Category: Houses for army officers

10 Apr 2014
Is return from Real Estate really that

Is return from Real Estate really that high

Over the last ten years, real estate in India has given good returns. Enticed with the idea of owning a house and seeing their assets rapidly appreciate in value, countless Indians have invested a large part of their savings in real estate. Many cities and suburbs have seen a veritable real estate boom in the last decade. While some investors had bad experience with their real investment due to delayed possession, stalled projects and in some cases the projects never taking off, nevertheless, many investors got excellent returns from their real estate investments. However, there is a big difference between the real returns from real estate and what is apparent. Let us take the case of Akash, a resident of Gurgaon, a New Delhi suburb. Akash purchased an apartment 10 years back for Rs 40 lakhs. The market valuation of his apartment today is Rs 1.5 crores. So Akash’s profit is Rs 1.1 crore on his Rs 40 lakhs investment? Not quite so. Real estate is a very complex investment and there are a number of factors involved, which investors casually ignore. In this article, we will examine different factors that affect the returns of your real estate investment. At the end, we will compare investment in real estate with other investment options.

Let us revisit the case of Akash, with whom many of us will relate, in terms of our own real estate investment. Akash bought a 2000 square feet apartment in Gurgaon 10 years back at a purchase price of Rs 40 lakhs (Rs 2000/sq ft), the market value of which today is Rs 1.5 Crores (Rs 7500/sq ft). Now we will examine the various factors affecting the returns of Akash’s real estate investment.

1. Home Loan:Akash took a home loan to purchase his house. As required by the housing finance company, he made a down payment of Rs 8 lakhs (20% of the house value) and took Rs 32 lakhs, 20 year floating rate home loan. The interest rate at the time of purchase was 12%. Accordingly his home loan EMI was set at Rs 35,235 per month. The home rate would have fluctuated both up and down over the past 10 years. Let us assume the average interest rate during this period was 11.5%. The chart below shows the interest and principal payments of Akash’s home loan EMI.

The red portion of the chart represents interest payment and the green portion of the chart represents the principal payment. The horizontal axis represents the number of months. As you can see, in the earlier part of the home loan term most of the EMI goes towards interest payment. In fact, for the first 7 to 8 years over 70% of his EMI goes to interest payment. Even after 10 years of his house purchase, after paying nearly Rs 41 lakhs in EMIs, nearly Rs 22 lakhs of the loan is still outstanding. After factoring in the EMI payments, the profit is no longer Rs 1 crore.

2. Stamp Duty:After Akash received possession of the property, he had to register it with the Government, as required by law. Akash bought the property in his own name. In the state of Haryana stamp duty charges at 8% for males, 6% for females, and 7% for jointly owned property. Stamp duties vary from state to state. Akash had to pay a stamp duty of Rs 320,000. He would have been better off, buying the property in the name of his wife, or jointly with his wife. Stamp duty and registration charges are additional costs that must be factored in a real estate purchase consideration.

3. Possession Delay:The possession of Akash’s apartment was delayed by 3 years. Possession delay, nowadays, is the norm not the exception. In fact, many will count Akash lucky, since his possession was delayed by only 3 years. Projects of many reputed developers have been delayed by 5 – 6 years. Nevertheless, there is a cost associated with possession delay. Mental aggravation aside, Akash had to pay both a monthly rent of Rs 10000 (with an annual escalation of 10% as per his rent agreement) and his home loan EMI for the three years. The total cost of his rent due to the possession delay was Rs 397,000. This must also be factored in.

4. Maintenance and Property Tax:After Akash got the possession of his apartment and moved in, he did not have to pay rent but he has to pay maintenance and property tax for his hose. His maintenance is Rs 3000 per month (at the rate of Rs 1.5 per square feet). Since possession was delayed by 3 years, Akash did not have pay maintenance in the first 3 years. Over the 7 year period Akash occupied the house, he paid maintenance of Rs 252,000. Akash also has to pay property tax, at average annual rate of Rs 10,000 over the 7 year period. His total cash outflow on property tax is Rs 70,000. This cost must also be factored in.

5. Income Tax:Akash could not claim any income tax deduction till he received possession of the apartment. After he received possession, Akash claimed deduction of Rs 90,000 – 100,000 for principal payment under Section 80C. However, the 80C deduction for principal payment is not relevant here since the same deduction can be claimed by investing in PPF or ELSS. Additionally, on receiving possession Akash claimed a deduction of Rs 1.5 lakhs from taxable income per annum on account of interest payment, under Section 24 of the Income Tax Act. Since Akash is in the highest tax bracket, Akash saved Rs 45,900 (Rs 1.5 lakhs @ 30.9% tax rate) in taxes on an annual basis. Over the 7 year period he saved Rs 324,450. The table below shows the calculation of income tax deduction for interest payment.

6. Broker Commission:If you buy property through a property dealer, you will have to pay a broker commission, usually a percentage of the total property value. The commission is usually around 3 – 5% of the property value, but can be negotiated. Luckily, Akash bought his apartment directly from the developer, as part of the initial allotment and therefore did not have to pay commission on purchase of the apartment. However, he will need a broker to sell the apartment. The commission paid to the broker will be Rs 4.2 lakhs (3% of the sale price, Rs 1.4 crores). This cost has to be factored in.

7. Capital Gains Tax:Since Akash has purchased the house 10 years back, long term capital gains will apply. Long term capital gains tax is 20% with indexation. The cost inflation index in 2003 – 04, when Akash purchased the house was 463. The cost inflation index in 2013 – 14 is 939. The total purchase consideration for Akash will be indexed for inflation by multiplying it with the ratio of Inflation Index in 2013 – 14 and Inflation Index in 2003 – 04 (939:463). The table below shows the calculation of the long term capital gains tax for Akash.

We have covered the major expenses for Akash. Now we can calculate Akash’s profit or loss.

Therefore, instead of the bumper Rs 1.1 crore profit, that was apparent earlier, the actual profit is much less at Rs 55 lakhs. Investors, who are planning to make real estate investments, must make a note of all the above factors in their financial plan, so that they have real sense of what to expect from their investments. Having said that, real return from Akash’s real estate investment is still very good compared to almost all other asset classes, with the exception of equity.

Alternative Investment Option: Equities

Now let us examine an alternative investment scenario. Akash’s colleague Sameer, who is in the same income bracket as Akash, decided not to buy a house and instead invested in equity oriented mutual funds, both through the lump sum and systematic investment plan route. For his investment he chose 5 top performing ELSS and large cap funds, to create a diversified equity investment portfolio. See the chart below for the annualized 10 year returns from these funds.

Just like Akash made Rs 8 lakhs down payment for his house, Sameer invested Rs 8 lakhs in equal lump sums in these five funds. Since Sameer did not own a house, he stayed in a rented apartment at a monthly rent of Rs 10,000 with an annual 10% escalation. In India rental yields for residential properties are in the range of 2 – 3.5% (in Gurgaon it is around 2.5%). Therefore, it can be safely assumed that Sameer’s rented house (Rs 10,000 rent) is of the same size and quality as Akash’s owned house (Rs 40 lakhs value). As discussed earlier, Akash and Sameer have the same disposable income. While Akash paid EMI of Rs 35,235 every month, Sameer invested his balance savings (Rs 24,235), after paying for rent and keeping a small buffer for future increases, in monthly SIPs of the 5 ELSS and large cap funds shown above. For his ELSS SIPs, Sameer claimed deduction of Rs 1 lakh under Section 80C. The average 10 year post tax return annualized return of Sameer’s investment portfolio is 22%. Long term capital gains from equity investments are tax exempt.

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14 Oct 2013
Would REITs make investing in real estate easy for you-

Would REITs make investing in real estate easy for you?

(Courtesy:; dated 14 Oct 2013)

Demand in the real estate sector has been sagging due to economic slowdown. Since many people are deferring their property purchases; inventory level in major property markets is rising. It is often found that due to higher ticket size, many find it difficult to buy properties. On the other hand, real estate developers have been knocked down by higher cost of borrowing due to which many projects have gotten stalled. To increase the investor-base and open up another financing avenue for real estate developers, Securities and Exchange Board of India (SEBI) has been considering allowing Real Estate Investment Trusts (REITs) in India. The initial draft was launched in 2008 but was subsequently withdrawn too due to non-transparent valuation norms, dissimilar stamp duty structure across different states and the lack of uniformity in land and property pricing. Recently SEBI has revived the plan by issuing draft regulations for launching REITs in the country.

What are REITs

REITs are trusts which are patterned like mutual funds. They pool capital from investors and deploy in real estate. REITs will be established under Indian Trust Act, 1882 and will have parties such as a sponsor, manager and valuer. Both, investors as well as property developers are expected to benefit from the launch of REITs.

 What are the positives?

For the real estate sector:

  • It could help the real estate sector to raise stable funds
  • Will encourage developers to think long-term
  • Will infuse transparency to the real sector (and would be well-regulated now if the Real Estate Regulation Bill is passed in the monsoon session of the parliament)
  • Instill professionalism in property management

For the investors:

  • Can make investing in real estate accessible to those who may not have the resources or may not want to directly buy a property
  • Offers an alternative investment avenue

For the economy:

  • Attract overseas investment
  • Could help in development of capital markets
  • Could help bringing in stable long-term flows which are needed to finance country’s Current Account Deficit (CAD)

Is the time of introducing REITs appropriate?

When the draft was withdrawn in 2008, there were concerns about protecting investors’ interest due to difficulties in valuations and scope for malpractices.
The Union Cabinet has recently cleared the much awaited Real Estate (Regulation and Development) Bill which furnishes establishment of a dedicated regulator for realtors. The bill intends to protect buyers’ interest and bring transparency to the sector. Some of the key points are;

  • Developers can launch projects only after securing all clearances
  • It is mandatory on builders to have a clear mention of carpet area
  • Penalties of upto 10% of the project cost if builders found guilty of putting out misleading advertisements and even a jail for repeated misdeeds
  • Now developers can take only upto 10% amount in advance without a written agreement.
  • It is now mandatory on developers to maintain 70% of the amount collected from investors in a separate bank account for every project.
  • Buyers can get full refund with interest in case of delay in projects


Personal FN is of the view that since REITs would majorly invest in completed projects and generate regular cash flows through rents earned; investing in them is relatively safe than investing in an under construct project. Moreover, ticket size for investors would be kept substantially lower at Rs 2 lakh. Investing through REITs would give investors an opportunity to diversify. Now investors would not only get a chance to invest in real estate with less capital but would also get diversification within real estate as an asset class since a REIT would invest across projects and property markets. You may also be able avail benefit of professional management.
However, PersonalFN believes, investors should also consider possible negatives too. Unlike mutual funds, income distributed by REITs wouldn’t be tax free in the hands of investors. Furthermore, despite having in place Real Estate (Regulation and Development) Bill; there is still a scope for manipulations and malpractices. Moreover, there’s no track record of any REIT as of now in India and thus investors shouldn’t jump in right away. A good track record is a pre-requisite for you to invest in it.


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13 Apr 2013
Take a home loan intelligently!-

Take a home loan intelligently!

The old perspective that one should never get into debt has changed now. It is not because of ‘enjoy today, pay later’ tendency of the current generation, but because changing financial dynamics demand so. This is more so in case of home loans.

A Home loan is taken for an appreciating asset, that is a house, which is a part of prudent financial planning. This is opposed to a loan taken for a depreciating asset like an automobile, holidays, white goods etc where the aim is to meet an immediate requirement (real or perceived!). In addition to creating a financial asset, the tax breaks given for home loans for houses could be the biggest tax exemptions you could ever get under the current tax laws, making the effective rate of interest paid by you much lesser than the one contracted for on your home loan. However, there should be no tendency to put the cart before the horse – we have seen a large number of people take a huge home loan because they want to save tax. If ever they calculate the total amount of interest paid Vs the tax saved, they might not even know how to regret their decision!

There are certain practical aspects to be kept in mind when you take a home loan:-

  1. Scout around for the best rate of interest. Generally large public sector banks like SBI, PNB and even smaller ones like Allahabad Bank, Indian Bank etc give the best rates with favourable terms and conditions like processing fees, file charges etc. Also, don’t overlook firms like LIC Housing Finance. Sometimes home loan lenders give a concessional rate for a special period, say 140 months, to balance their cash flows – it could be a good window for you if the special rate period is close to what you are looking for.
  2. Normally, for floating rates of interest, private sector banks are more ‘lethargic’ in reducing the rates than public sector banks. If this happens to you and the gap between the rate being offered to new customers and your current rate is large (typically 1% or more), fight / negotiate with the lender. If need be, pay the small fee to get it realigned to the latest rate – the fee will be worth it.
  3. It is not necessary that your employer-provided loan (like by AGIF, NGIS or AFGIS) will always be the best – it also would have the stipulation of restricting the tenure of the loan to your retirement date. In case of Premature Retirement (VRS), you would’ve to pay back the entire outstanding principal amount. Employer provided loans are generally at a fixed rate of interest which may turn out to be a disadvantage in current era of falling interest rates.
  4. Deciding on the correct tenure of the loan is very crucial. Don’t just take the longest term available. Generally try not to go beyond 15 years of loan period. See the table below for comparison of tenures for a loan of Rs 10L at 10% interest rate – here, 5 year tenure has been taken as the comparison datum.
Years EMI Total Interest Difference in EMI Additional
Interest Paid
Amount %
5 Rs.21,247.04      2,74,822.68 0      0  0
8 Rs.15,174.16      4,56,719.75 (Rs.6,072.88)                28.58      1,81,897.07
10 Rs.13,215.07      5,85,808.84 (Rs.8,031.97)                37.80      3,10,986.16
12 Rs.11,950.78      7,20,912.70 (Rs.9,296.26)                43.75      4,46,090.02
15 Rs.10,746.05      9,34,289.21 (Rs.10,500.99)                49.42      6,59,466.53
20 Rs.9,650.22    13,16,051.95 (Rs.11,596.83)                54.58    10,41,229.27
25 Rs.9,087.01    17,26,102.24 (Rs.12,160.04)                57.23    14,51,279.55
30 Rs.8,775.72    21,59,257.65 (Rs.12,471.33)                58.70    18,84,434.97

You would notice that EMIs and total interest paid by you rises disproportionately to the increase in tenure of a loan. The best way to decide is to take the EMI sheet from the loan provider (which lists out EMI Vs Tenure Table per Rs 1 Lakh of loan), decide on how much EMI you can pay and reduce the tenure to as less as possible. You might arrive at tenure of 12 years or even 10 years instead of say, 15 years. This would reduce your interest burden substantially.

  1. Floating rate of interest or fixed is a dilemma you could face. As a thumb-rule, if interest rates are falling (as is happening now), take a floating rate and a fixed rate when they are rising. In the former case, when you feel the rates have bottomed out (which happened around 7.5% per annum rate in the last interest rate cycle), pay a small fee to fix your rate.
  2. Try to part pre-pay the loans at the earliest opportunity, even if it amounts to prepaying just about say Rs 25,000 in an instalment. Remember, every part prepayment directly reduces the Principal part of your loan. Give a standing instruction to the loan agency to reduce your tenure with every part prepayment and not the EMI. In India, on an average, home loans are fully pre-paid within about 50% of their original intended tenure.
  3. When to prepay is also very important. In a home loan, generally EMIs are kept constant over the full tenure. Initially, as the full principal amount is outstanding, your EMI largely consists of interest portion. Towards the end, it is the reverse. Hence, it makes sense to prepay the loan in the beginning (say, first half of the loan tenure). After that, the interest part is already much lesser than the Principal since the loaning agency has already extracted most of the interest due from you of the complete period – it does not make much sense to prepay the loan, except the mental satisfaction of being debt-free.
  4. Lastly, after you have taken possession of the house and either your EMIs are quite manageable (in case of a self-occupied house) or your EMIs roughly equal the rent being received, you should start looking for another house property to go in for. This typically happens about 6-10 years after taking possession of your previous house property.

With regards,


CEO, Hum Fauji InitiativesTM,
Your Long-term Partner for Wealth Creation
E-511, 2nd Floor, Ramphal Chowk, Palam Extn, Sector 7, Dwarka, New Delhi-110077    |   Tele: 9999 022 033, 011 – 4054 5977, 011 – 4214 7236  |


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24 Nov 2012
Unexpected Windfall by Income Tax Tribunal for Sellers of House Property

Unexpected Windfall by Income Tax Tribunal for Sellers of House Property

On 31 October 2012, the Income Tax Appellate Tribunal (ITAT) delivered an order that is set to bring an unexpected relief to millions of home buyers in the country. It clarified that the interest paid on home loans is an expense to the home buyers and hence is to be counted as a cost to them. Thus, when they sell the house, the capital gains on its sale will be the sale price less the purchase cost and all the interest that they paid on its home loan, if availed of.

So far, capital gains on the sale of a house were its sale price less the purchase price. The only relief available was for LTCG (long-term capital gains) (ie, if the house was held for at least 3 years after its possession) where the cost of purchase and its improvement could be indexed to the CII (Cost Inflation Index). For short term capital gains, no indexation relief could be availed of. As far as the interest on housing loan was concerned, its advantage was available under Income Tax Section 24(b) where yearly relief of Rs 30,000 or 1.5 Lakhs for self-occupied property, and interest paid less the rent for rented out property was available. There was no relief available on capital gains for the interest paid.

The case under consideration of the tribunal was of a tax payer C Ramabrahmam, who borrowed money for buying a house property. He claimed deduction for the home loan interest paid while computing income from house property. When he sold the house, he also treated the interest paid as his ‘cost of acquisition’ of the house and claimed deduction there too. The income Tax assessing officer disallowed it. Matter went to the first appellate authority, Commissioner (Appeal), who allowed the claim of the taxpayer. Income Tax department appealed but even the ITAT has now sided with the tax payer holding that deduction under IT Section 24(b) deals with house property while the capital gains IT Section 48 deals with only the gains and the two can co-exist separately since they are covered under different heads of the income.

To illustrate the effect of this ruling, consider the case of a person X who buys a house for Rs 30 Lakhs in 1997, takes a home loan of Rs 24 Lakhs (80% of value) paying an EMI of Rs 23,672 for 15 years at average 9% per annum interest rate. The total interest outgo is about Rs 18.6 Lakhs over 15 years. Let’s say he sells it for Rs 1.87 crores in 2012 (taking a good 13% per annum appreciation). Using normal method of indexation, his cost of acquisition comes to Rs 73.77 Lakhs, capital gains is Rs 1.13 Crores and he pays a tax of Rs 35 Lakhs on it if he is in 30% tax bracket. However, if the ITAT judgement delivered now stands, his cost of acquisition (counting indexed payment of interest also) would be Rs 1.12 Crores, capital gains would be Rs 74.6 Lakhs and he would have to pay a tax of only Rs 23 Lakhs. Thus, he saves tax to the extent of Rs 12 Lakhs, ie a saving of about 35% of tax.

Now the question uppermost in everybody’s mind should be – will this ruling by the ITAT go unchallenged by the Income Tax department, given the large revenue loss that the Govt is likely to face. It is very unlikely that the Govt will let the matters lie at this point. The course open to Income Tax Department now is to go to the higher courts – first High Court, then Supreme Court and if even then there is no favourable ruling, a change in Income Tax Act itself should not be ruled out. What if anybody files his Income Tax Return as per new ruling in the intervening period? It will have to be allowed by the Income Tax assessing officer but chances of it being rolled back are also equally high if the Income Tax department gets a favourable ruling at any stage.

Another pertinent point is – will the interest paid at different points of time be allowed to be indexed? In case the interest is allowed as a cost as per the recent ruling, to my mind, there should be no dispute that indexation will have be allowed in the interest cost, as it is allowed currently in the cost of improvement or renovation of the house property.

With regards,


CEO, Hum Fauji Initiatives,
Your Long-term Partner for Wealth Creation
9999 022 033, 011 – 4054 5977, 011 – 4214 7236,  humfauji


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04 Apr 2012
Taxation of House Rent Allowance (HRA)

Taxation of House Rent Allowance (HRA)

We often come across people who consider HRA as the amount which is given in-lieu of accommodation and hence fully exempt from tax. There are an equal number of people who consider it as fully taxable – hence, if they get, say, Rs 20,000 as HRA per month, they consider that they are effectively getting only Rs 14,000 if they are in 30% tax bracket. None of the above is actually true, as explained below.

HRA is the amount paid by the employer to an employee as a part of the salary package. HRA is given to meet the cost of rented accommodation taken by the employee for his stay. A person can claim exemption on his house rent allowance (HRA) under the Income Tax Act if he stays in a rented house. The exemption of HRA is covered under Section 10 (13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.

Two conditions should be met to avail the exemption on HRA:

  • The rent must actually be paid by the assessee for the rented premises which he occupies.
  • The rented premises must not be owned by him.

Please do not confuse the above two conditions as ‘conditions for grant of HRA’ – it is not so. These are the conditions to be met if you wish to seek Income Tax exemption on HRA which has been granted to you by your employer.

While calculating HRA, we effectively calculate the amount that is exempt from being considered as part of the salary. This implies that complete HRA will be considered as part of the salary, except the amount as calculated below.

The amount of HRA exempt is the LEAST of these 3 conditions:

  • Actual amount of HRA received by the person in the relevant period during which the rental accommodation was occupied by him.
  • Amount left after deducting one-tenth (1/10th) of the person’s salary for the relevant period from the actual rent paid by him (Rent paid minus 10% of salary). [Note: No deduction if rent paid does not exceed 10% of salary]
  • In case the house is in Mumbai, Calcutta, Delhi or Chennai, 50% of the salary of the person in the relevant period. In case the house is in any other place, 40% of the salary of the person in the relevant period.

Example to Calculate HRA

The deduction is available only for the period during which the rented house is occupied by the employee and not for any period after that. For example, during the year 2012-13, assume an assessee resides in Pune and gets a salary of Rs 8 lakhs as basic and Rs 3 lakhs as HRA. He pays an actual rent of Rs 2.4 lakhs.

Amount of HRA exempt would be least of the following three conditions:

  • Actual HRA received = Rs 3 Lakhs
  • Excess of rent paid over 10% of salary, i.e., Rs 2.4 lakhs less Rs 80,000 (which is 10% of Rs 8 lakhs salary) = Rs 1.6 lakhs.
  • 40% of salary (as the accommodation is in Pune), i.e., 40% of Rs 8 lakhs = Rs 3.2 lakhs.

As, out of these, Rs 1.6 lakhs is the least, it will be allowed as a deduction from salary for the year. Thus, HRA considered as part of the salary would be 3 lakhs less 1.6 Lakhs = Rs 1.4 lakhs, which will be counted as his taxable income.

Definition of salary

For the purpose of arriving at the deduction available, salary means the basic salary and also includes the Dearness Allowance (DA), if the terms of employment provide for it, and the Commission based on a fixed percentage of turnover achieved by the employee.

When is the deduction not available

The deduction for HRA is not available in case the employee lives in his own house. The deduction is also not available in case the employee does not pay any rent for the accommodation used by him, eg, living with his parents and paying no rent to them.

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