BankBazaar.com CEO Adhil Shetty explains pros & cons, savings on taxes that come with realty investment

For those looking at investing in real estate, there are two options. Remember to ?invest? in real estate and not purchase the property to occupy. A house is an investment when you look at making money from it ? either in the form of rent or by re-selling it at a higher price. That is why in personal finance, the self-occupied property is not counted as an investment asset.

Let us look at the options available:

* You can book a flat when the project is launched and sell it when the project is completed

* You can book a ready-to-move property and get rentals. These rentals can partially fund EMIs.

Which of these sounds better? Forget the practical angle, financially which of the options make sense?

Option 1

When you book a flat, you have to put in only a smaller sum of money. The return on investment may be better.

However, if you were to borrow to purchase the flat, you might have to keep paying pre-EMIs or interest on the amount borrowed until you can sell the property. This is an expense without any tax benefits.

Also, remember the capital gains tax aspect. If the property is resold for a profit within three years of the agreement date, gains are taxed with no scope of tax saving.

Option 2

These problems with purchasing and selling a flat can be partially negated when you purchase a ready-to-move property.

You can purchase the property with a loan and start paying EMIs immediately.

Which means both the interest paid without any limit and also the principal repaid up to a maximum of R1 lakh (under Section 80C) can be claimed as deduction from taxable income.

There are many options to save tax on capital gains when a property is sold after three years. Until then rentals can be enjoyed.

Drawback

However, it has its own drawbacks

* Income earned as rental is taxable as income from house property.

* On an average, the rental income from house property will be in the range of 3% to 5% of the value of the house. Which means, say you buy a house for R50 lakh and avail 80% loan, your EMI for a 20-year loan at the rate of 10% will be about R39,000. In addition, the same property will yield about R15,000 to R18,000 as rent. Rest of the EMI is cash outflow from your pocket

* If you can shell out additional R20,000 from your other income, or if you have R30 lakh, which you can invest in the property and restrict your loan to about R20 lakh so that your EMI matches the rent, this whole proposition will work wonderfully.

* Finding a good tenant is a big task in itself. On an average, expect your house to earn only 9-month rents a year. Assume that for about 2-3 months in a year, the property may lie unoccupied, but your EMIs remain. You should be able to afford this amount

Therefore, the tax advantages and the fact that you may be able to resell the property for a substantially higher price after a longer period are the positives.

On other hand, the adverse cash flow situation in such a scenario is an obvious negative. Also, please remember a house property is not a liquid asset. If you are stuck with it, this can turn out to be a long-drawn affair. Go for it, if you understand the pros and cons well enough.