Loads that can water down profits from real estate
Property is a hot subject in investment circles today. Investment outflows are large and returns even larger. But investors need to know that while there are no upfront entry or exit loads, there’s more than meets the eye. Entry and exit loads in property transactions come in various forms and these could have an impact on your returns. Sandeep Sadh – CEO Mumbai Property Exchange.com lists down some of the important loads that you must keep in mind.
Capital gains tax
Until last year, if you sold your property and invested the sales proceeds in some specific bonds, you would save capital gains tax on the sale proceeds. However, this year, the government has brought in some restrictions to these bond issues. Hence, today’s buyer has limited options to exit from the real estate market. The option realistically, given the current market condition is only to pay either a short term or a long-term capital gain tax and exit.
Till last year, property sellers and buyers had options like the familiar Nabard and NHB (National Housing Bank) bonds to invest in to save on capital gains. Although the lock in period for these investments for tax saving was for a period of 3 years with minimal returns, the contentment level in investors was visible, as earlier the average rate of growth in the real estate market was well within single digit compared to a today’s astronomical growth.
The Finance Ministry this year has decided to restrict the tax benefit to investments in NHAI (National Highways Authority of India) and REC (Rural Electrification Corporation) bonds and also fixed a ceiling of Rs. 6,500 crore. With these two avenues of investment already filled up, the government, at present has no further plan to either raise the limit or come out with any other viable option.
The result here is that, the buyer who would like to exit the real estate market has no other option but to pay income tax. For example, if you bought a residential property for Rs.50 lakh in 2003 and sold it in 2006 after a span of 3 years for Rs.80 lakh, then your profit of Rs.30 lakh will attract 22.44% as income tax, which is nearly Rs.6.75 lakh.
In short, if you sell any property after holding it for more than 36 months from the date of purchase then you will have to pay out 22.44% income tax for an easy exit, where as if you wish to exit before 3 years then the income tax rate applicable will be 33.66% on the income generated as per the present laws.
With real estate markets grown out more than 70 to 130% over the past 30 months across different locations in Mumbai, Thane and Navi Mumbai, ‘the invested investors’ will probably have to adopt a wait and watch strategy and with multiple rationalizations in government norms, rules, infrastructure development and regulations on the anvil it is difficult to predict what the future holds.
Duties, registration and transfer fees
For short term investors, exiting the project or the property purchased may not be viable and after paying the so called ‘entry loads’ like stamp duty, registration fees, interest and all the additional charges which a conventional builder charges, the investor may just be left out with returns which may be much less than he comprehended.
The State Government’s last declaration was of the amendment in the Maharashtra Ord. II of 2005 dated 7th May 2005. (The new rule in the stamp duty enables a new home buyer to pay the stamp duty and in the event, if he sells the property within 3 years from the date of purchase after 7th may 2005 then, the new buyer has to pay only the difference in the ready reckoner values over the course of years). A lot of builders charge the buyers or sellers a charge or a transfer fees ranging from 1% to the transaction value to Rs.100 or more per sq. ft as transfer fees in case you sell the property within a short span and while the society is not formed.
Opportunity cost of parking funds
He has to also look at the opportunity cost of blocking his funds in the project and calculate the simple bank interest of at least 8% for his personal capital investment. He may not like to exit unless he has reasons to. The over all exit expense in the short term can be pretty high depending on a lot of factors and on the other hand, if he chooses to give his property on leave and license basis after the same is ready then probably he is better off as he has a notional capital appreciation and lease rental income ranging from 4 to 9%.
If you own more than 1 residential and 1 commercial property then you are liable to also pay wealth tax. The wealth tax is 1% of the total wealth above Rs 15 lakh. Only 1 house is exempted under the wealth tax, which may be of any value, and if you’re claiming depreciation on your commercial property, which is, self-used then there is no wealth tax on your second property, which is commercial. If you are looking to lease your property, which is the 3rd property, or the second property then you may have an onus of the wealth tax subject to the above-mentioned conditions.
A little and probably the only respite available in investment is still is the housing loan tax benefit of Rs.150,000 on interest and principle repayment under section 80C of the income tax act.
Inspite of all the above, we have seen through generations that the real estate has always remained the first and foremost preferred choice of a lot of conservative Indians and the government and the builders should take steps to initiate simpler procedures for buying, selling and re-investing and not drive away investors or buyers with complex policies and one sided terms and agreements.