What is the circle rate? Does it impact home loan eligibility in India?

Circle rate is a reference rate or the minimum rate (also called the ready reckoner rate) set by the state government for the registration of a property purchase or sale. The reference rate helps in the computation of property registration fees and stamp duty.

Usually, the circle rate is revised every year or every 2-3 years by the state revenue department.

State governments go on to set the circle rate based on a host of factors, including:

Location: Posh localities with better connectivity, infra, etc., command a higher circle rate Property type: The circle rate is decided differently for residential, industrial or commercial properties. Ownership: Freehold versus leasehold property is priced uniquely Amenities and infra: Well-located properties, with proximity to essential services such as hospital, school etc., attract a higher rate. Age and size: The size of the property also plays a pivotal role as older and smaller properties may command a different rate.

Circle rates are periodically revised to reflect evolving times and actual market conditions in the real estate market. This means rates are aligned to show the actual dynamics of demand and supply i.e. in booming areas - the circle rate may be revised higher and vice versa.

In addition, the circle rate is enforced in a bid to prevent buyers and sellers from declaring low prices to lessen stamp duty charges.

Suppose if the market price of a property is ₹1 crore and based on the circle rate its value is determined at ₹1.5 crore, your tax liability is on ₹1.5 crore. This is to ensure fair and just collection for the country’s revenue department.

For the buyers, the circle rate is important for several reasons, including:

1. Determination of total property costs: Total property cost also entails stamp duty as well as registration fee, and these charges are determined based on the higher of transaction value or the circle rate.
2. Helps assess fair market price: The property buyer can understand and determine whether the property is underpriced or overpriced, as the circle rate helps to know the minimum fair price of the property.
3. Crucial factor in determining home loan eligibility: Based on the circle rate, home financiers in the country assess the minimum fair value of a property, which then influences your loan eligibility.

How does the circle rate impact your home loan eligibility?

The circle rate impacts and influences home loan eligibility and amount greatly as it directly affects the loan-to-value (LTV) ratio. For determining the loan eligibility, banks and other financial institutions take into account the lower of the registered value (based on the circle rate) and the actual price, and in a situation if the circle rate is lower- the loan eligibility reduces drastically. This, in turn, increases the down payment for the borrower,