Investments in the realty sector to harness rich capital gains

The realty sector in the country is all set to enter into a new era in 2008 with a plethora of investment options lined up in the coming months. Investors may invariably be in a dilemma as to where to invest and what percentage should be earmarked for each category in the investment portfolio.

It is one area where both yield and capital appreciation is assured for investors. What is more, today, one can use the asset acquired over the years to raise short term funds for a rainy day through multiple options like mortgage loan against immovable property , loans against rental income and reverse mortgage for senior citizens.

Residential property

Those looking at residential property should remember there are three pertinent factors which are beyond investors' control like increase in land cost, input cost and registration fee. They are moving up at regular intervals irrespective of the government in power and its policies to supplement the revenue for the exchequer . Though the return on investment may not be relatively lucrative in the short term, capital appreciation in the long-term will compensate the investors well.

However, caution should be exercised to ensure that every family member in the house should own one residential property in his or her name so as to derive maximum tax benefit. This is because one self-occupied house is completely exempt from income tax and wealth tax.

It is not sufficient to just include the names of joint family members in the conveyance deed but there should be a clear mention about the percentage of ownership and the funds should flow pro rata to their ownership from their respective bank accounts.

From the taxation point of view, even if one has investible surplus, it is better to opt for home loans while investing in residential property as he is entitled for exemption upto Rs 1.5 lakhs per annum towards home loan interest paid. Further, an individual can claim deduction upto Rs 1 lakh towards repayment of principal amount.

With the benefit of full exemption on sale of residential property and cost inflation index for computing taxable longterm capital gains, smaller units already owned by the investors can be consolidated for larger premises both for self-occupation and leasing.

This is because with the entry of integrated township projects, investors can look forward to global standards in housing in the coming years. Land in suburban and peripheral areas appreciates much faster than in city areas. One has to look at the ground realities like zoning, government's proposal for acquisition, and whether conversion would be feasible here. Plot loans are available and if availed, would relieve the investors of the need for scrutiny of title deeds.

To encourage rental housing, it is hoped that the forthcoming Union Budget would provide more stimulus to investors . Even otherwise, exemption from wealth tax is already available if the house is let-out for a minimum period of 300 days in a calendar year. Moreover, a deduction of 30% from the rental income on account of repairs and collection charges besides exemption from the purview of wealth tax is available.

For commercial property, developers themselves want to retain the premises and are keen on leasing.
This is because they can realise substantial investments through rent discounting scheme offered by various banks. Leased commercial properties are sought-after and ideal for high net worth individuals. The yield varies from 10 percent and more, depending on the location, amenities offered, specification and proximity to landmark areas.
Investments in Tier II cities would be a viable proposition due to anticipated improvement in connectivity levels and infrastructure. Commercial property is currently exempt from the purview of payment of wealth tax and it is hoped that it would continue to remain so in the coming budget as well.

Yet another area that is promising a higher yield at 15-18 percent is the healthcare sector which is catching the attention of the investors in the garden city. Green buildings may offer an advantage over traditional buildings in terms of maintenance and so better yield to investors .

Good for NRIs

For NRI investors, investment options are available both on repatriation and non-repatriation basis. Investments made through foreign exchange are allowed for repatriation — upto two residential properties after a lockin period of three years.

Besides, there is an overall repatriation limit of upto USD 1 million every year. Rental income and sale proceeds of inherited properties , even though bought out of rupee funds, can be credited into NRO accounts and repatriated, subject to the overall ceiling. The current year will see yet another instrument entering the market with SEBI finalising the entry formalities for the launch of Real Estate Investment Trusts (REITs).

These trusts will be set in various centres across the country and provide investment opportunities for retail investors like in the developed countries

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