Hi Sir, I am employed with a 11LPA job. I do not have a history of saving but have started a 7000 rupees SIP recently (almost 60% in index and 30% in midcap and rest in hybrid). I inherit my father's Chennai property worth over 8cr by today's market value. As the property is too old, demolishing it and reconstructing requires a huge loan and a 20 year EMI commitment which i am not interested. I just wanted to know if i can sell the property (have to lose 20% as capital gain) and create an income generating scheme

Ans: You've got a great opportunity on your hands with the Chennai property inheritance. Let's explore how you can turn this inheritance into a long-term income-generating scheme without getting bogged down by a huge loan or long-term EMI commitment.

Understanding Your Current Situation
First, it's commendable that you have started saving with a SIP of Rs. 7,000. Your job with an annual package of Rs. 11 lakhs provides a stable income. However, the challenge is that you haven't had a history of saving. That's about to change, and I'll guide you on how to make the most of your current and future financial resources.

The Property Dilemma
You’ve inherited a property worth Rs. 8 crores. The property is old and needs reconstruction, which you are not interested in pursuing due to the huge loan and long-term EMI commitment required. Let's explore the option of selling the property.

Selling the Property
Selling the property could be a wise decision. Here's why:

Avoiding Reconstruction Hassles: Reconstruction involves not just financial strain but also time and effort. Selling saves you from these hassles.

Immediate Capital: Selling the property provides you with immediate capital. You can then invest this capital to generate a steady income.

Capital Gains Tax: Yes, you'll lose 20% as capital gains tax, but the remaining amount is still substantial. With proper investment, this can create a significant income stream.

Creating an Income-Generating Scheme
Let's explore how you can reinvest the proceeds from the property sale to generate income for the years to come. Here’s a step-by-step approach:

Diversification is Key
Diversifying your investments is essential to manage risk and optimize returns. Here are some investment options to consider:

Mutual Funds: Mutual funds offer various options like equity, debt, and hybrid funds. They are professionally managed and can provide good returns.

Fixed Deposits and Bonds: These provide safety and steady returns. They are less volatile compared to equity investments.

Systematic Withdrawal Plan (SWP): An SWP from mutual funds can provide regular income. This way, you can withdraw a fixed amount every month.

Mutual Funds: A Strong Contender
Mutual funds can be an excellent option for creating an income-generating scheme. Here’s why:

Variety of Options: You can choose from equity, debt, and hybrid funds based on your risk appetite and investment horizon.

Professional Management: Fund managers handle the investment decisions, ensuring your money is well-managed.

Potential for Higher Returns: Equity mutual funds have the potential to offer higher returns over the long term.

Systematic Withdrawal Plan (SWP): You can set up an SWP to receive a regular income from your mutual fund investments.

Balancing Between Safety and Growth
Considering your moderate risk appetite, a balanced approach is ideal:

Equity Funds: Invest a portion in diversified equity funds for growth. These funds invest in a mix of large-cap, mid-cap, and small-cap stocks.

Debt Funds: Allocate some amount to debt funds for stability. These funds invest in government and corporate bonds, providing regular interest income.

Hybrid Funds: These funds invest in a mix of equity and debt. They offer a balance of growth and stability.

Power of Compounding
The power of compounding can significantly grow your investment over time. By reinvesting your returns, your investment can grow exponentially. This is particularly effective in equity mutual funds.

Systematic Withdrawal Plan (SWP)
An SWP allows you to withdraw a fixed amount from your mutual fund investment regularly. This can provide a steady income stream. You can set up an SWP to match your monthly expenses.

Benefits of Actively Managed Funds
Actively managed funds can be more beneficial compared to index funds. Here’s why:

Potential for Outperformance: Fund managers aim to outperform the market index by selecting high-performing stocks.

Flexibility: Fund managers can adjust the portfolio based on market conditions, providing flexibility.

Research and Expertise: Active funds involve extensive research and analysis, ensuring informed investment decisions.

Risks and Mitigation
Investments come with risks. Here’s how to mitigate them:

Market Risk: Equity investments are subject to market risk. Staying invested for the long term can mitigate this risk.

Credit Risk: Debt funds carry credit risk. Choosing high-quality debt funds can reduce this risk.

Interest Rate Risk: Changes in interest rates can affect debt funds. Understanding the interest rate environment can help in selecting the right debt funds.

Long-Term Financial Planning
Long-term financial planning is crucial to ensure your financial security. Here’s how:

Emergency Fund: Keep a portion of your investment in liquid funds for emergencies. This ensures you’re not forced to liquidate long-term investments at an unfavorable time.

Retirement Planning: Plan for your retirement by investing in a mix of equity and debt funds. The power of compounding can help build a substantial retirement corpus.

Child’s Education: Invest in equity mutual funds for your child’s education. The long investment horizon can help accumulate a significant corpus.

Final Insights
Selling the property and reinvesting the proceeds can be a smart move. Diversify your investments across mutual funds, fixed deposits, and bonds. This approach provides a balance of growth, stability, and liquidity.

Remember, consulting with a Certified Financial Planner can help tailor a strategy that suits your unique situation. They can help you create a balanced portfolio that aligns with your financial goals, risk tolerance, and investment horizon.

Making informed decisions today can ensure a secure and prosperous future for you and your family.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

Ans: You've got a great opportunity on your hands with the Chennai property inheritance. Let's explore how you can turn this inheritance into a long-term income-generating scheme without getting bogged down by a huge loan or long-term EMI commitment.

Understanding Your Current Situation
First, it's commendable that you have started saving with a SIP of Rs. 7,000. Your job with an annual package of Rs. 11 lakhs provides a stable income. However, the challenge is that you haven't had a history of saving. That's about to change, and I'll guide you on how to make the most of your current and future financial resources.

The Property Dilemma
You’ve inherited a property worth Rs. 8 crores. The property is old and needs reconstruction, which you are not interested in pursuing due to the huge loan and long-term EMI commitment required. Let's explore the option of selling the property.

Selling the Property
Selling the property could be a wise decision. Here's why:

Avoiding Reconstruction Hassles: Reconstruction involves not just financial strain but also time and effort. Selling saves you from these hassles.

Immediate Capital: Selling the property provides you with immediate capital. You can then invest this capital to generate a steady income.

Capital Gains Tax: Yes, you'll lose 20% as capital gains tax, but the remaining amount is still substantial. With proper investment, this can create a significant income stream.

Creating an Income-Generating Scheme
Let's explore how you can reinvest the proceeds from the property sale to generate income for the years to come. Here’s a step-by-step approach:

Diversification is Key
Diversifying your investments is essential to manage risk and optimize returns. Here are some investment options to consider:

Mutual Funds: Mutual funds offer various options like equity, debt, and hybrid funds. They are professionally managed and can provide good returns.

Fixed Deposits and Bonds: These provide safety and steady returns. They are less volatile compared to equity investments.

Systematic Withdrawal Plan (SWP): An SWP from mutual funds can provide regular income. This way, you can withdraw a fixed amount every month.

Mutual Funds: A Strong Contender
Mutual funds can be an excellent option for creating an income-generating scheme. Here’s why:

Variety of Options: You can choose from equity, debt, and hybrid funds based on your risk appetite and investment horizon.

Professional Management: Fund managers handle the investment decisions, ensuring your money is well-managed.

Potential for Higher Returns: Equity mutual funds have the potential to offer higher returns over the long term.

Systematic Withdrawal Plan (SWP): You can set up an SWP to receive a regular income from your mutual fund investments.

Balancing Between Safety and Growth
Considering your moderate risk appetite, a balanced approach is ideal:

Equity Funds: Invest a portion in diversified equity funds for growth. These funds invest in a mix of large-cap, mid-cap, and small-cap stocks.

Debt Funds: Allocate some amount to debt funds for stability. These funds invest in government and corporate bonds, providing regular interest income.

Hybrid Funds: These funds invest in a mix of equity and debt. They offer a balance of growth and stability.

Power of Compounding
The power of compounding can significantly grow your investment over time. By reinvesting your returns, your investment can grow exponentially. This is particularly effective in equity mutual funds.

Systematic Withdrawal Plan (SWP)
An SWP allows you to withdraw a fixed amount from your mutual fund investment regularly. This can provide a steady income stream. You can set up an SWP to match your monthly expenses.

Benefits of Actively Managed Funds
Actively managed funds can be more beneficial compared to index funds. Here’s why:

Potential for Outperformance: Fund managers aim to outperform the market index by selecting high-performing stocks.

Flexibility: Fund managers can adjust the portfolio based on market conditions, providing flexibility.

Research and Expertise: Active funds involve extensive research and analysis, ensuring informed investment decisions.

Risks and Mitigation
Investments come with risks. Here’s how to mitigate them:

Market Risk: Equity investments are subject to market risk. Staying invested for the long term can mitigate this risk.

Credit Risk: Debt funds carry credit risk. Choosing high-quality debt funds can reduce this risk.

Interest Rate Risk: Changes in interest rates can affect debt funds. Understanding the interest rate environment can help in selecting the right debt funds.

Long-Term Financial Planning
Long-term financial planning is crucial to ensure your financial security. Here’s how:

Emergency Fund: Keep a portion of your investment in liquid funds for emergencies. This ensures you’re not forced to liquidate long-term investments at an unfavorable time.

Retirement Planning: Plan for your retirement by investing in a mix of equity and debt funds. The power of compounding can help build a substantial retirement corpus.

Child’s Education: Invest in equity mutual funds for your child’s education. The long investment horizon can help accumulate a significant corpus.

Final Insights
Selling the property and reinvesting the proceeds can be a smart move. Diversify your investments across mutual funds, fixed deposits, and bonds. This approach provides a balance of growth, stability, and liquidity.

Remember, consulting with a Certified Financial Planner can help tailor a strategy that suits your unique situation. They can help you create a balanced portfolio that aligns with your financial goals, risk tolerance, and investment horizon.

Making informed decisions today can ensure a secure and prosperous future for you and your family.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

Ans: You sold a property in June 2024 for Rs 30 lakh. It was bought for Rs 1,15,000 in 1994. Let's evaluate if there's a capital gain.

Indexed Cost of Acquisition

The property purchase cost will be adjusted for inflation. This is called the Indexed Cost of Acquisition (ICA). The ICA is calculated using the Cost Inflation Index (CII) provided by the Income Tax Department.

Calculating Indexed Cost

Calculate the ICA to understand your capital gain. Since we won't use specific formulas here, you can consult a Certified Financial Planner to get the precise ICA value. This helps in determining the exact capital gain.

Long-Term Capital Gains (LTCG)

Since you held the property for more than 24 months, it is classified as a long-term asset. The profit from the sale, after adjusting for the ICA, is your Long-Term Capital Gain (LTCG).

Tax on LTCG

LTCG is taxed at 20% with indexation benefits. However, there are ways to save on this tax.

Investing in Another Property

You can save on capital gains tax by investing in another residential property. This is covered under Section 54 of the Income Tax Act. If you buy a residential house within two years or construct one within three years, you can claim exemption.

Investing in Capital Gains Bonds

Another option is to invest in Capital Gains Bonds under Section 54EC. These bonds have a lock-in period of five years and provide tax exemption on the gains. The maximum investment limit in these bonds is Rs 50 lakh.

Purchasing a Shop

Buying a shop will not provide capital gains tax exemption under Section 54. The exemption is only for residential properties. If you sell a residential property, you must reinvest in a residential property to save on capital gains tax.

Other Options to Save Tax

Residential Property: Invest in another residential property within two years.

Construction: Construct a new house within three years.

Capital Gains Bonds: Invest in these bonds within six months of the sale.

Final Insights

To save on capital gains tax, reinvest in a residential property or Capital Gains Bonds. Purchasing a shop will not help in saving tax on capital gains. Consulting a Certified Financial Planner can help you navigate these options efficiently.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in