Real estate investment: Pros & Cons, Savings on Taxes

By Mr. Adhil Shetty, CEO, BankBazaar.com

Mr. Adhil Shetty, CEO, BankBazaar.com 

For those looking at investing in Indian real estate, there are 2 options.

Remember to ‘invest’ in real estate and not purchase the property to occupy. A house (home) is an investment when you look at making money from it - either in the form of rent or by re-selling it at a higher price. That is why in personal finance, the self occupied property is not counted as an investment asset.

Let us look at the options available..!:

* * You can book a flat (appartment) when the project is launched & sell it when the project is completed

* * You can book a ready - to - move property & get rentals. These rentals can partially fund EMIs (Equated Monthly Installments).

Which of these sounds better? Forget the practical angle, financially which of the options make sense?

Option One..!

When you book a flat, you have to put in only a smaller sum of money. The return on investment may be better.

Sametime, if you were to borrow to purchase the flat, you might have to keep paying pre- EMIs or interest on the amount borrowed until you can sell the property. This is an expense without any income tax benefits.

Also, remember the capital gains tax aspect. If the property is resold for a profit within 3 years (36 Months) of the agreement date, gains are taxed with no scope of tax saving.

Option Two..!

These problems with purchasing & selling a flat can be partially negated when you purchase a ready - to - move property.

You can purchase the property with a loan and start paying EMIs immediately.

Which means both the interest paid without any limit and also the principal repaid up to a maximum of Rs. 1 lakh (under income tax section 80C) can be claimed as deduction from taxable income.

There are many options to save income tax on capital gains when a property is sold after 3 years. Until then rentals can be enjoyed.

Some Drawbacks..!

However, it has its own drawbacks

* *  Income earned as rental is taxable as income from house property.

* *  On an average, the rental income from home property will be in the range of 3 per cent to 5 per cent of the value of the home. Which means, say you buy a house for Rs. 50 lakh and avail 80 per cent housing loan, your EMI for a 20 year loan at the rate of 10 per cent will be nearly Rs. 39,000.

In addition, the same property will yield about Rs. 15,000 to Rs. 18,000 as rent. Rest of the EMI is cash outflow from your pocket

* *  If you can shell out additional Rs. 20,000 from your other income, or if you have Rs. 30 lakh, which you can invest in the property &  restrict your loan to nearly Rs. 20 lakh so that your EMI matches the rent, this whole proposition will work wonderfully.

* *  Finding a good tenant is a big task in itself. On an average, expect your home to earn only nine month rents a year. Assume that for nearly 2 to 3 months in a year, the property may lie unoccupied, but your EMIs remain. You should be able to afford this amount

Therefore, the income tax advantages and the fact that you may be able to resell the property for a substantially higher price after a longer period are the positives.

On other hand, the adverse cash flow situation in such a scenario is an obvious negative. Also, please remember a house property is not a liquid asset. If you are stuck with it, this can turn out to be a long-drawn affair. Go for it, if you understand the pros and cons well enough.

Share: