steel, bricks, labour, et al. But these elements remain under the taxation model of Goods and Services Tax (‘GST’). The taxation models have to be reformed in consonance with each other. Meanwhile, the cap of Rs. 2 crores imposed by the Government for the benefit under the safe harbour limit also needs to be reviewed to provide laxity to not only the middle class but also to the developers, who will also be encouraged to undertake projects by similar reforms in GST regime. Along with the limit of June 2021 for the validity of this safe harbour limit should also be removed, rather the limit should persist until the next Budget Session to truly evaluate the impact in the real estate sector.


The government’s initiative to boost the real estate sector through the increase in ‘safe harbour limit’ is a much-needed step, especially as the sector attempts to recover from the slowdown incurred due to the impact of COVID-19. But the reforms have to be implemented in a substantive manner lest they suffer the risk of being inefficient. The exclusion of the real estate sector from the purview of GST has led to the Government incorporating a narrow view towards the reforms initiated for the benefit of the real estate sector. The Government must realize that the two taxation models operate in consonance with each other and not in two different silos. The homebuyers may be lured towards the developers offering readymade homes but the large section of the sector which offers land for sale will not be able to see much benefit. Moreover, it is this latter sector that should be re-energized as this will imbibe and increase the sale of goods and employ the informal labour which had to bear the worst impact under the lockdown period due to the absence of work.


[i] Ansal Housing & Construction Ltd. Union of India, W.P. (C) 10361/2017.


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