Real estate investor's guide

Real Estate Investors Encyclopedia

Trainings by Vidya Bhagwat

4.1 Who can Invest in Real Estate 1. Any person who is Indian Citizen residing in India can invest/acquire/transfer real estate without any permission from the Reserve Bank of India. 2. All persons, whether resident in India or outside India, who are citizens of Pakistan, Bangladesh, Sri Lanka, Afghanis-tan, China, Iran, Nepal or Bhutan require prior permission of the Reserve Bank for acquiring or transferring any immovable property in India.

3. A person resident outside India, who has been permitted by the Reserve Bank to establish a branch or office or place of business in India (excluding a Liaison Office) in order to acquire immovable property in India which is necessary for or incidental to the activity.


Prohibition on direct investment outside India No Indian party shall make any direct investment in a foreign entity engaged in real estate business or banking business except after taking prior permission from RBI. Real estate business‘ means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/ commercial premises, roads or bridges.


4.2 Acquisition and Transfer of Immovable Property in India by a Person Resident

Outside India Investing in immovable properties in India is not a Herculean task for the NRIs anymore. We have come a long way from the days of FERA (Foreign Exchange Regulation Act) regime, when buying or selling of immovable property was governed by the citizenship of a person. According to an estimate, about 25 million

NRIs are looking at home country for potential investment opportunities in real estate. The FDI under automatic route in real estate development has also augmented the confidence of overseas Indians to forge strategic alliances with global realty giants for testing select markets across the country. Before we go into the

details of the law governing NRI investment in real estate, let us first understand the basic definitions.


4.3 Income Tax Aspects for an Investor There are many provisions under Income Tax Act, 1961 under which income from real estates is taxable subject to certain exemptions and deductions. Income from real estate can be by way of rent or by way of gain on its transfer. Rent from building and land appurtenant thereto is chargeable to income tax under the head income from house property. Rent from land is chargeable under the head income from other sources. Any gain on transfer of any land or building is chargeable under the head income from business and profession if it is held as stock-in-trade; otherwise it is chargeable under the head Capital Gains.


Based on its use, a real estate can be categorized as under:

Self-occupied properties for residential use. Self-occupied properties for commercial use. Properties used for agriculture. Let out properties. Vacant properties. Properties kept as stock in trade. Properties kept as investment.


4.4 Tax Planning for Real Estate Investment One of the most important rules for tax planning while buying a house property in India is that one should own only one house or a part thereof in the form of a flat or apartment particularly when it is meant to be used for self-occupation or dwelling by self or any member of his family. If any one is the owner of two or more self-occupied houses or flats,

only one self-occupied house would be exempt from income tax and the extra self-occupied house(s) would be liable to tax

in respect of deemed rental income.


House Property for Renting Purposes If one is interested in acquiring a house for the purpose of letting out, then a distinction is to be made between commercial property and residential property.

Wealth-tax exemption There is an exemption not only for the commercial property used for one‘s own business or profession but also for all commercial complexes and commercial buildings from the levy of wealth-tax. Besides, if any individual is the owner of only one house

property or a plot of land up to 500 sq. m, he would be granted complete exemption in respect of the same from wealth-tax under the provisions of section 5 thereof. Besides, all residential properties let out for a minimum of 300 days in a year would be completely exempted from wealth-tax.


Saving tax with the use of Gift Tax norms Until the gift tax was introduced, taxpayers had devised an easiest way to evade or reduce estate duty, income tax and wealth tax by gifting money, as also movable and immovable assets within the family. It was at this juncture that the government decided to introduce gift tax. Gift Tax was introduced in 1958. The objective was to curb instances of tax evasion by taxing gifts in the hands of the donor.

Methods to reduce tax You can reduce a great amount of tax by gifting assets within the family. Subject to the payment of stamp duty and registration charges, you can now transfer property in the form of houses, flats or plots to children above the age of 18, or even minors on the threshold of 18, without attracting gift tax.


4.5 Service Tax on Investors Investors are persons who put their money in real estate for a period of time. They do not render any service and hence, are not liable to service tax. However, a service provider collects service tax from the investor when he uses the services.

Some Important Points about Service Tax

Service tax is levied on provision of service. Six conditions have to be fulfilled for levy of service tax, viz. 1. a service should have been rendered. There is no service tax where only goods are sold. 2. there should be a service provider.


Wealth Tax Planning

Under the Wealth Tax Act, wealth tax is charged for every assessment year in respect of the net wealth on corresponding valuation date for every individual, HUF and company. Wealth tax is charged at the rate of one percent of the amount by which the net wealth exceeds Rs 15 lakh. Net wealth includes assets owned by the assesses.


Properties owned by an assesses considered for computation of wealth tax:

1. Any building or land appurtenant to it: This includes any type of house. The house may be used for residential or commercial purposes, for the purpose of maintaining a guest house or any other purpose. It also includes a farmhouse situated within 25 km from the local limits of any municipality. 2. Urban land: This means land situated in any area which is comprised within the jurisdiction of a municipality or a cantonment board and which has a population of more than 10,000 according to the last preceding census. It also includes land situated in any area within a distance of eight kilometres from the local limits of any municipality or cantonment board.


3. It is to be noted that all residential houses and properties are not included for the purpose of computation of wealth tax. Some are exempt from wealth tax. These include:

4 . One house or part of a house or a plot of land belonging to an individual or a Hindu Undivided Family. The house may be self-occupied or let out. In case the house is owned by more than one person, exemption is available to each co-owners of the house.


Objective of self-assessment of property tax There are two systems in assessment and recovery of taxes. 1. Assessment of tax by the officer. 2. Self-assessment system. Under the former there was huge discretion vested in the assessment officer which made the system arbitrary and often allegation of corruptions were made. Under the later the taxpayer assesses his own property tax based on definite rules. Obviously Self Assessment Scheme is superior to the assessment by an officer.


How is property tax calculated?

The tax on land and building is commonly called property tax. The property tax base is classified into two groups. 1. Annual rental value of the property. 2. Property tax based on estimated capital value of land and buildings.

For every property there lies a capital value. If the property is let, there lies a rental value. Each property is not let. It is difficult to decide annual rent for the self-occupied houses. There is no annual rent in hotels, but the rooms are let on daily rent.


4.8 Real Estate Mutual Funds A NEW WAY OF INVESTING IN REAL ESTATE REMF in India Owning a home is an ambition common to most of us. Most of

us buy a home to live in it. But there are a few who buy real estate

as an investment. This was the state of affairs till recently.

However, with the introduction of Real Estate Mutual Funds into Indian markets, things have become to change. Now investing in real estate is not the hobby of just wealthy businessmen. Ordinary real estate funds.


The following are the few advantages of investing in a real estate mutual fund are: 1. Professional management: Each Real Estate Fund has in place a well qualified and experienced team to safeguard the interests of the investors. 2. Diversification: Investors can have variety of investment options in their portfolio thereby, equipping themselves better for future market downturns. 3. Convenient administration: Since their investment is in the safe hands of professionals, they can save themselves from the headache of taking care of their investment themselves.


4.9 Precautions to be Taken in Real Estate Transactions

Home is one of your most prized possessions. It is important to be prudent and discreet in each and every step of buying a house, right from choosing the agent to closing the deal. Here is

a list of questions you should check on different stages.


4.10 All About Home Loans The sky rocketing real estate prices has not put a dampener on people‘s intentions to invest in it. 2005 was a good year for the home loan industry and reports suggest that there has been a 30% growth rate in comparison to 2004 in home loan disburse- mends. Housing finance companies (HFCs) have made merry on account of such sporadic growth. HFCs are also slowly seen to be moving beyond the realm of offering pure‘ home loans. They are not just restricting themselves to home loans only but are now venturing into offering property related loans. The year 2006 has been seeing the HFCs moving towards becoming a one-stop shop for property and home loan seekers. The loan seeker will look at the HFC as a very convenient destination to meet all their property and home loan requirements.


4.11 Know All About Mortgage Mortgage is a transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement, which may give rise to a pecuniary liability. The person borrowing and transferring his interest in an immovable property to the lender is the mortgagor. The lender is the mortgagee.


4.12 Accounting for Investors

Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment . an interest in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise . Accounting standard 13 would be applicable in accounting for investments.


Accounting for Investments

The following is the text of Accounting Standard (AS) 13, Accounting for Investments‘, issued by the Council of the Institute of Chartered Accountants of India.

Introduction

1. This Statement deals with accounting for investments in the financial statements of enterprises and related disclosure requirements. 2. This Statement does not deal with: a) the bases for recognition of interest, dividends and rentals earned on investments which are covered by Accounting Standard 9 on Revenue Recognition.


b) operating or finance leases; c) investments of retirement benefit plans and life insurance enterprises; and d) mutual funds and/or the related asset management companies, banks and public financial institutions formed under a Central or State Government Act or so declared under the Companies Act, 1956.

Definition• “Investments are assets held by an enterprise for • earning income by way of dividends, interest, and rentals, • for capital appreciation, or for other benefits to the • investing enterprise. Assets held as stock-in-trade are not • Investments”.


Classification of investments 1.An enterprise should disclose current investments and long term investments distinctly in its financial statements. 2. Further classification of current and long-term investments should be as specified in the statute governing the enterprise. In the absence of a statutory requirement, such further classification should disclose, where applicable, investments in: a) Government or Trust securities b) Shares, debentures or bonds c) Investment properties d) Others—specifying nature.


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Real estate investor's guide

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