Invest in assured returns projects at your own risk

These are very high-risk, high-return real estate deals with no regulator overseeing them. Unless you are a speculator and have the money, legal help and stomach for such deals, stay away

Devesh Chandra Srivastava, Mint 9/4/12

source: http://www.livemint.com/2012/04/08205625/Invest-in-assured-returns-proj.html

You can’t miss the billboards, the full-page advertisements, the television commercials offering you a juicy 12% per annum “assured” return on an upcoming residential or a commercial project. At a time when equity is volatile and high inflation is reducing the real return on deposits, the offer of a 12% return on a long-term appreciating asset like real estate sounds too good to pass up. The golden rule of investing is to question any deal that looks too good to be true; it often is too good to be true.

How do assured returns schemes work?

You buy a property outright (even when the completion of the construction is two or three years away) with either your own funds or a loan from a bank. Say, you pay Rs 1 crore for the flat. During the construction period, you get Rs1 lakh a month (12% per annum of Rs 1 crore) through post-dated cheques the builder issues you.

Once you get the possession of the flat, you can either exit the project or continue with the agreement, but the terms could change as the property will be leased out to a tenant and the developer may share the rent with you. There is no lock-in period for the agreement; it is usually for the next two, three, five or 10 years after possession.

SOUNDS GREAT. BUT LET’S ASK SOME QUESTIONS

From where is the developer giving a 12% return?

When a deal looks so good, we need to begin asking questions. The yield from residential housing is usually in the band of 2-6%. That means the annual rent as a percentage of the capital value is about 4%. A Rs1 crore property should get you an annual rental of about Rs4 lakh a year or Rs33,000 a month. So how is it that the builder is offering you a return that is three times the rental? There is obviously some other story at play.

Data from Kotak Securities Ltd, a brokerage house, shows that absorption levels in projects have deteriorated and there is an increase in inventory across prime real estate markets.

The excess supply is making some developers less creditworthy in the eyes of the banks and private equity (PE) that traditionally fund the business. This is forcing developers to turn to various other funding options, such as getting hold of bank finance but routing it through you, the buyer, because you get the loan at much lower rates. Says Gulam Zia, national director (research and advisory services), Knight Frank India, a property consultant firm, “This is a measure taken in desperation to raise cheap money from investors and buyers. If the same developer looks for a financing option from banks, he would get the money at a high cost (at a rate of 14-15%). Thus for him, getting money for 10-12% means cheaper financing.”

What is the guarantee that the post-dated cheques will not bounce?

Says Omaxe Ltd’s spokesperson, “In the past, it has never happened that any cheque has bounced from any developer.” The company that is running the scheme at one of its commercial projects at Greater Noida accepts payment from buyers in the company’s account, he adds.

However, it is worth mentioning that banks sometimes lend money to real estate developers by creating an escrow account. The receivables from customers also come in this account. The deposits made in this is strictly meant for the construction of the particular project. Says Ramesh Nair, managing director (west), Jones Lang LaSalle India, an international property consultant firm, “There is no such mandatory rule for creating an escrow account. However, this has been discussed in the proposed real estate regulatory bill.”

So is there a regulator overseeing this promise?

Seems not. In an email response to our query, the spokesperson of Reserve Bank of India said, “We do not regulate real estate firms so I won’t be able to respond to the queries.”

Capital markets regulator, Securities and Exchange Board of India (Sebi), too, does not regulate real estate projects, but has regulatory oversight over the collective investment schemes around real estate like PE funds.

India does not have a real estate regulator in place as yet. So you are believing the good intentions of the developer and his ability to keep the promise of payment. Questions Anurag Mathur, managing director, Cushman and Wakefield India, an international property consultant firm: “These are basically non-secure schemes. If there is some default from the developers’ side, what is the recourse for investors in these schemes?”

Unless you are a speculator and have the money, legal help and stomach for such deals, stay away from the assured returns projects. They come in with very high-risk (almost 90% of the cost is paid upfront to the developer) and high-return category of assets. There is an investor for whom these will work, but if you are the average salary-earning and EMI-paying homebuyer, stay away.

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How to save long-term capital gains tax

By investing the profit you make from selling a house, you can avail tax exemption. Here are the options that can help you get the tax benefit

Bindisha Sarang, Mint 2/3/2012

source: http://www.livemint.com/2012/03/01203751/How-to-save-longterm-capital.html

If you earn anything, it’s minus taxes; if you buy anything it’s plus taxes,” goes a witty one-liner, which is quite true for all practical purposes. Like most other earnings, when you make a capital gains by selling your residential property, you are liable to pay tax. Here, your gain is the difference between the price at which you buy and the price at which you sell.

You can make two kinds of capital gains by selling a house property, depending upon the time you have sold the property. Says Parag Paranjpe, a Nagpur-based chartered accountant and certified financial planner, “If you hold a house for less than three years before selling it, then it is considered a short-term capital gain (STCG) and you have to pay tax according to your income-tax slabs. If you sell the house after three years or 36 months, then it’s considered long-term capital gain (LTCG) and you have to pay 20% of the profit as tax.”

On LTCG, you can claim tax exemption under certain conditions. Also, you get the indexation benefit on LTCG. Here are some ways through which you can claim exemption.

Buy a new property

One way to get an exemption on LTCG received from sale of a house property is to buy a new residential house within the stipulated time period. Says Parizad Sirwala, partner, KPMG, an audit and consulting firm, “To get the exemption, you need to purchase the new residential house within a period of one year prior to or two years after transfer of the original house. As far as under-construction house goes, the construction needs to be completed within three years from the date of transfer of the original house.”

If you don’t plan to construct your own property, you can even book a residential under-construction house to avail this exemption.

You can get an exemption for an amount equal to the cost of a new house, or the amount of capital gains, whichever is lower. So let’s say, you sold your house for Rs80 lakh, made LTCG of Rs40 lakh, and bought a new house worthRs20 lakh. On the remaining Rs20 lakh amount, you will have to pay LTCG tax at 20%, that comes to Rs4 lakh.

There is a good chance that you may not get a new house of your choice within the stipulated time period. In that case, the Capital Gains Account Scheme (CGAS) can come to your aid.

Open a CGAS

You can deposit the capital gains amount in a CGAS before the due date of filing tax returns (31 July) to save LTCG tax. But treat CGAS as a parking place, where you can deposit money until you find a house that suits you, but of course within a time limit. The amount has to be parked in CGAS with the intention to use the funds to buy a new house within two years or to construct one within three years.

If you fail to buy or construct a new house within the stipulated period, the entire amount is treated as LTCG and you will have to pay tax on it. For instance, let’s say, you sold a property in April 2010. The capital gain made should be used to either buy a house by April 2012 or construct a house by 2013. Until then, you can deposit the money in a CGAS account before the date of filing returns, which in this case was be 31 July 2011, to save tax.

If you do not acquire the new property till April 2013, the LTCG would be taxable in the fiscal year 2013-14.

Where can you open it? You can open a CGAS account at an authorized government-owned bank.

It’s important to remember that the amount you withdraw from CGAS should be used to purchase a house within two months from the date you’ve withdrawn these funds. Paranjpe says, “In case you buy a new house, ensure that you do not sell the new house within three years or you stand to lose the exemption. In such a case, you will have to pay LTCG tax in the year you sell the new house.”

Invest in 54EC bonds

But what if you don’t want to buy a property at all with the LTCG amount? You can still get tax exemption, but you will have to invest the amount in specific bonds that fall under section 54EC of the Income-tax Act. These bonds are issued only by the National Highways Authority of India and Rural Electric Corp. Ltd.

To get the tax benefit, you have to hold these bonds for at least three years. Keep in mind that as per the said section, capital gains have to be invested in the bonds and the benefit is allowed to the extent of the amount invested. Therefore, if you’ve made LTCG of, say, Rs30 lakh and have invested it in one of these bonds, the amount will be exempt from tax. But if you invest only a part, say, Rs10 lakh, you will get an exemption only on that part and will have to pay LTCG tax on the remaining Rs20 lakh.

Sirwala says, “To avail the exemption, you need to invest the whole or part of the capital gains in these bonds within a period of six months after the date of such transfer.”

As per the Act, the exemption under this section is available provided the investment is made on or after 1 April 2007. Exemption is allowed on an amount up to Rs50 lakh in one fiscal. Paranjpe says, “Since the rule says that the maximum amount is Rs50 lakh per fiscal, you can take advantage if the six-month limit falls between two fiscal years.”

In fact, you could time the sale of your house property in such a way that this period of six months actually falls between two fiscal years. So, if you sell the house between October and March, you come in the six months limit between two fiscal years. In that case, you can invest Rs1 crore in total over two financial years and get the tax benefit (see table).

Bond features: You can invest a minimum of Rs10,000 and a maximum of Rs50 lakh. The face value is Rs10,000 per bond and you can buy up to 500 bonds. The bond is available for three years and can be redeemed only after three years. They come with a coupon rate of 6%, payable annually.

If for some reason, you are unable to keep the bond for three years, your tax exemption will be withdrawn and you will have to pay LTCG tax in the subsequent year. Also, if you avail a loan against such bonds within three years, you will have to let go of the exemption.

Also See | Making the most of 54 EC bonds ( PDF )

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Dipta Joshi, Business Standard, 21/7/2011

source: http://business-standard.com/india/news/buying-under-construction-property-can-be-serious-trouble/443388/

Onus of paying the home loan is on the buyer

Two recent court verdicts on land acquisition should ring as warning bells for buyers of under-construction property. A fortnight before, the Supreme Court (SC) quashed the acquisition of 156 hectares in Noida Extension. Yesterday, the Allahabad High Court cancelled the acquisition of 589.13 hectares in Greater Noida.

Property buyers would find themselves in deep trouble because of these two judgments. Many would have taken loans from banks to fund their houses and paid the builders — most likely, only the first instalment.

Loans for under-construction properties are disbursed in three to four tranches. That implies, with a loan-to-value ratio of 80:20, the buyer would have paid his part of the money completely.

The bank’s exposure, especially in the first tranche, would be 5-15 per cent. However, with the payment of the first instalment, many buyers start paying equated monthly instalments (EMIs) to the bank. According to an official in a housing finance company, most buyers prefer to pay the pre-EMI, where a simple rate of interest is charged. Only some buyers start paying the entire EMI.

The SC has come to the rescue of buyers in the case of Noida Extension by asking the builders to pay the buyers back with interest.

However, after the court judgements, builders cannot continue construction anymore, implying there will be no ownership of a flat in the next few years. On the other hand, the EMIs have already started.

If one does get into such situations, the onus is completely on the buyer to pay back the bank. Says a senior official in a housing finance company, “There is nothing much we can do in such situations because we have to protect our depositors as well.”

A senior SBI official says since the contract is with the borrower and not the builder, there is nothing much they can do. While lenders also do the due-diligence of properties and look at the record of the past 13 years to ensure it has a clear title, there is little they can do when such situations arise.

A buyer who has taken a loan has little option. If the builder pays back the money, things could be settled amicably. However, if they do not, there could be a long haul. In such situations, if a builder is offering a ‘suitable’ property in any of his other projects, one could use the option. However, ‘suitable’ is the key word here.

“Developers can create third-party rights or sell the units to customers only once they have the commencement certificate. Buyers who have bought the flat without asking for a copy of this certificate are at fault and cannot be protected in the court of law,” says Pranay Vakil, chairman, Knight Frank, a real estate consultancy.

In Maharashtra, under the Maharashtra Ownership Flats Act, the developer needs to hand over a conveyance deed to the buyer. This will include the stamp duty paid for the flat, besides the terms of agreement between the builder and the buyer. The customer is liable for compensation for any delay from developers’ side.

However, most developers may, instead, hand over an allotment letter on the builder’s letterhead. Such letters are not considered legal evidence and can put the buyer in a spot, if he is trying for a refund on cancellation.

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