Can your home earn you a pension?

Earning a pension with the help of your home is a fairly new concept. Let us take the example of Mrs. Palekar to show how a home can earn you a pension. Mrs. Palekar belongs to a well-to-do family and has two sons settled in the U.S. She has a home to live in and also has a sum of Rs. 50 lakh saved in the form of a fixed deposit. Every month, Mrs. Palekar earns a sum of around Rs. 30,000 from her fixed deposits in the form of interest which takes care of her expenses, including medication which costs around Rs. 10,000-12,000 per month.

Income Returns

Everything was fine, until Mrs. Palekar discovered that the housing complex she resided in was getting redeveloped and she would have to find herself alternate accommodation. Her existing flat is in the Andheri, Mumbai, and she does not expect to find an inexpensive flat in the same locality. Her promoter is offering her a sum of Rs. 60 lakh for relocation which would be insufficient in the current scenario. Her new flat is going to be ready in four years.

To arrange for an amount higher than Rs. 60 lakh, Mrs. Palekar would have to break her fixed deposit. However, that would not be a feasible option, as then she would not have anything to rely on for her daily living and medical costs.

The Solution

Reverse mortgage is the solution under such circumstances. This scheme is available for senior citizens who are low on cash, but are asset rich.

We have all heard of banks lending money and then mortgaging a house to recover the loan amount. In the case of reverse mortgage, the scenario is opposite. In this case, the bank would pay the owner of the house timely installments in lieu of the house and this practice would continue until the death of the owner. After the death of the owner, the house would become the property of the bank. If a relative or friend wants the house, he could pay the interests and other charges and become the owner of the property.

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Current Trends in Indian Real Estate

The past few years have witnessed the emergence of the Indian real-estate industry as one the biggest sectors for investments. The continuous growth can be attributed to the liberalization of direct investment norms, the introduction of SEZ Act in India and low prices that continue to attract investors from both India and abroad.

Indian Real Estate Market

A recent survey indicates that India has the fourth ranking among the top Asian destinations for direct foreign investment. Being the largest democracy with transparent property laws, India attracts more investors than any other country in the region.

Some of the major factors that have contributed largely in the growth of this sector are:

Ø  Strong and continuous economic growth – Being the fourth largest economy in the world while maintaining a growth rate of over 7% for the past few years, India has also witnessed a steady growth in its real-estate industry. Various economic reforms coupled with increased globalization and demand has propelled its progress. The steady economic growth has led to the rise of areas like Delhi NCR, Hyderabad, Chennai, Pune, Kolkata and Bangalore. Moreover, the economic rise is no longer centered on the bigger cities with states like Bihar and Gujarat leading the charts. This has further enhanced real-estate market in these states.

Ø  Introduction of FDI in the real-estate sector - The introduction of Foreign Direct Investment (FDI) in the real estate sector has enhanced the Indian real-estate industry’s position as one of the most rewarding avenues for investment. This policy has allowed foreign investment in the market and has kindled the interest of the some of the world’s most renowned builders. Their entry into the Indian real-estate market will bring along efficient management, advanced technology along with effective regulatory policies.

Ø  The rise of the middle class – With a population of over 300 billion people falling in the middle class with higher incomes and better education, the workforce is shifting base beyond the four metropolitan cities. High aspirations together with more disposable income at hand motivate people to invest in real estate.

Ø  Continuous growth and development of the IT sector – TheIndian IT sector has shown the upward trend for past few years with many Multinational Companies and corporate increasing the demand for commercial property. This has also led to the increase in employment opportunities, consequently helping in the overall economic growth and increase in disposable income at the hand of prospected real-estate investors. This growth has not only had a positive impact on commercial property, but residential and industrial property as well.

Ø  Accessibility to bank loans – With the incoming of various multinational banks in the Indian market, loans for property are easily accessible now. It is no longer a tough job to seek and get a bank loan with easier norms and regulations and various loan repayment options available.

Ø  The demographic factor – India is the second largest populated countries in the world with over 75% of its population well below the age of 50.

According to ENAM securities research, the Indian real-estate market will grow at a CAGR of 33% over the next five years. The upward trend is also witnessing a huge gap in demand and supply. However, with more foreign investments set to enter the real-estate market in the near future, this development and growth is here to stay.

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What needs to be taken care before a NRI sells his/her property in India

The recent boom in the Indian real estate industry has prompted NRIs (Non Resident Indians) to sell their properties in India to take advantage of the hike in land prices. However, NRIs must take note of the special provisions of the Indian tax laws before selling their property in India in order to ensure a smooth transaction and avail maximum benefits.

NRI invests in Indian real estate

One Indian to another

• An NRI can only sell residential or commercial property in India to a person residing in India or to an NRI or a PIO (Person of Indian Origin).
• Under general permission, an NRI can sell his agricultural land/plantation property/farm house in India only to a person who is a resident of India and is an Indian citizen.
• An NRI can also transfer his/her residential or commercial property to an authorised dealer or housing finance institution in India through mortgage.
• An NRI should not transfer by way of mortgage their residential and commercial property in India to a party abroad. For this purpose prior approval of the Reserve Bank of India (RBI) is required.

Tax liabilities: Like in the case of purchase, sale of the property also attracts tax liabilities. For NRIs, tax implications are as per the Foreign Exchange Management Act (FEMA) 1999, for which factors that need to be considered are, transfer (sale) date for determining capital gains; agreement value for calculating profits and thereby capital gains; transfer charges to the society; legal charges and outstanding loans, if any.

• If the NRI sells his/her house within 3 years from the date of purchase and makes a profit, then he/she is liable to pay short-term capital gains tax at the normal rate applicable as per his/her tax bracket.  But if the sale occurs after three years from the date of purchase, then he/she has to pay capital gains tax at a flat rate of 20%

After the sale of property, the NRI may repatriate the sale proceeds of residential or commercial property in India but must remember that the repatriation of sales is restricted to two properties only. Also, the repatriated amount should ideally not cross the sum paid for acquiring the property, either in foreign exchange received from banks or the Non Resident account, nor should it overshoot the foreign currency equivalent as on the day of payment. Today, remittance of funds from property sales is simple and hassle-free for the benefit of NRIs.

However, the NRI must ensure that he/she is well guided by a legal expert in matters of property sale in India and must also be wary of fake property dealers. It is best to hire authorised dealers so that the property and sale is handled in safe and appropriate manner.

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Planning to buy a Property through an Auction, points to keep in mind

Auction of your Home

What happens if you are unable to repay the home loan that you took within the stipulated time?  For one, you can expect the bank to send a notice with the required amount to be paid. The failure of making the full payment may force the bank to seize the house. 

The procedure

If the borrower cannot repay the mortgaged payment, the bank sends a Notice of Default. If the borrower does not respond by the specified date, the bank takes legal action to recover the loan amount due.

According to the laws created to safeguard lenders, a bank or any lending organisation can seize the property of the person who is unable to repay the loan on that property. The bank does not need to go to a court to claim the property because they are lawfully allowed to do so themselves.  

The rights of the borrower  

A person availing a loan is also entitled to some rights. The Consumer Credit Protection Act allows the borrower to take action against unfair loan repayment calls or excessive and repetitive pressures. The loan providers can call you only at a specified time and you have the full right to modify a loan under specific conditions.   

Auction of the property

Once the property is seized by the bank, they arrange to auction it. First, they find out the real market value of the property. Next, they determine a value for the minimum auction price, which is 15-20% lower than the market price. The price rises with the bid offers from the buyers.

Points for a buyer to consider before auctioning

Auction date

If you want to buy a property in auction, keep an eye on the newspapers for details  such as the date of the auction, price and location of the auction.

Online auctions

Sometimes, a lender arranges an online auction for a property. This allows them to reach a large number of buyers. 

The legal aspects

Hire a lawyer to get acquainted with all the legal terms and conditions. You will also be charged a fee to inspect the property.  

Check records 

Contact the municipal corporation and enquire about the legal aspects and tax issues related to the property. Check if it is indeed safe for you to buy that property.

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