Investment real estate is defined as real estate that produces revenue or is otherwise meant for investment purposes and not being primarily used for residence purpose. Investing in real estate helps diversify our portfolio, and it’s not as hard as we might assume for entering into market. It is very common among the estate investors to own multiple properties, one of which is utilized as their personal residence while the others are held to produce rental income and capital gains through appreciation in the value of the property.
The real estate sector in India is the second largest industry which generates employment for the people of India after Agriculture sector. According to a report by JLL India, the Indian real estate market is expected to rise significantly in the coming years, with the projections of a 10 to 15%. In 2023, the Indian real estate market had a highest sale till date it recorded. Niranjan Hiranandani, Managing Director of Hiranandani Group stated that if the real estate market continues to grow in 2024, then India’s GDP growth will touch 8 % as of now i.e. Q2 of FY 23-24 our GDP growth rate is 7.6% he also stated that this industry will grow faster than any other industry. Our upcoming budget for 2024 should focus on affordable housing, with possible incentives or interest rates for home loans expected to decrease.
The main drivers of growth in all real estate sectors—residential, commercial, and retail—are expected to be the formation of nuclear families, growing urbanization, and rising family income. Owing to its high ROI value, the Indian real estate sector is booming and has been a part of many profitable investment portfolios.
Let’s take an example of residential real estate investment:
We decide to invest in a residential property by purchasing an apartment in a growing urban area. The apartment is currently valued at ₹2 Crore.
You make a down payment of ₹40 Lakhs (20% of the property value) and secure a mortgage for the remaining ₹1.6 Crores.
Investment Details:
1. Rental Income:
If we rent out the apartment for ₹25,000 per month, generating an annual rental income of ₹3 Lakhs.
2. Mortgage and Expenses:
After accounting for the mortgage interest, property taxes, maintenance, and other expenses, your annual costs amount to ₹2 Lakhs.
3. Net Income:
Subtracting the expenses from the rental income, you have a net annual income of ₹1 Lakh.
Appreciation:
Over the years, the property appreciates at an average rate of 5% annually. After five years, the property’s value increases to ₹2.63 Crores.
And if we sale the property after 5 years the total return
Rental Income: Rs1lakh*5 years = Rs5 lakhs
Property Appreciation: Rs2.63 crores – Rs 2 crores = Rs 63 Lakhs
Total Return: Rs 5 lakhs (rental income) + Rs 63 lakhs (appreciation) = Rs 68 lakhs
Tax Implication on total return on income:
Rental income is taxable as “Income from House Property” under the Income Tax Act.
We can claim deductions for expenses such as property taxes, maintenance, and the standard deduction of 30% of the annual value.
Capital Gains will arise on the property appreciation value- If we sell the property after holding it for more than 24 months, the gain is considered a long-term capital gain. The long-term capital gains are taxed at 20%, and we can avail indexation benefits to adjust the purchase cost for inflation and if we held for less than 24 months, the gain is considered as a short-term capital gain and taxed as per our tax slab.
Alternatively, we have the option to invest the capital gains in a residential property or specified bonds to claim exemptions under Section 54 or Section 54EC, respectively.
Understanding Investment Real Estate:
Investing in Real Estate can help building wealth, increase income and diversify an investment portfolio. While the real estate market offers a wide variety of assets, most may be broadly divided into two categories.
1. Residential: Investing in Residential properties include homes, townhouses, buildings.
2. Commercial: Investing in commercial real estate may involve owning retail establishments, office buildings, warehouses, and storage facilities. Compared to residential investments, commercial real estate investments are usually more complex and expensive. Leases for commercial real estate may last longer than those for residential space.
Advantages of Investing in Real Estate in India:
1. Rental Income: Many investors buy real estate for steady income as it the a part of monthly source of income for many of the investors and rent of the properties increases when economies expand and one of the most attractive sources of passive income is rental revenue.
2. Tax Benefits and Incentives: There are many tax benefits to a real estate investor. Under 80C we can get deduction up to Rs 1,50,000 on the repayment of the principal amount of the home loan. Under section 24b we have deduction on the interest payment upto Rs 2,00,000. This deductions are generally available to both first-time and subsequent home buyers. However, there are specific conditions and limits associated with these deductions. Here’s a brief overview:
Section 80C: Under Section 80C, you can claim deductions for the repayment of the principal amount of a home loan for the property’s purchase or construction. This deduction is available for both first-time and subsequent home buyers. The overall limit for deduction under Section 80C, including home loan principal repayment, is maximum upto ₹1.5 lakh.
Section 24(b): Section 24(b) allows you to claim deductions on the interest paid on a home loan. This deduction is available for both first-time and subsequent home buyers. The maximum deduction allowed under Section 24(b) for self-occupied properties is ₹2 lakh. For properties that are not self-occupied (i.e., rented out), there is no upper limit on the interest deduction.
3. Diversification and Risk Management: Diversification is the main advantage of the real estate investors and compared to other assets like stock market, gold, cryptocurrencies, and banks, investing in real estate can be much safer.
4. Long- Term Value Appreciation: Investing in real estate is always beneficial in the long run. The prices of the properties raises in long term when market raises. As everyone knows the increase in properties prices now as compared to 2000’s.
Risk to Investing in Real Estate:
In Real Estate we can never get immediate gains it take many years to make profits in this market. When there is a recession period it would be very difficult to find tenants for the landlords so as a result the owner needs to pay for the maintenance of the property and it is difficulty in managing tenants like repairs can occur and tenants can always emergency in middle of night then there would be difficulty in handling the tenants.
Conclusion:
In conclusion, investing in Indian real estate presents significant opportunities for wealth creation and income generation. The sector’s anticipated 10 to 15% growth, as highlighted by industry experts, has the potential to positively impact India’s GDP. Factors such as nuclear family formation, urbanization, and rising incomes drive growth in residential, commercial, and retail real estate. While advantages like steady rental income and tax benefits make real estate appealing, investors should be mindful of delayed returns and challenges during economic downturns. Despite risks, strategic planning and risk management can position real estate as a valuable asset in a diversified portfolio, contributing to long-term benefits.
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The above article is written by Ms. Shruthi Nyavanandi (shruthi.nyavanandi@abacussolutions.co.in) and reviewed by Mr. Suyash Tripathi (suyash.tripathi@abacussolutions.co.in)
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