Sir, I purchased a residential plot in 2018. Paying 6 monthly installment.Total amount paid with interest was 43,00000/- forty three lack. I have no residential house at present. Now the present price of that is 95,00000/- . Now I want to sell that and investing Rs 40,00000/- for residential house and balance in commercial land. please advise me.
Ans: You’ve achieved excellent appreciation on your plot investment, which is highly commendable. You now aim to sell this property and use part of the funds for a residential house while considering the rest for commercial land. Let’s analyse this plan from a Certified Financial Planner’s perspective. Here’s a 360-degree assessment to help you make a well-informed decision.
Capital Gains and Tax Implications
Long-Term Capital Gains (LTCG): As you bought the plot in 2018 and are selling it now, the capital gains qualify as long-term. Given the increased value, you may incur LTCG tax on the profit.
Exemptions: When reinvesting in a residential property, you can potentially claim exemption under Section 54F of the Income Tax Act. This exemption applies if the capital gain amount is reinvested in a residential house within a specified timeframe. Consulting with a tax advisor could optimize your tax efficiency here.
Analyzing Residential House Purchase
Primary Residence Investment: Using Rs 40 lakh for a residential house is a wise move, as it gives you a self-owned home, fulfilling a fundamental need. Without a current home, owning a residence enhances your long-term security and reduces rent expenses.
Long-Term Value: Owning a home can offer lifestyle stability, tax benefits, and asset value over time. However, as residential properties are typically less liquid and may have lower returns than other assets, it’s best to consider it a personal asset rather than an investment.
Considerations for Commercial Land Investment
Investing in commercial land may seem attractive due to potentially higher rental yields and appreciation rates. However, let’s evaluate it against alternative investment avenues.
Risk and Return: Commercial properties generally offer higher returns than residential properties but come with higher risks. Rental income from commercial spaces can be inconsistent based on economic conditions and tenant demand. It’s essential to assess if you’re comfortable with this risk.
Liquidity Concerns: Real estate, especially commercial property, is less liquid. Selling a commercial property may take time, and in down markets, you may not realize your expected price.
Maintenance and Management: Commercial properties often require more active management, legal clearances, and compliance checks. Unless you’re prepared for these responsibilities, this investment could become complex.
Exploring Alternative Investments for Growth
To maximize growth, diversifying your remaining funds into financial instruments can be beneficial. Here are a few alternatives:
1. Mutual Funds
Actively Managed Funds: Actively managed mutual funds, overseen by professional fund managers, have the potential for higher returns than index funds. Unlike passive index funds, active funds aim to outperform benchmarks, making them appealing for growth-focused investors.
Regular vs. Direct Funds: Regular funds come with guidance from a Mutual Fund Distributor (MFD) and a Certified Financial Planner, who can provide personalized advice. The convenience of a CFP-guided approach often outweighs the slightly higher fees compared to direct funds. Direct funds, while fee-saving, lack advisory benefits and can lead to suboptimal choices if not expertly managed.
2. Fixed Income Instruments
Corporate Bonds or Government Securities: These can provide steady income and safety for conservative investors. Interest rates vary based on the issuer and tenure, and they offer fixed returns over time.
Fixed Deposits (FDs): Bank FDs or other fixed-income options offer stability and liquidity. Though the return rates are modest, they add a stable component to your portfolio.
Debt Mutual Funds: For a moderate-risk approach, debt funds are ideal. Debt mutual funds invest in bonds and government securities, offering stability and potentially higher returns than FDs. Remember, debt funds are taxed as per your income slab.
3. Gold as a Hedge
Sovereign Gold Bonds (SGBs): Investing a small portion in SGBs diversifies your portfolio, providing a hedge against inflation. SGBs offer interest income and avoid the hassle of physical storage, making them an efficient gold investment.
Gold Mutual Funds and ETFs: Alternatively, gold mutual funds or ETFs provide liquidity and flexibility, though they may have slightly lower returns than physical gold or SGBs.
Evaluating Your Financial Goals and Needs
Based on your current objective, here’s a tailored roadmap to help meet your requirements:
Primary Residence Ownership: Prioritise the Rs 40 lakh towards a residential home purchase, fulfilling your immediate housing needs.
Enhanced Diversification: For the remaining funds, diversify between mutual funds, fixed-income products, and gold. This combination offers growth, stability, and inflation protection.
Balanced Liquidity and Growth: Consider liquid investments like mutual funds and FDs for accessible funds. These can support liquidity while generating returns.
Key Takeaways for a Secure Future
Avoid Concentration in Real Estate: Since you already hold residential and commercial property, too much allocation to real estate could limit liquidity and growth opportunities. Financial assets offer more flexibility.
Tax Optimization: By consulting a tax advisor, you can strategically reinvest and claim exemptions, optimizing your tax outgo while achieving your financial goals.
Active Monitoring and Review: Regularly review your portfolio, especially in mutual funds, with the assistance of a Certified Financial Planner. This ensures alignment with your goals and adapts to market changes.
Final Insights
Selling your plot offers a unique opportunity to balance asset allocation between real estate and financial assets. By investing in a residential property for personal use and diversifying into financial assets, you achieve both stability and growth potential.
Your disciplined approach to financial planning is commendable. With a balanced strategy, you can maximise both security and growth for a prosperous future.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
Question by Shivaji on Dec 02, 2023Hindi
