Financial & Legal Tips Archives

Should I Invest in Real Estate?: Part I

Real estate may seem a desirable but unnervingly unversed venture for most investors. A wise and calculated investment strategy can help generate ample returns as is the popular belief. However, a very meagre number of investors has had the opportunity to have direct experience with the asset class. Although there are a number of benefits in real estate investment, it will not be incorrect to mark it as complicated form of investment. In the present scenario, it is important to understand and be aware of the general approach to different kinds of real estate investment methods. One may want to begin with asking the right questions.

The blog will help you get an insight into assessing an investment before you take your first step towards real estate investment.

Before You begin

Irrespective of the type of investment one is looking forward to, every prospective real estate investor must ask a primary question before putting in their hard earned cash in the market.

Do you have expertise to actively invest in the real estate market?

For beginners, it may take some time to have a clarity of what interests them so as to have a preference in the first place. However, when one is clear about which one is more suitable, making a choice won’t be difficult and you can choose between an active or passive investing whichever is more economical in your case.

Have you defined your investment timeline?

A investment timeline is critical for any investment including real estate. One must have a knowledge or target when it comes to procuring liquidity, therefore, having a foresight into whether your investment can provide you the funds at the time of your necessity.

How will you be benefitted from the investment?

Depending on the investment, one can expect certain tax benefits from real estate investing, be it active or passive. Being eligible for tax exemption can definitely be a goal for some who look forward to putting a lump sum amount of their cash into the market. Try to gather more information about what tax benefits your type of investment can help you get.

How would you determine the accomplishment from a real estate investment?

Expecting good amount as returns must seem like an obvious answer to this question, but success can vary from one person to another when it comes to investment. For some, getting hefty returns may be the definition of their achievement in the market, while acquiring benefits or managing other aspects can be how another person deems as their rightful strategy for their future in the investment sector.

To be continued in PART II

Moratorium and its Effect on Home Buyers

On account of the global pandemic and the economic blow that has been caused due to it, the Reserve Bank of India (RBI) has permitted moratorium period on term loans initially for 3 months till 31st May 2020 which has been extended to August 2020.

RBI Governor Shaktikanta Das announced this in aid of those facing major difficulties in loan repayments and are financially compromised in these crisis period due to the worldwide and nationwide lockdown. But what does this mean to you if you are paying EMIs and how does this affect you? We are here to answer some of the questions you have been seeking answers for.

What is moratorium period and how does it affect a borrower?

A moratorium period means a time-off from loan repayments for a borrower. It should not be confused as a waiver at all. Moratorium only means a borrower does not need to start loan repayments, instalments or interest dues for a certain period of time including personal and credit card dues.

A fixed period of time announced as moratorium period hence means that one can defer EMI payments for that period. Although not all lending institutions are obligated to allow this and can independently set the criteria for permitting a repayment holiday. Similarly, one can choose to avail the moratorium or not.

Whether one avails the moratorium or not, has nothing to do with the CIBIL score and he or she will not be considered as a defaulter for that period.

If a borrower avails it, he or she ends up paying more interest that gets added to the overall liability. This means, whereas the borrower gets some time to re-organise funds in short-term, at the end he or she ends up paying more than the actual liability that is far less when moratorium is not opted for. On account of longer tenure due to moratorium period, the interest accumulated on the outstanding sum ends up in higher repayments.

Most home buyers requesting for moratorium period while purchasing an under-construction property are offered up to 3 years of moratorium and up to 6 months in case of ready-to-move properties by the banks who agree upon it.

With most businesses suffering losses due to the pandemic and lockdown, the extra interest accumulated shall be a reason for concern for the self-employed citizens. For those whose funds suffice and are not facing a cash crunch, it is advisable to pay the EMIs instead of availing the moratorium. This is applicable on credit cards as well and a deferment in payment can result in an increased interest of 4-8% instead of the usual 2-4% charged on roll over balance.

If you have booked a property in Kolkata and have started paying EMIs already, ask you bank about moratorium and the difference in the final loan repayment amount before you decide to avail it.

Tax Benefit on Home Loan

Although the year 2020 has given us a tough time, it may be the best time to invest on the property you wished for since long. Easy home loan facilities gets a cherry on the top of the cake with the tax benefit increased up to Rs 3.5 Lakhs in July 2019 budget. Additional benefit for first time home buyers have also been given as per the policy. This scheme, the deadline to avail which was March 31, 2020, has now been extended to March 31, 2021, by Finance Minister, Nirmala Sitharaman in her Budget 2020 speech.

The total interest amount payable on a housing loan, can be claimed as a deduction from one?s total Gross Income as per the income tax laws. One can claim a maximum of Rs 3.5 Lakhs as deduction amount allowed FY 2019-20 onward for those purchasing residential property under the affordable housing scheme. As a part of the ?Housing for All by 2022? policy of the Government, this deduction under Section 80EEA has been extended to the next financial year.

Features of Section 80EEA

Who can avail this deduction?

Only individuals and not any other taxpayer can avail this deduction. For example, Partnership firm, a HUF, AOP, a company, or any other kind of taxpayer, are not entitled to any benefits under section 80EEA.

How much deduction can I avail through home loan?

A deduction up to Rs 1,50,000 is available under Section 80EEA for interest payments which is over and above the deduction of Rs 2 Lakhs for interest payments available under Section 24 of the Income Tax Act. Hence, an individual taxpayer is privileged to a total deduction of Rs 3.5 Lakhs for interest on home loan. However, these are further subject to conditions applicable under this section.

Is this similar to section 80EE?

First time home buyers are meant to be highly benefited from this policy if one avails a home loan valued up to Rs 45 Lakhs and is sanctioned before March 31, 2021. The middle-class strata of the society will mainly profit from this and affordable housing shall be an integral part of the Government?s Housing for All by 2022 policy.

Conditions Applied on Tax Benefits on Home Loan under Section 80EEA?

A financial institution or housing finance company must be lending the loan to the individual to buy property for residential purpose only.

The stamp duty value of the house property should not exceed Rs 45 lakhs.

The individual availing the scheme shall not be qualified to claim deduction under the existing Section 80EE.

The taxpayer must be purchasing a residential property for the first-time and cannot own any residential house property as on the date of sanction of the loan.

The carpet area of the property shall be not more than 645 sq ft in metropolitan cities and 968 sq ft in any other cities or towns.*

The property for which the individual wants to avail this scheme must be approved on or after September 1, 2019.*

Inorder to avail tax deduction, one first needs to ensure that the property is individually or jointly owned by the taxpayer and the loan is sanctioned against the individual or jointly with another co-borrower. The home loan certificate must be submitted to the employer for adjustment of TDS whereas, in case of self employed individuals, one must use it while filing tax deduction for self.

*These conditions have been specified in the memorandum to the finance bill, but not mentioned in section 80EEA.

The Need for Affordable Housing in India and the Housing Loan Market

Countries like India, China, Macau, Singapore, and Hong Kong face severe housing shortage in both urban and semi urban areas as the population density is quite high.

The Affordable Housing program is to provide housing units to that segment of our society whose income is below the average household income. It covers the economically weaker sections of the society along with the middle-class section.

Current Scenario of Housing in Rural and Urban India

While looking at the housing sector in India, we often forget that nearly 60% of the population of India resides in villages. Although there is not much shortage of land in the rural areas, the efficient usage of such lands is the real problem. Apart from that rural India also lacks infrastructure development, trusted real estate companies, uninterrupted electricity supply and efficient connectivity. More people are migrating to big cities for better and healthy living. While the space is limited and the population of our country is growing at a significant pace, affordable housing projects appear to be the only sustainable solution to the problem.

Need for the Boost of Affordable Housing in India

As per the estimations by Urban Housing Shortage, there is a wide gap between demand and supply of housing units in India. Continuous efforts have been made over the years to provide low cost homes, Yojanas like JNNURM (1994), Rajiv Awas Yojna(2013), & the Pradhan Mantri Awas Yojana (2015) have shown significant impact with an aim of ?Housing For All? by 2022.

The Central government has decided to provide 100 per cent exemption on income from interest, dividends and capital gains on investments made by sovereign wealth funds in infrastructure in India. It also includes investment in affordable housing projects. The deadline of 31 March 2024 has been set for availing this benefit with a minimum lock-in period of three years. This measure is expected to boost the real estate sector of major cities like Kolkata, Mumbai, and Gurugram, thereby creating jobs, which will result in a greater pool of homebuyers in the affordable housing scheme.

Growth in Housing Loan

Over the next five years, Indian home loan market is expected to see a major hike. There are two major reasons for such growth. Firstly, the home loan interest rate is relatively cheaper in comparison with other developed and developing economies. Secondly, the acute shortage of supply of housing units is a reason.

Home loan market in India has been categorized upon type, source, interest rate, tenure, area of property and region. In terms of source, the market can be segmented into bank and housing finance companies. Bank is the dominating segment in the market. HDFC, ICICI and SBI are the leading players in India home loan market. This is due to lower interest rates and various home loan schemes catering to customers.

RBI’s 3 Months loan EMI Moratorium scheme and its immediate effect

The Reserve Bank of India announced a three months moratorium on EMIs of all term loans, due from 1st March to 31st May. In this global crisis where there is disruption of cash-flows, by January end- Rs.13 lakh crore of housing loan and Rs. 2 lakh crore of auto loan are outstanding including credit card dues.

The moratorium of loan instalments has been availed for those who are facing some serious cash crunch in their respective businesses. It can be considered as the deferment of loan EMIs for three months where interest is being continuously accrued on the outstanding portion of the loan. There has been a confusion with loan waiver, when a loan is waived off you do not have to pay either of the loan amount or the interest. RBI has not waived any loan and announced moratorium of loan as a relief package for all term loans including educational, agricultural, retail, and crop loans under pool purchases. But, it hardly shows any signs of relief to the borrower because they have to pay the interest for these 90 days.

All lending institutes especially scheduled commercial banks have drafted different measures on the procedure of loan EMI moratorium. Some banking and non banking financial institutes have requested their customers to submit an application to avail loan moratorium. Whereas, some banks have kept moratorium as a default option and have asked customers who do not wish to avail the benefit to write an application.

After the RBI’s move, a large number of issuers had approached the Securities and Exchange Board of India (SEBI) seeking approval for extending the maturity of the commercial paper worth INR 77,798 crore and corporate bonds worth INR 91,902 crore. But SEBI is reluctant to approve this as the payment of bonds is owed to customers and not SEBI itself.

Recently, a plea has also been filed in the apex court stating the moratorium availability as “eyewash” and it makes no sense because the interest is being continuously accrued on the principal amount making the loan costlier.

Looking For Flats In Kolkata? Are You Ready Financially?

Whatever the reason may be, if you have decided to buy a property of your own, you should make sure you are monetarily prepared. To make the process as stress-free as possible, it is necessary to be prepared prior the search for your dream abode begins. Whether you are relocating or looking for investing in flats in Kolkata, the initial step is to make a plan in advance. And this is exactly where we can be of help.

CIBIL Score:
While your search for flats in Kolkata hasn?t hit the wall, you can still be ready you?re your CIBIL Score. Knowing your credit score is the first major step that you should take. Check for any miscalculations in the credit report and review it scrupulously to avoid any oversights. It is now easily possible to obtain CIBIL Scores online as well. With a high CIBIL Score you can get home loans at cheaper rates of interest and also easy approvals of loans.
Well-organized Savings:
Keeping savings in the right amount at the right time helps in paying the down payment easily in future while investing on the interested property. Proper savings can be of great help while making investments in other accessory expenditures while not being worried about the home loan that you have applied for. More than anything it helps to make the financial institutions believe in you and smoothen the loan approval process.
Avoid additional credit:
Once you have decided to plan for a new home, it is advisable to stop taking additional credit 6 months prior to making an investment or applying for a loan. Swiping your credit card too often may not be a good idea also. It is important to keep in mind that this may have an undesirable effect on your CIBIL Score. Hence, being extra cautious is the mantra.
Check the whims:
In the process of owning the best of the flats in Kolkata, watch yourself from becoming extravagant in your pursuit. Plan your investments in a manner that you can afford to keep up with what you have invested in. You should be aware of where you need to confine yourself. Maintaining the cash-flow is as necessary as finding solace. It is more important to enjoy your stay than ending up owning an over expensive property which you cannot afford to maintain.
The DRC Fund:
You may have never even heard of such funds. Well, you are not mistaken. DRC is short for Deposit Reserve and Contingency Fund. Although you are saving for your future investment or you are paying your EMI?s for it, keeping some money aside for your daily requirements is mandatory. The deposit fund should be at least 20% of your total savings. The Reserve Fund, i.e., your daily and monthly expenses, seen or unseen, like repairs, new furniture, etc. must be kept aside. And the last one, Contingency Fund, as the name suggests, for unforeseen expenses such as accessory alteration or renovations.

A range of apartments is available these days in and around Newtown and Rajarhat in Kolkata. Some real estate developers also offer home loan solutions while booking a project with them. They also help you plan your investment to make it easier for you to pay the installments. While you are still searching for the right property, keep an eye on your assets and savings. Let not the search for the perfect home put a hole in your pocket.

Has Real Estate Projects Been Affected By GST?

The year 2017 had seen its ups and downs with the advent of demonetization itself. Before even, we saw the face of stability, sales, and launch of new homes went down because of more focus on under construction projects by the developers. The real estate saw a further downfall when the government introduced a 12% GST on under construction real estate projects along with other goods and services. However, the only ray of hope was seen when the leading developers increased their market share every 3 months and developers and investors from Mumbai and Pune contributed more than 45% on demand and supply of the whole country. The GST has had its impact on all sectors and here we discuss how it can affect your dream of moving into a new home.

Impact of GST on Under Construction and Luxury Real Estate Projects

Ongoing residential construction services are subjected to 12% tax with total input tax credit (ITC) and are non-refundable in case of surplus ITC. Developers in Tamil Nadu, Karnataka, and Andhra Pradesh can expect improvement in margins (up to 12% from 10-11%) due to the availability of input cost credits provided there is no price revision in future. The top real estate builders in Kolkata, who do not fall under these regions may increase their property prices by 6% with no input credit available to them.
In case the credits are passed on completely by the developers, the base price is expected to come down and the home buyers are the one to gain from this under the GST rule. Although stamp duties will be applicable in case of both under construction and completed projects.
Property under the luxury real estate projects are subjected to 12% ITC and is not adequate to bring down the tax liability due to overhead taxes. Only the basic construction cost is supposed to lower by a very thin margin in case of luxury projects.

Impact of GST on Ready Properties

Ready properties for sale can wave off the GST only if the OC for the project has been established. According to a report from CRISIL, excise duty and VAT paid by a developer was different for every state. This disparity has been sorted out by imposing 28% and 18% GST on cement and steel and 28% on paint and other white goods. This has led to 12% tax on the final product. The tax amount applicable to the land and the entire cost is 12% which makes it easier for the developers to avail the input credit. The home buyers are thus relieved of the GST liability.

However, the developer has to pay the GST on the complete project and the input credit is only claimed on the construction cost. This causes a gap of 30% which the builder in order to bridge will raise the price of the property whether or not you choose to buy a ready-to-move-in or an under construction property.

What to expect?

After the demonetization in India last year, many potential buyers were expecting a drop in real estate prices which wasn?t happening.
With 2018 budget, buyers can expect reduced stamp duty rates and home loan rates. If the Government looks deeper into the matter and realigns the stamp duty rates with the GST rates or waives off stamp duty rates, the price of property an witness a subtle fall which is beneficial for home buyers in 2018.
Presently under the GST regime, real estate is applicable for 18% tax along with only 1/3rd abatement for land. Since the share of land in metro cities is more than half of the total project cost, it is not wrong to vouch for increment on abatement of land to 50%.

Government Plans for Real Estate Projects-2022

The ‘Housing For All By 2022’ venture by the Government targets at delivering 10 million houses out of which 95% is to be constructed for Economically Weaker Sections (EWS) and Lower Income Groups (LIG). People are expecting lowered tax rates from 18% to 12% GST on property purchase with abatement for land raised to 50% hence bringing down the tax rates to further 6% GST. This program can prove of huge advantage to the actual cause of the project by the year 2022. For those looking forward to purchasing new residential projects in Kolkata, can hope for a better scope in the coming 2 years.

Can NRIs Purchase A Property In Kolkata Too?

You had the wings to fly, and now your roots are pulling you back? Every individual feels the urge to come home once in their lifetime so strong that they try all ways and means to fulfill that wish. Bengalis residing abroad are always looking forward to investing in a property in Kolkata for future use. However, countries and continents apart, old age and religion may not keep you from getting what you want, but the law can. Property acquisition for non-residential Indians has certain constraints.

Do the RBI guidelines allow an NRI to own a real estate property in Kolkata?

The RBI does not prohibit any NRI from purchasing or owning a residential or commercial property in India. Although the NRIs are free to purchase or inherit a property in India, they cannot buy any agricultural land or plantation property without special permissions.

The Foreign Exchange Management Act (FEMA) has laid down few rules and regulations for the NRIs and Persons of India Origins (PIOs) interested in acquiring property in India. Every NRI or PIO shall be treated at par for investing in real estate property.

Being an NRI, you will not require any permission from the RBI to purchase any residential or commercial property in India.
There is no need of sending any communication or intimation to the RBI regarding property purchase.
The income tax laws also do not prohibit NRIs from procurement of one or more real estate property in Kolkata or anywhere else in India.
The investor can apply for a loan to any bank by online or offline methods too.
NRIs are not eligible to buy or own any farmhouses or plantation in India. They shall require special permission from the RBI for such kind of land acquisition.
All transactions done in Indian currency maintained in a non-resident account by the FEMA and RBI regulations.
The NRI interested in purchasing a real estate property has to give Power of Attorney (PoA) to one of their friends or relatives for compliance with processes in India.
The PoA can be customized to give full or restricted rights to the representative.

Co-owning a property isn?t a trouble too

So you are looking forward to jointly owning your property in Kolkata with someone? As an NRI you can do that too. The Government of India allows an NRI or a PIO to jointly own a property in India. Your second holder has to fulfill the following criteria:

He or she has to be an NRI or PIO
One should be eligible to invest in any property in India
The second owner should contribute to the property acquisition

What if a person who owns properties in India, subsequently, becomes an NRI?

It may happen that an individual, who is a resident of India has invested in a real estate property and has later attained citizenship of another country where he or she has started residing becoming an NRI in the process. In such situations too, one shall continue to be the owner of the property irrespective of his or her duration of stay in the country. In this case, a person owning an agricultural land or a farmhouse shall also remain the owner of the same. They are also free to rent, sell, transfer or gift their property to an Indian or an NRI post all taxes have been paid on time.

Certain real estate builders in Kolkata can also give proper guidance regarding the legal aspects and tax issues too before purchasing any property in Kolkata. For more details, contact Realtech Nirman.