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Freehold property: Meaning, title and ownership

Real estate basics: What is a Freehold property?

Understanding the type of ownership you hold over a property is crucial when making real estate decisions. One common form of ownership is freehold property, which offers the owner full control and rights over the land and the building, without the need for permission from any external authority. Unlike leasehold properties, freehold properties provide indefinite ownership and greater flexibility in usage. However, this freedom often comes at a higher price. In this article, we’ll delve into what freehold property entails, its advantages, disadvantages, and key aspects that every property owner should know.

See also: All about written down value method of depreciation

What is freehold property?

Meaning of a freehold property is a property that is legally ‘free from hold’ of any entity other than the owner. The owner of such a freehold property has the right to use it for any purpose, in accordance with the regulations of where the freehold is located. The sale of a freehold property requires significantly less paperwork, as it is not necessary to request authorisation from the state. However, this also means that a freehold property is more expensive to purchase than a leasehold property.

 

Freehold property: Title and ownership

The title of a freehold property grants the owner the highest level of ownership recognized by law, encompassing the land, any structures on it, and related rights. Understanding the elements of this title is crucial for comprehending its impact on ownership.

 

Freehold property: Advantages

As the name suggests, freehold property signifies complete freedom. Thus, the owner of the property has complete control over the freehold premises and has no further payments to make, in the form of ground rents, service charges or any other kind of charges that might be in the case of leasehold properties. Thus, the owner knows the exact amount he spends for purchasing the property. A freehold also has no restriction regarding time, visitors and the like. Thus, the owner can do whatever he legally wishes to within his property, without being answerable to anybody else.

 

Freehold property: Disadvantages

The only disadvantage of freehold properties is that they are more expensive. Since an individual owns both, the land and the property, to have complete control over it, the cost incurred on it increases. Thus, such properties might be difficult to be purchased by individuals who are used to staying in flats or apartments, where they just own the property and therefore, pay a lower price.

See also: All about immovable property

 

What is a freehold land title?

Freehold land title refers to a freehold property title by which the owner of the freehold land owns it for perpetuity (free from hold). In other words, freehold land title ownership has no limit in time for the landowner and its beneficiaries.

See also: Types of land ownership

 

Freehold land: Pros and cons

Pros of freehold land
Cons of freehold land
Freehold land is easy to sell, as the ownership lies with the actual owner. Freehold land is costlier than leasehold land.
Bank loan and refinancing is easier for freehold land. For freehold land you may need to pay more down payment for blocking the unit.
For freehold land, the capital appreciation is more, as compared to leasehold property.

 

Is freehold property an asset?

For income tax filing for businesses, it is imperative to show certain fixed assets which need to be installed like furniture, office building and plant & machinery, etc. While stocks, cash on hand and debtors are considered as current assets, freehold land and building is considered as fixed assets.

See also: How to remove illegal possession from your property?

 

Freehold property: Rights of the owners

There are no restrictions on the right of an owner of a freehold property to transfer it further and it can be inherited. There is no encumbrance to the absolute freehold title of the property and it can be transferred, by registration of a sale deed. When you purchase a freehold property, you also own the land it was built on (freehold land), along with the house itself. If the freehold property is an apartment, the home owner becomes a shareholder in the freehold property. You have the right to live in the house as long as you wish and you can also make changes to it.

While most houses in India are sold as freehold properties, apartments are also sometimes sold on lease. However, this is gradually changing, as buyers feel more confident in purchasing a property that is freehold.

 

know about: land ownership

Freehold land does not depreciate

Freehold land is not depreciated, because freehold land is assumed to have an unlimited useful life. Other long-life assets, such as land improvements, buildings, furnishings, equipment, etc., have limited useful lives. Since the owners of leasehold assets cannot sell the property, the depreciation is not factored in leasehold property.

 

Can freehold land be taken back by the government?

Under the Land Acquisition Act, the government has the right to acquire all types of freehold title or private land for the purpose of industrialisation, development of infrastructure facilities or urbanisation of the private land, after compensating the affected land owners suitably.

 

Home loan for a freehold property

Banks are generally more willing to extend a home loan for a freehold property, as compared to a leasehold property. This is because it is considered a safer investment, as the registration of a freehold property is done and it is also expected to increase in value. Banks are also willing to sanction a larger home loan amount for a freehold property with a high market value (where the loan-to-value ratio can be 80 per cent of the market value of the freehold property).

 

Freehold property: Tax implications

Owning a freehold property in India comes with various tax implications, both during the ownership period and when selling the property. Understanding these taxes can help owners manage their finances better and maximise their returns.

Capital gains tax

Property tax

Freehold property owners are liable to pay property taxes to the local municipal corporation or urban local body based on the annual value of the property. Property tax is typically calculated on factors such as the area of the property, its location, and its usage (residential, commercial, etc.). These taxes are levied by the local authorities and can vary depending on the city or town. Property owners need to ensure timely payment to avoid penalties and interest on delayed payments.

Deductions for home loan interest and principal repayment

Stamp duty and registration charges

When buying or transferring a freehold property, stamp duty and registration charges are payable, which vary by state. These costs are typically added to the overall cost of acquisition and are not deductible under income tax. However, the cost of acquisition, including stamp duty, can be factored into the calculation of capital gains when the property is sold.

Tax benefits on renting freehold property

If the freehold property is rented out, the rental income is taxable under the head “Income from House Property.” Property owners can claim a standard deduction of 30% of the rental income for repairs and maintenance, regardless of actual expenses. Additionally, home loan interest paid on the property can be deducted from the rental income.

Tax on inherited freehold property

If the freehold property is inherited, no immediate tax is levied. However, when the property is eventually sold, capital gains tax is applicable, based on the sale price and the fair market value of the property on the date of inheritance. The long-term capital gains tax benefits, such as indexation, will apply in this case as well.

 

Freehold insurance

Freeload properties or freehold land involves several risks and responsibilities that might cause high expenditure. For example, the freehold property may be damaged by a storm or a fire. Thus, the owner of a freehold property requires an insurance to cover for the financial expenditure, in case of any freehold property damage. The freeholders’ insurance policy provides adequate financial cover for both, the freeload property and freeload land, in case either of it is damaged. The premium against the insurance depends on the size and net worth of the freeload property. However, once the owner of a freehold property is eligible for such an insurance, the risks involved in owning a freeload property can be minimised. A freeholder’s insurance policy not only protects the freeload property or freehold land from any loss but also provides adequate financial cover, in cases of loss of rent if the property is found to be uninhabitable.

See also: The pros and cons of buying agricultural land

 

Difference between freehold property and leasehold property

Any commercial property in India is categorised as either freehold or leasehold. These spaces serve as venues for companies, factories, businesses or shops, either owned outright or leased.

 

 

 

 

 

 

 

Freehold ownership: Conversion to freehold property from leasehold property

What is freehold ownership? 

A leasehold property can be converted to a freehold property through a clear sale deed, a general power of attorney and a no-objection certificate (if the land is under mortgage or rent). Additionally, you would also need to pay a conversion charge, to the relevant authorities. In Delhi, a property owner can get the status changed, using only the registered agreement to sell and the general power of attorney. In Maharashtra, the state government has set the rate for the conversion of leasehold property to freehold at 25% of the ready reckoner (RR) rate.

Documents needed for converting leasehold property to freehold property 

For converting an immovable leasehold property into a freehold property in Delhi, there are certain documents that need to be submitted by the applicant to the Delhi Development Authority (DDA):

The applicant must also pay the conversion charges to the Authority.

See also: All about land conversion

Freehold property conversion charges are tax-deductible: ITAT 

In a recent judgement, the Income Tax Appellate Tribunal (ITAT), Allahabad Bench, allowed the tax deduction on the share of freehold conversion charges, stamp duty, etc., for converting a property into freehold. The assessee had contended that the freehold conversion charges constituted improvement of the property for better title of the property and claimed the same as deductions towards the cost of improvement of the property while computing long term capital gains tax. To this, the court ruled that that the assessee had rightly claimed the deduction on account of improvement in the property being an improvement in the title of the property on being converted from leasehold Nazul land to freehold property. Also, the court agreed that making the property freehold, would grant perfect ownership rights/title in favour of the existing lessees, who would then be in a position to transfer/sell the property.

See also: How to become co-owner of property?

 

Types of properties ineligible for freehold ownership

In India, specific categories of properties are not eligible for freehold ownership, and the restrictions can vary based on state and local regulations.

 

Housing.com POV

Freehold property ownership presents a compelling option for individuals seeking long-term control and investment in real estate. With the advantages of indefinite ownership, full autonomy over property modifications, and the absence of ongoing lease-related costs, freehold properties are often viewed as a more desirable investment compared to leasehold alternatives. However, potential buyers should be mindful of the higher costs associated with freehold properties and the restrictions that may apply to certain types of land, such as agricultural or government-owned properties. Understanding these nuances is crucial for making informed real estate decisions. As the real estate landscape continues to evolve, staying informed about freehold property rights and regulations will empower buyers to maximise their investments and secure their financial futures. 

 

FAQs

What is a freehold property?

Freehold property is any real estate that is legally 'free from hold' of any entity other than the owner.

How to convert leasehold property to freehold?

A leasehold property can be converted to a freehold property through a proper documentation process, as mentioned in this article.

What is the difference between freehold and leasehold property?

The major difference between freehold and leasehold properties lies in the ownership status and control rules.

(With inputs from Surbhi Gupta and Anuradha Ramamirtham)

 

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