Other than illiquidity, taxes and other costs like high rate of stamp duty and registration also impede investment in real estate. According to Suresh Sadagopan, Founder, Ladder7 Financial Advisories , while there is no long-term capital gains tax in equity investment, such a tax liability may arise in case you had invested in a real estate property and want to sell it now. "Unless you buy another property or you invest the mon ey in capital gains bonds, the investor will be charged capital gains tax on the gains from property investments. And even if one invests in capital gains bonds, the net gains come to about 4.5% per annum" Sadago pan said. Also these bonds come with a three-year lock-in.
The rates of capital gains tax from the sale of a real estate property depend on the duration for which the property was held Compared to equities, where the long-term capital gains is waived off after just one year of holding in case of real estate the long term capital gains of 20% after indexation is applicable when the holding period is more than three years. In case of short term capital gains, the rate is according to the income tax slab rate applicable to the investor.
Despite these facts, it cannot be denied that real estate is an important asset class. And there are situations when financial planners advice clients to invest in a property. "For one, if the property is being bought for self consumption, then there is no argument to that," Sadagopan said. "Secondly, if you have higher amount of money and is well invested in equity, bonds and gold etc, then you can invest some amount in real estate," Sadagopan said.
Generally, however, not many financial planners suggest clients to invest in real estate up front. They first evaluate the merits of investments in all the asset classes, including real estate, and give their nod if invest ing in a property is found to be suitable to the to an investor's risk profile. Next week of late, inflation has been one of the most discussed topics for everyone, from policy makers, analysts and economists to common investors. Next week, we will deal with how at times of rising costs, equity funds can help you beat inflation.