Property Registry is one of the most curious subjects for any buyer. Predominantly, it depends whether you are buying a resale or under construction flat / property. Property Registry is most crucial and a final step of property purchase. Normally, a buyer gets confused because of unique suggestions from builders/lawyers on property registry. In many cases, banks also impose conditions on property registry. Each stakeholder has it’s own motive/logic on how to execute property registry.
The stamp duty and registration charges play a crucial role in this regard. The prime objective of a buyer is to save stamp duty. The builder or seller play with this psychology of a buyer & try to keep property registry value as low as possible. Some time back, i have written a post on how to save property registration charges. It might or might not be beneficial in all the cases. Normally, buyers fail to judge the impact of low property registry value on capital gain at the time of purchase. I always suggest my clients to take a balanced approach. A saving in stamp duty at the time of purchase might not compensate for the incremental capital gain at the time of sale. The approach should be financially beneficial depending on the investment horizon, appreciation, tax slab, and various other factors. I will discuss this topic in detail in my future post.
Property Registry – 10 Most Common Types of Registration
As the property registration has a financial and capital gain implication on a buyer. Therefore, it is important to understand the types of property registry. It can also have an implication on Home Loan eligibility of a buyer. For simplicity purpose, i have divided the property registry into Resale and Under Construction. Each one of the following types is unique but may sound common. I can share the overview and common pros and cons. For any specific clarification, you can post your queries in the comments section at the end of the post.
A. Resale Property:
1. Full Property Value: From a buyer perspective, It is the simplest and straightforward way to execute property registry. The only precondition is that the property value should be more than or equal to circle rate/guidance value/ready reckoner rate. The only negative is that a buyer may need to shell out more for stamp duty and registration charges.
Quite interestingly, if the buyer is registering at full property value that is higher than the circle rate. In this case, the officials of sub registrar office desist property registry at full value. Many clients asked me the reason for same. The answer is very simple, the real estate mafia. The circle rate/guidance value/ready reckoner rate is decided every year by the average value of transactions in a particular area. It’s a known fact that the actual property value is still higher than circle rate though govt tries to bridge the gap. Now assume that everyone start registering property at full property value that is closer to actual market value. In this case, next year’s circle rate will be at par with market value. It is not a happy situation for builders. It may impact real estate market negatively. The officials of sub-registrar office in collusion with builders insist buyers register property near to circle rate.
2. Property Value is Higher than Circle Rate: This is the most common scenario. In this case, the buyer has the option to execute property registry at circle rate. Let me clarify that in this case, it is perfectly legal to register property at circle rate that is lower than property value. A buyer can execute Deed of Transfer of Rights to bridge the gap between sale deed and sale agreement value. By following this arrangement, a buyer can save on stamp duty and registration charges.
3. Property Value is Less than Circle Rate: I discussed this point in detail in my post What if circle rate is more than market value. You may go through the post for more details. The only word of caution is that the difference amount of circle rate and property value is taxed as “income from other sources” to the buyer. For example, if i bought a property for 40L and circle rate is 60L. In this case, i can register property at 40L. I will be paying stamp duty and registration charges at circle rate i.e. 60L. So far so good but biggest catch is that difference amount i.e. 20L will be taxed as income from other sources. It will be taxed as per my Income tax slab.
4. Bank Valuation: In some cases, banks insist borrowers register the property at either full property value or higher value. In the first scenario i.e. full property value, the home loan eligibility is fixed based on sale deed value instead of sale agreement value. The reason being, many borrowers fraudulently execute sale agreement at a higher value to increase the home loan eligibility. A sale agreement is not registered and mostly executed just for home loan purpose. For example, my property cost is 50L and based on that my home loan eligibility is 80% say 40L. Now i would like to avail home loan of 50L. Therefore, i will execute sale agreement of 62.5L and can avail home loan of 50L. It may land buyer in trouble if seller raises the fresh demand of diff between actual sale value i.e. 50L and inflated value i.e. 62.5L. This difference of 12.5L is added just to increase home loan eligibility. To avoid such frauds banks like SBI insist property registry at full property value.
In the second scenario, banks may insist higher property registry value depending on their internal property valuation. In one of the case, my client was buying a property for 63L whereas circle rate was 72L. In this case, the bank insisted on registering the property at 80L. The reason being, bank’s valuer assessed the property value at 80L. The banks are particular about property value so that in the case of default they should get fair market value through auction.
5. Sale Certificate: This scenario is applicable only in case of bank auction properties. Mostly the bidders have a lot of confusion on property registry in case of bank auction process. Let me clarify that in the case of bank auction, the Conveyance Deed or Sale Deed is NOT registered in the sub registrar office. In this case, sale certificate issued by the bank is registered in sub registrar office. It is signed by the designated and authorized bank official at the time of registration.
B. Under Construction Property:
The property registry of under construction property is slightly confusing compared to resale property. The timing of property registry is also crucial. The timing will have a major financial bearing on the capital gain of the property. As i shared, i will discuss the impact of property registry on capital gain in my later post. Let’s check out the 5 most common types of property registry of under construction property.
1. UDS/Sale Agreement Value: To register a property at Undivided Share (UDS) is the most common practice. For an under construction property, builder sign 2 agreements with the buyer i.e. Sale Agreement and Construction Agreement. In layman terms, Sale Agreement is towards the cost of land. It is also referred as a common area or undivided share in the land or undivided right and interest in the property. On the other hand, construction agreement is towards the construction cost of the flat/property.
Builders register the property at sale agreement value or UDS. It helps to save the stamp duty and registration charges. In many cases, the stamp duty and registration charges charged to the buyer is much higher compared to actual cost. The reason being, builder levy registration charges on total consideration value but property registry is executed at UDS value that is normally 25% to 35% of total cost. Therefore, balance is savings for builder or icing on the cake. In this point, i am referring to the registration at the time of possession to the buyer.
2. Under Construction Property: I have discussed this topic in detail in my post, Register Under Construction Property for Home Loan. This type of property registry is executed only to avail home loan and is very risky. A buyer hedges the risk of a builder and the bank.
3. Sale Agreement and Work Order: This type of registration is very common and popular in Hyderabad. Builder shares two agreements with the buyer i.e. Sale Agreement and Word Order. A work order is executed to include the cost of tiles, kitchen slab, Windowpane, doors, flooring, POP etc. Normally in such cases, buyer are not aware of VAT and ST implications of the work order. Builder informs these charges only at the time of execution. A top line calculation shows that this kind of arrangement is financially beneficial only for the builder. From buyer’s perspective, the outflow towards stamp duty and registration of sale agreement and VAT + ST of Work order are same if the property is registered at full or gross value. The buyer should insist on property registry at full value. As we know that the attitude of a builder is as if he is selling the last flat on this planet, therefore, very difficult to convince him.
4. Sale Agreement Value + Construction Agreement value: The reputed builders prefer to register the under construction property at full value. A sale deed is executed equivalent to a total of sale agreement and construction agreement value. Similar to point 1 in resale property i.e. property registry at full property value, it is a hassle-free type of property registry for a buyer.
5. Transfer Cases / Assignment Deed: The biggest confusion for a buyer is in the case of transfer cases or assignment deed. A buyer buys under construction property from the secondary market. A tri-party assignment deed is executed between the builder, buyer and the seller. The mystery is in the execution of property registry. Logically speaking a builder cannot register property at UDS in this case as the sale agreement is not signed with the new buyer. I observed that builder still prefers property registry at UDS or sale agreement value of original buyer. The reason being, sub-registrar will never come to know that the under construction property exchanged hands.
On the contrary, if the property is registered at assignment deed value then it is problematic for the builder. The reason being, the premium on property sale is retained by the seller. Technically, the builder will only receive original consideration value as per the sale and construction agreement signed with the first owner. Typically, i observed that property is registered at a value somewhere in between the total consideration value of first owner and the sale agreement value. Personally, i could not understand the logic behind the same.
Summary: We have checked some of the most common types of property registry. I can explain more no of scenarios but would not like to confuse readers. Some of the scenarios are similar in nature but the mode of execution is different. As a buyer, you should not accept the execution process of property registry until unless you completely understand the logic behind the same. As i mentioned that property registration value has a major impact on buyer’s capital gain in future. Therefore, it important to understand the future impact on capital gain. Any decision should not be based only on today’s gain or savings. As a buyer, you should follow an approach that is financially beneficial on a net basis.
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