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What is a ready reckoner rate and why you must car...

What is a ready reckoner rate and why you must care

ready reckoner rates

We as a nation, dream of a home for each of us. Our Government thus launched its ambitious mission “Housing for all by 2022”. Noble might be the intentions, reality shows a different picture. It has become almost impossible for a common man to buy a new home in a decent locality. Look at the housing price index published by RBI over the last 6years, it shows the ever increasing prices of homes all over the country. The major cities have shown 3-15% rise in housing prices, making buying homes -a real dream.

The great Indian paradox:

We say we need a home. And hear about residential housing sales not picking up. The RBI has cut rates still prices of new projects are not coming down. Developers say their business is in trouble. And they won’t cut down the housing prices!
Got confused? This is the ‘REAL’ paradox I am talking about.
Let’s analyze problems with each of the segments involved:
First the demand side. A demand won’t pick up because of various factors like high priced homes (read unaffordable), dearer loans, high-interest rates, a general slowdown in job creation, delay in delivery of projects etc… These directly contribute to slowing down the demand.
Now the supply side. The developers say they have a little control over high prices. High input costs caused by huge land acquisition prices, government taxes and levies, etc. contribute to a fixed minimum basic price which is not in their control. Considering their own profits adding to this sum we get an even bigger number as the final price of the property.
To maintain their profit margins on already invested huge money, developers are in a wait and watch position hoping for the revival in demand.

readyreck1

Now, as we get a clear picture of the housing drama, we understand that there is fixed the basic price of any real estate. A major portion of this price is altered by the government itself. The real estate rates are regulated by the government through a reference rate called as ready reckoner rates.

What are these ready reckoner rates?
Ready reckoner rates are nothing but predetermined price of a property like the residential property, land or commercial property for a specified area by the State government.
Mind you, these rates are applied on the building area and not on the carpet area of the property.
Generally, ready reckoner rates are revised every year.

One might wonder how do these rates affect buyers, builders and property owners?
On the basis of ready reckoner rates, stamp duty, and registration charges are paid by the consumer i.e. Buyer.
Municipal corporations use the ready reckoner price to devise formulae for charging builders.
The ready reckoner rates affect the buyer and builder and the owner of the property as well. The Municipal corporations of the city calculate property tax on the basis of the rates published by the government. If these go up, so will the property tax rise when a local body revises taxes.

How are these rates are used in a transaction?
Here is an example, current stamp duty is equal to 5% of ready reckoner rate or 5% of the actual value as mentioned in the sale agreement by the developer, whichever is higher. Consider a property in at some area has a ready reckoner rate of Rs. 40 lakhs, while the builder has demanded the price of Rs. 50 lakhs. (Logically, builder’s prices are higher than the government-specified rates.)
In this case, a home buyer would have to pay stamp duty on Rs. 50 lakhs only, as it being a higher price. So 5% of 50 lakhs equals desired stamp duty. Got it?

Why are these rates  important?
As we have previously seen these rates are regulated by the state government. One might think what’s in it for the government? They are important for any government simply because they form the largest chunk of the revenue source for the state government.
For example, the collection of stamp duties and registration forms a second largest source of revenue for Maharashtra. They are important for buyers because they affect the property value. Generally, these rates reflect the market price of the property. So one can immediately get an idea about different housing prices in different localities. There is very little scope for cheating by claiming cheaper houses than market value.
We shall note another important point here: A transaction below, these rates is considered illegal. (This is because the Income Tax Act says if a property is sold below the reference rates, the difference between the selling and the ready reckoner price is considered a black money transaction.)

So till now we have seen almost all the important aspects of ready reckoner rates. When we see increasing values of ready reckoner, we can clearly get why the real estate prices are inflating too.
Given below are statistics for Maharashtra showing an increasing trend of RR rates.
Year         Value (%)
2010          14
2011           18
2012           37
2013           27
2014           22
2015           14

Rising rates effectively making the purchase of residential, commercial, industrial properties costlier (approximately up by 20% to 30% after March 2016.)

These rates affect so many different sections of our economy that it is important to look for problems with them. The first problem being arbitrariness. These rates are regulated by respective state governments so there is a large scale disparity on all India level. Housing prices in major cities differ from each other to a large extent. In some states like Maharashtra real estate properties are costlier than others.
Also at some places, these rates are greater than the actual market price and at the other they are found to be lesser.

For example, a study conducted by IIM after the Delhi government increased circle rates by 20 per cent, shows rates were higher than market prices in several localities.
Unlike Delhi and Mumbai, the reference rates in Bengaluru were found to be still lower than the market value.
The second problem comes where ready reckoner rates don’t reflect the actual market price. In this case, the buyer and the builder both get benefited as lesser duty is paid by the buyer and builder by reducing income tax liability by under-reporting of transactions. This is how black money comes into the picture.

So, I think we need greater transparency in this whole process of deciding the ready reckoner rates.
There should be a fixed mechanism for finding a correct value of these rates. This might bring uniformity on all India level.

Also, loopholes leading to the formation of black money must be fixed.
Buying our own house is a precious dream. So next time you think of it, do not forget to check ready reckoner rates of your desired area!

 


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