Today multiple investment options are available in market with different specification and one of them is real estate. While asking to anyone about investing in real estate most of people including financial expert give instant response that real estate is good investment option.
Everyone think that one can earn lacs of rupees by buying and selling as real estate provides decent returns. Yes Real estate do provide good returns over a period of time but apart from return you have consider various other factors bedeciding real estate investment is good or bad . In this post we will guide you to make decision that real estate is good investment option or bad.
Our one of the client Mr.Raju thought real estate is good investment option and he has purchased flat at prime location of Navi Mumbai in 2010 for investment purpose. After 2 years that flat was giving him return of 50% and in order to fetch profit he has sold this flat.
Unfortunately, he was unaware about the tax implication on his hasty decision. Not only did he have to pay a substantial amount as tax on the profit, he also had to shell out the tax exemptions that he was availing of on the home loan. After considering this tax implication he was earning 5% return only.
Learning:-Any financial transaction without knowledge can turn in to disasters.
Let’s understand all factors described above, before making any real estate investments:-
Tax Implications:-
Short term capital gains tax:
As per income tax rules, if anyone sells real estate within 36 months (3 years) of buying it, the profit (difference between the purchase price and the selling price) will be added to his income for that particular year and taxed as per the tax bracket he is in.
So if you come in the highest bracket (tax at 30%), your gains will be taxed at 30%.Therefore if you gained 10 lakhs from the sale, you will have to pay 3 lakhs as tax.
Long term capital gains tax:
As per tax rules if you sell real estate after three years or 36 months, then it’s considered long-term capital gain (LTCG) and you have to pay 20% of the profit as tax.
You can get exemption of this tax under certain conditions. “To get the exemption, you need to purchase the new residential house within a period of one year prior to or two years after transfer of the original house. As far as under-construction house goes, the construction needs to be completed within three years from the date of transfer of the original house.”
Loan implications:-
Due to lack of money if you have bought the house by taking home loan than you can take advantage of tax exemption on your principal amount (up to 1 lakh per year) and interest (up to 1.5 lakh per year).
Income Tax Act says, if you sell a house within five years of buying it, the tax benefits on the principal repayment and interest paid on the home loan are reversed. These are then included in your taxable income in the year of sale.
Therefore, if you have availed 5 lakh tax exemptions for the principal (in 80 C) & 7.5 lakh tax exemption on interest in last 5 years (since purchase of this house), you have to add this entire amount in your taxable income & you will be taxed at whatever income bracket you fall in. If you’re in the highest bracket of 30%, then 30% of 12.5 lakhs will have to be paid to income tax dept.
Home loan Interest implication:-
If you have purchased a house through home loan, than you have to pay EMI. EMI consists of the principal amount and interest. In the initial interest component in EMI is maximum. You have to simply reduce your profit by Interest amount you have paid to bank.
Maintenance & other Cost:-
If you have purchase flat than you are liable to pay fix maintenance cost to society every month. Not only that every year you will be paying municipality/ property tax.
RBI has passed directive that prepayment penalty is not applicable otherwise it could lower your profits even more as bank were charging up to 2% penalty.
Rental Income:-
Many people think that they will rent their real estate investment and earn money. Nothing wrong in it but maximum rent in most of the case is around 6% on investment amount. This 6% return will not even cover inflation.
Apart from this you have to declare this rental income as taxable income which may increase your income tax burden.
Cost of Time and trouble:-
It is very easy to buy property but sometime it is very difficult to sale. You might have to wait month together to get good deal for your property, During that time,you are investing your time and money in efforts to sell this property.
Sometime in need of urgent money you may sale this property at discounted rate or may end up paying brokerage charges to broker. This will further reduce your profit.
If you put all factors considered above than PPF, FD or RD could be better investment option as you are earning fix around 9-10% interest per annum. This return is assured & returns tension free. Of course income tax is applicable on this return but if you consider all factor describe above it is defiantly good deal compare to real estate.
So, real estate is good investment option only if:-
(1) You can hold property for long time (more than 5 Years)
(2) If you have excessive cash and you need not to take any loan for making investment.
(3) You are making profit in black transaction and white transaction profit is very less.
(4) You are always reinvesting profit from real estate to real estate.
After reading this article if you are thinking of hiding your transaction for not paying tax than think again, every transaction done above certain value is in eye of income tax.
Every registry paper requires your PAN card details and these details are capture by income tax. Income tax department may send you notice & you may be in other trouble.
So next time if you get advice that real estate is good investment option do remember what you read here. It may save your time and money.
All the Best!