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Land as an investment option has always been popular in India. Its popularity has not receded, despite the availability of various financial products such as mutual funds and equity shares. However, you should be aware of all the pros and cons of investing in land.
Limited supply of land
Other than a few reclamation cases, the supply of land is limited and the possibility of creating more, is quite impossible. Due to its limited supply and the ever-increasing need, the demand for land has only been going up. However, this continuous demand has ensured that the price of land hasn’t experienced volatile changes like with other assets like gold and equity.
Land is a big ticket and illiquid investment
The amount of money required to invest in land is substantial. Those with less savings, cannot afford to invest in land. Instead, they should opt for financial assets such as units of mutual funds, shares, recurring deposits or even gold. Moreover, investment in land is relatively illiquid and you cannot dispose of this investment as and when you want to encash it. In some cases, the time taken for the sale to actually happen, may run into years, thus, defeating the purpose of making the investment in the first place.
Risk of acquisition and encroachment of land
We have all come across stories of encroachment of land causing investments to sink. In some scenarios, your legal right over the land gets jeopardised, resulting in litigation and unnecessary legal costs. These auxiliary expenses can sometimes outweigh the appreciation in the value of your land. There’s also the risk of the land being taken over by the government by way of compulsory acquisition. The compensation received, may not always be satisfactory. A prime example of such a scenario is the acquisition of land in the Noida Extension case.
Non-availability of finance for buying land
In order to buy or construct a house, loan seekers can only get up to 80% of the value of the property. In case you want to construct a property on a plot of land, you can get a composite loan covering the cost of the plot and cost of construction. However, no bank will generally lend money to buy a plot of land, unless the same is purchased from an endorsed and reputed government development authority like DDA or MHADA.
In the event of a home loan, you can claim tax benefits with respect to interest payment as well as principal repayment, under Section 24 and 80C of the Income Tax Act. No such provision exists for the interest paid on money borrowed for investing in land.
Pros and cons of investing in land
|Limited supply, never-ending demand makes land more valuable.||It is a big-ticket investment and difficult to encash quickly.|
|Land appreciates more quickly than any other type of property.||It is a risk asset since it could be easily encroached upon or compulsorily acquired by the government.|
|No gap between purchase and possession.||Banks provide loans for buying a plot only if you plan to construct a property over it.|
|No maintenance cost.||No tax benefits on buying a plot.|
Things to know before you invest in land
- As investing in land requires lot of finance, you should be clear about the purpose of this investment. If you are buying the land for residential development, make sure that the land has all the necessary permissions. If you are buying it for commercial development, check the conversion norms. If you want to buy it for livestock-raising or vegetable farming or for vineyard or for recreational purposes, you would have to check for permits and other documents.
- There could be instances where the land-use restrictions may curtail the manner in which the land can be used by the owner. You may need to check the land easements, which may grant access to a portion of the property to an unrelated party. For instance, the conveyance of mineral rights may grant an unrelated party the authorisation to extract and sell minerals for financial gain.
- Investors should consider the availability of basic utilities such as electricity or water supply, before purchasing the land. Apart from this, the buyer should also review the land’s annual property-tax obligation and analyse the distance of the land from the nearest community.
- Investors should know that buying raw land is a risky investment, as it will not generate any income and may not generate a solid capital gain when the property is sold.
Is it good to invest in land?
Depending upon your requirements, land can be a good investment provided you are looking for long-term benefits.
Is it better to buy land or a house for investment?
Since buying a land requires more due diligence than buying a house, you would have to spend more time and effort when investing in land.
Does land ever lose value?
Land values do not depreciate.
(The author is a tax and investment expert, with 35 years’ experience)
(With inputs from Surbhi Gupta)