• Insights

Real estate constitutes the largest chunk of the net worth of an individual and is a stable, income producing and appreciating investment proposition. It has an in-built tax efficiency for a loan availed for acquisition and construction of property and is a supplement to retirement stream by way of reverse mortgage. Also an asset for passing on to the next generation, real estate requires huge investment. Hence, borrowing funds from banks or housing finance companies becomes inevitable. Investment in real estate is reasonably safe with regard to the volatility of returns. The returns also beat the rate of inflation in the long run.
The ease with which finance is available, coupled with tax benefits in servicing, props up the demand for housing. The growth of the real estate is also highly influenced by economic cycles. The business environment of the period has a significant impact on the demand and rental value of commercial properties. However, one must be cautious about when one enters a cycle as exposure at the peak and just before downturn or consolidation may result in large investment with neither proper income yields nor suitable exit route.
Home loan borrowers are entitled to tax benefits under Income-tax Act, 1961, Section 80C for repayment of principal up to Rs.1 lakh, and under Section 24(b) for payment of interest up to Rs.1.5 lakh. The above tax deduction limit under section 24 is applicable for self-occupied house property. For let-out or deemed-to-be-let-out house property, there is no upper limit for the paid interest deduction from total income. For deemed-to-be-let-out property, a notional rent is considered as per applicable provisions and the tax calculations are done in the similar fashion. The tax provisions also favor, apart from interest expended on loan, a 30% standard deduction towards repair and maintenance expenses of the income generated/notional income from such a property minus municipal taxes. Under DTC (to be notified shortly), benefit under Section 80C may be withdrawn.
The housing loan can also be availed in joint names, usually with your spouse, thus providing tax benefits to both. With the introduction of reverse mortgage, the senior citizens owning  a property can have a comfortable retirement with a constant inflow of income. The property can be mortgaged to a bank or HFC that pays regularly.
Reverse mortgage guidelines state that one of the joint holders (usually spouse) has to be above 60 years (with the other over 55 years) and the maximum term for the facility is 20 years. Also, up to 60% of the valuation amount is considered for annuity and a lump sum payment, restricted to 25% of value.
There are certain inherent disadvantaged, too, for realty investment, illiquidity of investment being one of them. Others are high transaction and registration costs, inefficient price discovery, low transparency and title verification. A legal advice and expert’s scrutiny are required before entering a property deal.
Overleveraging may lead to a debt trap and a high loan repayment to income ratio may hamper investments for other life goals. Careful long-term planning of finances, especially in consultation with a certified financial planner or CFP practitioner is advisable when entering real estate investments. Beyond the physical ownership of real estate, an exposure by way of real estate mutual fund schemes, real estate investment trusts and dedicated private equity funds are options which are evolving and are worth consideration only on experts’ advice.

Ranjeet S Mudholkar is the Vice Chairman and CEO of Financial Planning Standards Board India. The views expressed here are personal, and do not necessarily represent that of the organization.

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Ranjeet S. Mudholkar, real estate