Dhantheras Special on Radio Ishq 104.8FM
Should you buy gold on Dhanteras?
Radio Ishq 104.8 FM
Checks to be done while purchasing a health insurance plan.
Co Owners and Co Borrowers on a home loan- Are they the same?
Is Real Estate a good investment for realizing your financial goals?
Raman, a 40 year old software professional wants to build a retirement corpus and build funds for his only daughter’s education and marriage. For this purpose, he has invested in some fixed deposits and post office schemes and also wants to buy a second property worth Rs 60 lakhs as an investment. He wants to use his accumulated savings for the down payment of the second house. Based on his income and expenditure patterns, he could easily get a loan of Rs 48 lakhs from any financial institution.
Raman will retire in 20 years and opts for a 15-year loan on the new property. But once he pays off the down payment Rs 12 lakhs and starts paying the EMI he is left with no investable surplus.
He decides the last five years prior to retirement will be sufficient time enough for him to generate retirement savings. He also assumes the property will grow in value by the time he retires and, the rental income would be sufficient to take care of household expenses post-retirement.
Disadvantages of Raman’s existing financial plan
- His asset allocation is heavily dependent on real estate and because of that his asset allocation is less diverse.
- The potential appreciation of the property’s value as per his estimation is based on his past experience and not dependant on facts or figures of the real estate market .
- Real estate assets can be illiquid and unless one is able to sell-off assets, it will not fetch much returns, when needed .
- Unless the property was bought much below the current market value, rent yields hardly match the interest earned on the savings bank account.
- He has ignored the maintenance and depreciation factors of the property.
- While rent may support his existing budget, he did not factor in the impact of inflation on his subsequent monthly budgets.
- Investment in real estate is not risk-free.
Actions to be taken to correct the situation
- He should focus on a personalised asset allocation plan as per his risk appetite and diversify his portfolio across various asset classes such as fixed income, equity, gold etc. His primary home, where he lives must not be considered for this purpose.
- He should reconsider buying a second house availing a home loan.
- He lacks a corresponding exposure to equities and has not invested in growth assets to meet long-term goals.
- Though his financial goals are focussed enough he should plan for both short-term and long-term goals.
- He is also advised to review it and rebalance his portfolio periodically, preferably every year.
Pitfalls of linking financial goals with real estate assets
In recent years there have been many instances of investors having increasing allocations to real estate as an asset class. It is important to understand how this over exposure might have pitfalls for them. The drawbacks are stated below:
Illiquid Nature – Considering liquidity as an important parameter in investment decisions, the fact that real estate investments are high value and big ticket in fact leads to illiquid assets. This actually means not being able to use funds even though the investor may have a high net worth, mainly due to illiquid nature of this asset class. Thus, it would be difficult to sell property immediately when there is a need for cash for a financial goal. Moreover, regulatory and transparency issues in the sector also pose risks to liquidity and jeopardise the investment .
Too much affinity towards physical assets – Indian Investors have a bigger emotional connect with physical assets such as real estate and gold as compared to financial assets. However there are two kinds of corrections that assets can undergo – price correction and time correction. The real estate markets are at present experiencing a time correction, where values have remained same over a long period of time, giving investors an impression that the valuations of their holdings are intact. This comes in the way of investors making rationale decisions to exit investments in real estate.
High absolute values – Many a time we hear stories as to how property bought a couple or more years back has grown and multiplied to worth crores of rupees. If one calculates the growth rate for this investment made in terms of today, the rate of return would be in the range of 10-12% per year. Assuming a long term horizon say 30 years in the Indian stock markets, one could have got much better results.
Easy availability of leverage – With the lowering of interest rates and attractive financing schemes, Indian investors are finding it easier to fund real estate purchases. As buyers usually have to put down only 20% of the cost, the balance 80% being funded by lenders, property purchase has become easier for investors.
However, investors need to be aware that since this is an unregulated market currently, they should not fall for any false promises and /or funding schemes which they do not understand. This may lead investors to get into a negative cash flow situation especially if the EMIs that they have committed to are high. As under construction projects may not be completed in time, there may not be any rental inflows and hence the burden of EMIs may not be comfortable for investors.
Too much real estate investments just because of taxation impact – The tax rules currently make it mandatory that the capital gains made from sale of property to be reinvested in real estate and/or capital gain bonds. To avoid taxation, gains from sale of property thus flow back into buying more of this illiquid asset class , thereby creating an overexposure of investor portfolios into this asset class. The other option of capital gains bonds offers a 6% rate of return which is less attractive to investors, thus making them go back to real estate, yet again.
Real estate purchase does not allow portfolio re balancing – Real estate purchase does not allow portfolio re balancing to happen from one asset class to another. For investors that are planning re balancing from real estate to debt or equity may find that they may be in a fix after exiting from real estate as they either need to go back to real estate or to debt in the form of capital gain bonds.
Debalina Roy Chowdhury
Radio Ishq 104.8FM
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NRIs Buying Real Estate In India
If you are a non-resident Indian (NRI) planning to buy a property in India, time could not have been better for you to do so. While India’s real estate sector has seen a price correction in the recent past, buying property in Indian has also become more lucrative with favourable currency rates.
India has emerged as a lucrative spot for international capital. Overseas investments have surged 137 per cent, from USD 3.2 billion during 2011-13 to USD 7.6 billion during 2014-16. According to a survey, almost 30 per cent of the total global real estate transactions in India, will be cross-border.
NRIs have a variety of investment options in India. But real estate still remains to be one of their favourite options, not just because of high returns but also because of nostalgic attachment and the dream to come back to a safe and world-class retired life in their homeland.
In addition, many NRIs are also interested in several Indian metros considering high growth prospective of the real estate segment in the country having attractive options including apartments, villas, plots and pent houses with world-class facilities.
As per RBI an NRI is “ A ‘Non Resident Indian’ (NRI) is a person resident outside India who is a citizen of India.”
And POI is – A ‘Person of Indian Origin (PIO)’ is a person resident outside India who is a citizen of any country other than Bangladesh or Pakistan or such other country as may be specified by the Central Government, A PIO will include an ‘Overseas Citizen of India’ cardholder.
What can be bought :
Though RBI has given general permission to the NRIs to purchase immovable properties in India, the permission does not grant power to acquire any and every property in India. The NRIs are allowed to purchase only residential or commercial property. So NRIs cannot purchase any agricultural land or plantation property. Since it is fashionable to own a farmhouse, be clear that under the existing dispensations, NRIs cannot purchase a farmhouse in India.
This way as long as the investment being made by NRIs in India is either in residential property or commercial property, they are not even required to intimate RBI about such purchases, even post conclusion of the transaction. Moreover there is no restriction as to the number of residential or commercial property an NRI can acquire.
How to fund it:
The payment can’t be made in foreign currency. NRIs can make the purchase using Indian currency, the Rupee, through funds received in the country by means of normal banking channels. These funds have to be maintained in a non-resident account under the foreign Exchange management Act (FEMA) and the Reserve Bank of India (RBI) regulations.
The payment for purchase of permitted property by an NRI can be made by way of remittance through banking channels from abroad or from money lying in their NRE/NRO or FCNR account. NRIs are even allowed to finance the purchase with home loan in Indian Rupees. The home loan can be granted by the Indian employer of the NRI employee for the purpose of financing of the property.
As far as payments of EMI for the home loan taken in Indian Currency in India is concerned, the same can be done either by direct remittance from abroad or from the money lying to the credit in NRE/NRO/FCNR account of the NRI. In addition to the above sources, the home loan can even be serviced out of the rents received from such property or money transferred to borrowers account from the account of relatives of such borrower.
In case the NRI is buying the property for the purpose of his own residence, the NRI can even take loan against deposits lying in their FCNR or NRE account upto an amount of Rs. 100 lacs for the purpose of servicing the home loan.
- The property to be purchased by an NRI can either be purchased in single name or jointly with any other NRI. It may be noted that that a resident Indian or a person who is otherwise not allowed to invest in the property in India cannot even be made a joint owner in such property though the second named person might not even be contributing any money towards the property
- A person who owns a property when he becomes an NRI can continue to hold the property in his name. It is interesting to note here that such resident Indian becoming an NRI is even allowed to continue to own agricultural land, plantation property or farm house which he is otherwise not allowed to purchase after becoming NRI
- An NRI is even allowed to get the money sent back outside India after appropriate taxes have been paid in India from rent so received.
- As they live outside, NRIs have an option to give PoA to their friends or relatives to complete the property purchase process in India. The PoA can be general or specific about the rights your representative can exercise.
- Documents required at the time of registration:
- Pan card (Permanent account number) if any
- OCI/PIO card (Overseas Citizenship of India/ Persons of Indian Origin)
- Passport size photographs
- Address proof
- Registered power of attorney (if you are not physically present at the register office)
- Title Deed (in the name of the seller)
- Prior Title Deeds (of last 15 years)
- Latest Tax Receipts (land and building if any)
- Updated Encumbrance Certificate (covering last 15 years)
- Approved Plan
- Building permit / Notice Of Commencement (from corporation, municipality or panchayat, if you are purchasing a house / apartment
Not really !
When an NRI sells a property in India, TDS (tax deducted at source) calculation is done at the rate of 20.6 per cent on long-term capital gains and 30.9 per cent on short-term capital gains. However, the final taxation rate is similar for NRIs and resident Indians. If an NRI has a lower tax slab applicable to him, he can apply for a refund of the TDS by filing their income tax return.
Repatriation of funds back to the foreign country
There are certain guidelines for repatriation of funds. An NRI or Person of Indian origin (PIO) may repatriate the proceeds from the sale of immovable property in India on the conditions mentioned below:
- The property must have been purchased in accordance with the FEMA directives, applicable at the time of purchase.
- The amount repatriated cannot exceed the original amount paid for the property, if the property was acquired in foreign exchange remitted through normal banking channels or out of funds held in an FCNR (B) account.
- However, in the following circumstances, the NRI/PIO may repatriate a maximum of $ 1 million per financial year:
- Out of the balance held in the NRO account, if the property was purchased out of rupee source of funds.
- If the property was acquired by way of gift, sale proceeds must be credited to an NRO account and may be repatriated thereafter.
- If the property was inherited from a resident Indian, funds may be repatriated on producing a documentary evidence proving inheritance, an undertaking by the NRI/PIO, and a certificate of an authorised chartered accountant in the formats prescribed by the Central Board of Direct Taxes (CBDT).
- In the case of a residential property, repatriation of sale proceeds is restricted to less than or equal to two properties.
- A foreign national may repatriate sale proceeds even if the property was inherited from a person outside India. However, prior approval of the RBI must be obtained.
A citizen of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan and Iran must seek specific approval from the RBI for repatriation of sale proceeds.
Apart from the above-mentioned points, an NRI is given the same treatment as applicable to any other Indian resident.
Some general tips –
NRI investors should avoid projects by unknown developers. Numerous buyers have fallen into difficulty, by putting their funds in projects that lacked mandatory clearances and fell short of even the minimum standards of quality.
Plan your visit to India and evaluate projects, opt only for reputed developers. In all cases, NRIs should strictly verify points, such as the track record and brand visibility of the developer, the social and civic infrastructure available in the location, the amenities in the project and the timelines for possession, in the case of under-construction projects.
A project that is targeted towards NRIs, is no different from other offerings in the market. A property should be evaluated, purely on the basis of its location and amenities on offer, the legal validity of its title and the developer’s brand image.
Besides exercising necessary due diligence, NRIs also need to adhere to certain specific laws and regulations, while buying, selling, or renting out real estate in India
Dilzer Consultants Pvt Ltd.
Radio 104.8 FM Ishq
Impact of Total Expense Ratio Reduction on Mutual funds- September 2018
What are the tax implications of receiving an Inherited Property
Real Estate Sector is one of the most sought-after investment alternatives in India. We usually make it as an emotional asset too. Many people want to make a mark of their own in the heart of their next generation and for that, they consider property as the best tool. The property thus acquired in one’s lifetime has to be transferred to the next generations like what our ancestors had passed on to us. You can obtain immovable property in various perspectives, and there can be various circumstances when you wish to transfer your ownership of property. This can be through selling the property to someone on high price for making profit or to fulfill your needs. But, most people are concerned about selling this inherited property, as it is not acquired by them and also the value might have increased many folds. The main concern while selling the inherited property is on the part of tax implication on the sales value. The frequently asked questions are :
Will the whole value of sale be taxable?
Will it increase my tax liability?
Do I have ways to reduce the tax liability?
How is the tax liability calculated?
Even if I purchase a new house with this sales proceedings, will it be taxable?
Here we will answer all these questions.
At the time of inheriting the property from ancestor, there is no tax on the transaction. However, any profits made on the sale of inherited property are taxable as capital gains. The capital gain arising from sale of the inherited property will be fully taxable in your hand.
The sales proceedings of the property comprises of two factors. First, the cost of acquisition – the value which you spend to purchase the property on its purchase date. Second, the capital gain – this is the gain arising from sales proceedings.
Sales value – Cost of acquisition + Capital gains
While the cost of acquisition of the property is tax free, the capital gain is taxable.
The capital gains from the sale of the property are calculated on two ways depending on the period of holding of the property. However the period of holding will be considered from the date of purchase by the ancestor not the date on which the property is transferred to you. Depending on the period of holdings, the capital gains are calculated on two ways.
Short Term Capital Gains (STCG)
Long Term Capital Gain (LTCG)
Short Term Capital Gains (STCG)
Any gain arising from a sale transaction which happens within 24 months (earlier 36 months) from the date of acquisition is called STCG. And, any amount arising from that STCG will be added to the income of the individual and tax according.
Long Term Capital Gain (LTCG)
The capital gains arising from a property which a person has been holding for a period of more than 24 months (earlier 36 months) from the date of acquisition is called LTCG. The LTCG will be calculated at 20% with the indexation benefit. The LTCG shall be computed as the difference between net sale proceeds and indexation cost of acquisition.
LTCG= Sales proceeds – Indexed cost of acquisition.
Indexation is a technique to adjust tax payments by employing a price index which adjusts for inflation. In other words, indexation is the process that takes into account of inflation from the time you bought the asset to the time you sell it. The way it works is that it allows you to inflate the purchase price of the asset to take into account the impact of inflation. The end result is that you get the benefit of lowering your tax liability.
This impact of inflation over the value of an asset cannot be ignored. Hence it must be taken into account when computing tax on the difference between the buy and sell cost. It is for this reason that the government uses the Cost Inflation Index, or CII. This is an inflation index tool used to measure the rate of inflation in the economy. The value of the index is determined by the central government and is increased every year to reflect inflation. With FY2001-02 (Earlier FY1981-82) as the base (CII=100), it was fixed at 208 for FY2018-19.
The indexed cost of acquisition will be calculated as :
Indexed cost of acquisition= Purchase value of the property* (Cost inflation Index of the current year / Cost inflation Index on the year of acquisition)
In case the property is acquired prior to 2001, then cost inflation Index of 2001 is taken while calculating the index.
For Example: Mr.X received a property from his father on 2015, which his father had acquired on July 2005 for Rs.20,00,000. Mr.X sold this property to Mr.Y this financial year for 1 cr. The Long term capital gains for this transaction is
LTCG= 1,00,00,000 – Indexed value of 20,00,000
Indexed value= 20,00,000 *(208/117)= 35,55,555
Out of the sales proceeding of 1 Cr, Mr.X can take 35,55,555 as tax free and for the rest of the amount, he has to pay an LTCG of 20% on 64,44,445. Further, he can also avail tax exemption by investing in Capital gain bonds for a maximum of Rs.50,00,000 on a financial year. The other way is to buy a new property with this sales proceedings.
Tax implication on buying new property
Sec 54 of income tax act allows you to reduce your capital gains to the extent these have been invested in purchasing a new house property. It should be noted that, you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains, however your exemption shall be limited to the total capital gain on sale. Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale. In the Budget for 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase.
While, finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property is one time consuming process. The Income Tax Department also agrees with these limitations. So, if you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you do not have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.
There is considerable confusion over the taxes applicable on the sale of an inherited property. While many think that the money received on sale of an inherited house is fully tax exempt, others feel that it is fully taxable. In reality, there is no tax liability at the incidence of inheritance. However, any profits made on the sale of an inherited house, are taxable as capital gains. Selling the inherited property and purchasing a new property has now become the best means to save the tax as the lock-in period of capital gain bond has been increased to 5 years from a previous 3 year lock-in period
Dilzer Consultants Pvt Ltd.
Radio Ishq 104.8FM
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Yesterday Arun sent me a mail,stating that the SBI Life Manager is saying investing in equity mutual funds is not good anymore, because of the 10 per cent long-term capital gains tax imposed on equity after April 1, 2018 basis Budget 2018 announcement. Instead, the manager went on to say “there is a fantastic ULIP plan that will double your money in three years and returns are tax free!”