To Buy Land for Real Estate Investment sounds very logical decision. Land is a scarce resource, no one can generate parcel of Land. The supply of land is very limited with many buyers vying to buy Land. For Vertical Expansion, builders can increase the no of floors in apartment but for Horizontal Expansion, Land is required. Delhi is typical example wherein due to scarcity of Land, Last year Govt allowed to increase no of floors in certain areas for vertical expansion of city. Another example is Mumbai, currently no land is available for horizontal expansion.
In India, people buy land to meet long term financial commitments. One of my acquaintance bought 3 plots of 40X60 each. Two plots for son’s higher Education & one plot for his Marriage. It sounds very exciting but decision to buy land comes with its own merits and de-merits. In this post, we will discuss 10 points which every buyer should consider before he buy land
Legal Dispute
In North India, there is famous saying that there are only 3 core reasons for any dispute in this world i.e. Zar (Money), Zoru (Woman) or Zameen (Land). Its a matter of fact that most no of legal cases in India are related to Land Dispute. Before you buy land, it is very very critical to ascertain that Land is free from any legal dispute. Some of the common legal disputes related to land are Land is Pledged or Pledged multiple times, Marking of Land Boundary, Agricultural Land, Adivasi land, Land notified for Govt Projects or Special purpose, Claim of legal Heirs etc.
It is absolutely necessary to hire local competent lawyer who knows all the local laws and help to buy land without legal trouble.
Buy Land for Faster Appreciation
Its a known fact that value of Land appreciate faster compared to flat or a house. This is most compelling factor to buy land. The depreciation due to ageing factor in flats/house is not applicable in land. At the same time some of the factors which can wrong are Location of Plot, Shape of Plot, Direction of Plot, Neighborhood, Accessibility etc. If all these factors are not considered before you buy land, your biggest asset can easily become biggest liability.
Documentation
The basic difference between flat and land is that in case something goes wrong legally in apartment, you have other owners along with you to fight jointly. Whereas in case of Land, you are the only stakeholder. It is critical to understand local laws related to land transfer. At the time of land purchase, please ensure that documentation related to land transfer is complete to avoid future hassle. All the legal heirs of the land owner should be party to transfer of title deed. Following documents are must for land transfer
1. 7/12 document: Title and proof of right
2. 6/12 document: Past transactions i.e. record of change in ownership of land
3. 8/A booklet: It contain details of tax, land revenue tax etc
4. Encumbrance Certificate: Normally EC is of 13 years but to buy Land, you should ask for 30 years EC
5. Release Certificate: It certify that land is not pledged and if the land is owned by joint holders than ask for release certificate from each owner. It may be the case than 1 owner might have pledged his share in land.
6. Survey Sketch: Land grabbing is common problem. Hire a certified surveyor to certify the boundary of land. He will match the actual dimension with approved sketch from survey department.
7. DC Certificate: If the land is agricultural and you are buying for residential purpose than ask for DC certificate
Surveillance of Land
Most critical factor, Before you buy land kindly ensure that you have bandwidth or resources (friends or family members) for more surveillance. Land is more prone to trespassing and illegal occupation as it is quite easy to grab a land compared to flat or house. Land mafia is very active specially in upcoming areas. A very popular movie “Khosla Ka Ghosla” was all about Land Grabbing. In real life it is not that easy to get the land back from clutches of Land Mafia. If your job is transferable or you are not staying city than its advisable to avoid land purchase. Land Mafia only target the plots where owner is away or there is inadequate surveillance. As we know legal cases related to land can go on for decades.
Land is Non Productive Asset
Though land will appreciate at faster rate but it does not generate any income. A flat or House can generate regular rental income but Land is dead asset during holding period. If a land has potential to appreciate @ 20% & flat / house can appreciate @ 15% with annual yield of 4% from rent than rather to buy land its better to go with flat / house
Wealth Tax
Though land is Non Productive Asset but you need to pay Wealth Tax if you have more than one House / Flat / Plot. If you have 1 house and 1 urban plot / land (more than 500 meters) than house can be shown as self-occupied. For the urban plot / land, you need to pay wealth tax equal to 1% of net worth if the net worth (after adjusting debts) exceeds 30 lacs.
Income Tax Benefits
A bad news on this front, unlike flat or house there are no tax benefits available on Plot Loan i.e. Land Loan to buy Land without any plan to construct the house. Composite loans i.e. loan to buy land and build a house for self occupation enjoy income tax benefits. We should not get confused between these 2 types of loan. In composite loan, construction should be completed within 3 years from the end of financial year of availing loan. To summarize Plot Loan availed for vacant plot without any plan to construct the house, there are no income tax benefits available.
Only exception to above rule is if the plot is rented out. In this case, interest paid on Loan can be availed as deduction whereas No deduction is available on principal component.
Rate of Interest
The rate of interest of Land Loan is normally higher compared to Home Loan. Usually for Plot Loan banks charge 0.25% to 1% over and above Home Loan interest rate.
Loan to value Ratio
The LTV (Loan to value ratio) for Land / Plot Loan is normally 70% against 80% for House / Flat. In short, you need more funds from your end to buy land. If the allotment is from Govt development authority than the LTV can go upto 80%.
Word of Caution
If you are a migrant workforce than i will not suggest you to buy land. In short, if you are not a native of state & don’t know local language than it is not advisable to buy land. I am not advocating or criticizing regionalism but its a matter of fact that you will face more problems if you are not a native of state.
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nice observations
Hi.
I’m planning to purchase a BDA approved site. It is being developed by a builder. The farmers/owners have signed a JDA with the developer and also the GPA is given to the developer. Land sharing agreement is also made with 55% to owners and 45% to developers. Now as part of verification we asked about originals, but developer refused to show in original the JDA, GPA and partition deeds. But we have the xerox copies and have taken the registered copies from authority. Now without seeing the originals JDA, GPA and partition deeds is it genuine to take it further? The layout has been approved by HFLs and some of the private banks. So far I have verified the BDA layout plan, EC, mutation, work order, relinquishment deed. Are there any possibilities that farmers might have pledged the original position deeds, and some problem could side later? Of they are pledged with financial institutions will it reflect in EC?
Thanks to help with the answers.
Are there any possibilities that farmers might have pledged the original partition deeds, and some problem could arise later? If they have pledged with financial institutions will it reflect in EC?
Thanks to help with the answers.
Normally a lien is put on any property which is mortgaged. Encumbrance Certificate is only way to check whether land is mortgaged or not. In some cases, lender does not report to sub-registrar office and lien is not put on the property. This risk you will always carry.
I really appreciate the answers.
NOC part I think it is getting covered in the sale agreement, there is a clause/point which talks about the title being clear from all encumbrances, litigation, liens, mortgages etc. And I take it that this sale agreement will be base copy for sale deed during registration.
For the point ‘lender not report to sub-registrar office and lien is not put on the property’, if I’m able to check the original copies from the lenders, can I say the risk is minimized. Because had if the lender been to any private financial institution, the originals will not remain with the lenders. So in this way I presume the risk is minimized, this is my understanding. May be you can throw more light on this.
Do I need to ask for release certificate also in this case?
Thanks in advance!
I agree that if original documents are available then it rule out possibility of foul play but even if original documents are available builders are not willing to show to buyer. Any release record is mentioned in Encumbrance certificate still you may ask for it.
Thanks Nitin, it clears my doubt.
Besides checking Encumbrance Certificate. You may seek NOC from builder regarding same that property is free from any mortgage or Encumbrance.
hello sir,
will there be any service tax over transfer of development rights of a land to other firms ?
Service tax is applicable for transfer of development rights. The liability to pay service tax rests with the owner who transfer land.
Thank you sir. Have you written any article on methods of valuation of a property ?? If yes, please share it sir. I found your articles very clear and easy to understand.
Thanks for liking my website. You may check following post on property valuation
https://www.nitinbhatia.in/real-estate/fair-value-of-property/
Thank you very much sir.
Thank you sir for detailed and really informative article but still I halted at a point. As you said if original documents of all the above things are available then it gives good singles of seller’s possession. But as we all live in the age of information technology and geeks where it has become hard even to verify Genuineness of currency notes then How can one verify the Genuineness of those legal papers ? I’m literally concerned a lot about this. As its indeed not hard to make fake stamps(impressions) and even holograms like genuineness signs.
You may check Encumbrance certificate and also get title certificate from competent property lawyer, who will verify authenticity of all documents.
I agree that 100% fraud cannot be avoided.
I understood sir. Thank you :)
Hi Nitin,
I am planing to take one BMRDA aproved plot in bangalore. They are saying LIC, HDFC and Axis banks are giving loans for that site. I asked for SBI and they are saying now if you want to go for SBI they will take 2 to 3 months time to aprove and we don’t have that much time to regsiter, please choose among these 3 banks for loan.
In among these 3 , whcih is preferable LIC, HDFC and Axis and can please explain me why it is better ? Which one will do legal verification strongly ?
We can say that if we get loans from banks for a property then that will be having clear titles or still some deputes we can expect ?
Please help me in this regards,
GISR
Hi Sir ,
am planning to purchase a private BDA approved layout ,
this comes under kitagnur village . this is a joint venture with
developer and land owners.
what are the main points need to be noted or asked with them for
verifying the document .
regards
It is subjective and depend on case to case basis. You may hire a lawyer for title certificate.
Hi Sir,
Very informative.
I am planning to buy BDA site in Bangalore. Will there any litigation in plots that are developed by Bangalore Development Authority.
Can it happen same land sold to multiple people?
what and all should we take care, while transferring plot to our name?
Thanks,
All the scenarios shared by you are possible. Though you cannot rule out 100% mischief but you should hire a local property lawyer for property title certificate.
SIR I HAVE A 2 FIRM I WANT TO SALE PROPERTY TO MY PERSONAL NAME TO MY FIRM NAME SO IN THIS CASE I WANT TO NOW WHAT TYPE OF TAX TO PAY PLEASE LET ME NOW.
You have to pay capital gain tax.
Hi Sir, I got a land proposal from a party and this land was mortgaged 2 times in 1972 and 1979. It is reflected in Encumbrance certificate. But it is NOT closed at that time. Owner sold the property to another owner in 1980 and again it got transferred in 2006 to another guy. Can i buy this land ?
I will not suggest.
Hi Sir, Thanks for your input.
There might be change in the village jurisdiction. You may check with the local Tehsildar office. It seems the plot or land is agricultural. Therefore, you need DC conversion and approved layout plan from local development authority before you avail construction loan.
Hi Nitin. Firstly Thank you for all the information that you provide. I have a query wherein I need a land/plot loan of 11 lacs but the total value of the plot/land is 26 lacs. I am short of 11 lacs which I would like to bridge the gap by availing land/plot loan. Can I get the this small amount of 11 lacs from the Banker. Please advise. Thank you.
Yes. You can get this amount as a plot loan subject to your eligibility.
Hi nitin I am schedule tribe category person from Maharashtra,and I am planning to buy land from schedule tribe category person in Maharashtra.plz provide me detail process involved in it!
I request you to approach local development authority for applicable rules and regulations in this regard.