Introduction
Other than haunted homes, readers will agree that property at selected locations provide phenomenal appreciation and value for money in the long run. In the fast developing economy, land is the only thing that cannot be grown (other than reclaimed land from water bodies). Human population will keep on rising and living place will always be in short supply. Earnings will rise to keep up with inflation. That leaves properties as one good investment proposition. Importance of properties is well stated in this quote – “Don’t wait to buy a property. Buy a property and then wait.”
Rising trend amongst the young celebrities is also to invest in properties be it Justin Bieber, Justin Timberlake and the list is endless. Rather than parking all eggs in one basket or businesses, it makes sense to invest in properties at different locations.
Are some Indians looking for a second home outside India? Say Dubai, UK etc. Yes, Foreign Exchange Management Act also allows resident Indians to own properties outside India subject to certain limits. (Current cap on outgo from India per financial year is USD 2,50,000/- per person under the Liberalised Remittance Scheme)
Structuring the investment:
INDIA
It is obvious that investment in properties all around the world is structured in a way to have more benefits with least tax and other expense outgo. In India properties are bought in individual names or under a corporate or Limited Liability Partnership (LLP) structure.
Under corporate and LLP structure the liquidity of the properties is tough be it recent change in provisions be it Rule 11UA of the Income-tax Rules, 1962 or the Reserve Bank of India guidelines debarring corporates and LLP from holding only properties and securities as investments without they being registered with the Apex bank. However non-investment business based entities still prefer Corporate and / LLP structure due to deductibility on account of depreciation, expenses on maintenance of properties and interest on borrowed funds.
Under the individual scenario, tax benefits be it deductible interest and municipal tax or repayment of principal amount or investment avenues to safeguard against the capital gains liability of sale of assets held for more than three years (two years in case of transfer of immovable property) under the provisions of the Income-tax Act, has benefited many to own properties of their choice without worrying about the EMIs and buy larger properties in place of old properties. Absence of estate duty and Wealth tax in India has made inheritance also very easy with some riders that need to be taken care of on the legal side.
DEVELOPED COUNTRIES
In developed countries, payment on account estate duty is a big issue. Therefore around 30% of properties bought are in the name of Trusts or LLC and balance in individual names. And the trend of buying in Trusts or LLC structure is rising. Reasons being
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anonymity,
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ease of selling properties under the Trust or LLC structure as compared to India,
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pre-nuptial agreements in case marriages hit a rough patch,
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Liability on property, if any, will be restricted to the value of the property in case of LLC.
FINANCING
Means of financing can be as under
OWN FUNDS
LOAN FUNDS AGAINST
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Immovable property
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Movable property
OWN FUNDS
Either the property is fully financed using own funds or partly financed to the extent of down payment due to be paid to the seller. In the current scenario be it India or Other Countries, the rate of interest charged by the lender is much lower than the rate of inflation. Thereby more and more buyers borrow funds as a preferred means of financing.
LOAN FUND AGAINST – Immovable Property
Buyer takes loan against the proposed property or against any other immovable property. Loan tenure is dependent on the number of working years the person can put into. In India generally the eligible loan amount works out to four to five times his/ her yearly income. The rate of interest is floating rate throughout the tenure of the loan or fixed rate for initial years converted into floating for the balance period. Current rate of Interest on housing loans ranges from 8.35% to 10%. Income-tax benefits like deductibility of interest and principal repayment has gone a long way to incentivise buying of properties amongst the tax paying citizens in India.
In the current dull market, property developers are also offering loan schemes wherein payment starts after some years of taking possession of the property and at cheap rate of interest ranging between 7% to 9%.
LOAN FUNDS AGAINST – Movable Property
Gold and jewellery are most common movable properties against which loans are taken. Repayment terms are generally lower as compared to loans against immovable properties. Current rate of Interest on housing loans ranges from 9% to 17%.