Land Investment In India: Worth The Risk?

Investing in land in India is a popular option, despite the availability of other financial products such as mutual funds and equity shares. Land is a tangible asset that is always in demand due to its limited supply and increasing population. It is also a safe investment option as it is not affected by market conditions and offers high returns at low risks. However, investing in land requires a substantial amount of money and comes with certain risks, such as encroachment and acquisition by the government. Additionally, there are various procedures and legal requirements involved in the land-buying process in India, which can be complex.

The benefits of land ownership

While buying raw land can be a risky investment, there are several benefits to land ownership.

Vacant Land Requires Minimum Work

Unlike properties, commercial buildings, and houses, land requires low maintenance. Owners can leave the land in its natural state or install fencing for security. Raw land presents various opportunities for future development, recreation, or agriculture if it is located in high-demand areas.

Profits with a Buy and Hold Strategy

The buy-and-hold strategy involves buying an asset and holding it for a long time to gain high appreciation value and long-term profit. Unlike other real estate investments, land requires almost no maintenance, allowing investors to hold onto it patiently before selling it when there is potential for wealth accumulation.

Generate Income by Leasing Out Land

Leasing out land is a lucrative option for generating passive income without being involved in day-to-day operations. Leasing empty land for agriculture, recreation, commerce, or warehousing can generate a substantial passive income to pay taxes and more.

Affordable and Long-Term Investment

Land investment is affordable, even for beginners, who can start with a minimum amount and diversify their portfolios. While raw land investment has some risks, the benefits outweigh them as market fluctuations do not impact the land.

Low-Risk Ownership

With a budget, financial goals, and research, you can own land with minimal risk. Employing a real estate agent can ensure legal ownership and save you from various risks associated with land investment.

Land Investments Are Worth a Great Deal of Money

Land is a tangible, finite asset that increases in value over time due to its limited supply. Land ownership provides financial security and improves your investment portfolio.

Land Ownership Ensures a Secure Retirement

Leasing out land is a great strategy for a secure retirement. Unlike property, land requires almost no maintenance and continues to appreciate over time, making it a safe way to earn passive income.

Land Offers Flexibility of Use

Land ownership grants you the right to utilize the land for various purposes, such as agriculture, storage, outdoor recreation, building a house, or creating rental properties.

Minimum Property Tax

Land ownership can benefit from various tax credits and deductions, reducing tax liability. Additionally, there is no income tax on profits from selling land for a higher price than the original investment.

Highest Resale Value

Land appreciates faster than built-up properties and is immune to external factors like weather or erosion. As a finite resource with high demand, it offers bigger profits when sold within a reasonable time frame.

The risks of investing in land

Investing in land is a risky business, and there are several drawbacks to consider before taking the plunge.

One of the biggest issues is zoning. Zoning laws dictate how you can use the land, and they vary depending on the area. For example, land in a commercial zone cannot be used for residential buildings. While it is possible to petition for reclassification, this is not guaranteed and can be a lengthy process.

Another issue is utility access. If your land is in a remote location, getting access to basic utilities like electricity, water, and the internet can be difficult and expensive. For instance, if there is no access to a sewer line, you will need to pay for a percolation test to ensure you can install a septic system.

Environmental issues are also a concern. The land could have high levels of asbestos or radon in the soil, or it could be prone to flooding. These issues can make it unsuitable for building on and can be costly to rectify.

Land investments are also illiquid. Unlike gold or mutual funds, land can take months to convert into cash, and it may be difficult to find a suitable buyer.

Furthermore, land ownership comes with a host of responsibilities and costs. These include property upkeep, tax management, land-use decisions, security, and utility management. There may also be ongoing costs associated with the land, and it may not provide a reliable income source.

Finally, the real estate market is subject to fluctuations, and land values can be impacted by economic downturns, zoning regulations, and market sentiment. This could result in a decrease in the value of your land.

Therefore, while investing in land can have its benefits, it is essential to carefully consider the potential risks and drawbacks before making any decisions.

The process of buying land in India

Research and Planning

Firstly, identify the location and type of land you are interested in. Research the market rates and local real estate trends in the chosen area.

Engage a Real Estate Agent or Broker

Hire a licensed real estate agent or broker to help find suitable land. Ensure they have a good understanding of the local market and legal requirements.

Legal Due Diligence

Verify the ownership and title of the land through relevant records. Check for any encumbrances, liens, or legal disputes associated with the property.

Verification of Property Documents

Ask the seller for and review the following documents:

• Encumbrance Certificate
• Property Tax Receipts
• Khata Certificate and Extract
• Survey Sketch of the Land

Visit the land to physically inspect its condition, boundaries, and surroundings. Confirm that the land use aligns with your intended purpose (e.g. residential, commercial, or agricultural).

Negotiation and Agreement

Negotiate the terms of the sale, including the price, payment schedule, and any conditions. Draft and sign a Sale Agreement (also known as an Agreement to Sell) with the seller.

Verification of Seller's Identity

Verify the identity of the seller through legal documents such as an Aadhar card or PAN card.

Payment of Token Amount

Pay a token amount to the seller as a commitment to the transaction and ensure a receipt is issued.

Request a Title Clearance Certificate from a lawyer to ensure there are no legal issues with the property title.

Obtain a No-Objection Certificate (NOC)

Obtain an NOC from the relevant authorities if required, especially for agricultural land.

Sale Deed Execution

Draft the Sale Deed, the legal document transferring ownership. Sign the Sale Deed in the presence of two witnesses and a Sub-Registrar of Assurances.

Stamp Duty and Registration

Pay the applicable stamp duty based on the value of the property. Register the Sale Deed at the local Sub-Registrar office by submitting the necessary documents.

Mutation of Property

Apply for the mutation of the property in the local municipal records and update the land records with your name as the new owner.

Possession and Handover

Take possession of the land after completing all legal formalities. Ensure the seller hands over all relevant documents and keys.

Post-Purchase Formalities

Update your ownership details with local municipal offices and utility providers. Keep the original Sale Deed, Title Deed, and other relevant documents in a safe place. Consult a legal advisor or property lawyer throughout the process to ensure legal compliance.

Documentation Process

List of Documents Required:

• Land Title/Deed: Check the title/deed is in the name of the seller and that they have full rights to sell. Insist on the original document.
• Encumbrance Certificate: Obtain this from the sub-registrar's office to check for disputes, legal complications, and unpaid taxes/dues.
• Property Tax Bills and Receipts: Request original copies and check payments are up-to-date.
• Loan Papers: If the land had a mortgage, check loan repayment and obtain a release certificate from the bank.

Documents Required from Sellers:

• Encumbrance Certificate
• Original Land Title/Deed or the 7/12
• Release Certificate from the bank
• Original Property Tax Receipt and other bills

Documents Required from Buyers:

• Title Deed after name transfer
• Receipt of stamp duty payment: The land can then be registered in the buyer's name at the sub-registrar's office.
• The State Municipalities require prior sanction for construction or modification of a property. A building plan and fee are necessary for approval.

Property Registration Process

The 1908 Indian Registration Act makes property registration mandatory in India. Buyers pay registration charges to their respective state governments as a percentage of the total plot cost. During document submission, buyers also pay a percentage of the total plot price as stamp duty (usually 3-4% of the plot's saleable value) and registration charges (0.5% of the value). Senior citizens and women may be eligible for discounts in many Indian states.

Documents needed for registering a plot include:

• Zone Certificate
• Sale deed/Khareedi Khat/Sathe Khat
• Encumbrance Certificate
• Latest tax payment receipt
• Landowner's title documents
• Agreement of sale
• Power of attorney (if applicable)
• All agreement copies with registration

The examination of details and verification can take around 5-7 days and cost around Rs 10,000-20,000. Checking continues while the seller agrees to the sale, with ownership documents in order and issued by the department of revenue records.

Appoint a lawyer to finalise the transaction. The lawyer will create the final document for stamping. Pay the stamp duty as a buyer at the chosen bank; this procedure takes one day. The bank will provide a receipt acknowledging the stamp duty payment on the front page of the sale deed.

The sale deed is then signed by the seller, buyer, and two witnesses. A number is generated when the registration charge is paid via demand draft or cash, and the documentation is delivered.

Two passport-size photographs, along with ID proof of the seller, buyer, and witnesses, are required. Exact copies of the seller's certificate of incorporation, PAN card details, latest property register card copy, and municipal tax bills are also needed.

After registration, get the title changed to the buyer's name. Apply for the mutation, final sale deed copy, and affidavit at the office of the registrar. The next step is property tax calculation, after which the authority issues the mutation.

Online services are available for registration and document submission.

The financial requirements of investing in land

Investing in land in India requires careful consideration of various financial requirements. Here are some key aspects to think about:

Budget and Location

Before investing in land, it is crucial to determine your budget and the desired location. The cost of land can vary significantly depending on factors such as proximity to the city centre or emerging areas in the city's peripheries. It is essential to choose a location that aligns with your budget and investment goals.

Due Diligence and Documentation

Performing due diligence is essential when investing in land. This includes verifying the identity and nationality of the seller, especially if the property is held jointly or owned by a company. Checking and obtaining all the necessary documents is crucial to ensure a smooth and conflict-free transaction. These documents may include title deeds, seller's certificates, registration documents, and approval certificates.

Land Conversion and Approvals

If you intend to use the land for non-agricultural purposes, ensure you obtain the necessary approvals and certificates. The 'NA-Residential' order is crucial if you plan to convert agricultural land for residential use. Additionally, seek construction approvals from the municipal body and government approvals for providing essential amenities like water, electricity, and sewage treatment.

Property Registration and Taxes

Property registration is mandatory in India, and buyers must pay registration charges and stamp duty, typically ranging from 3-4% of the plot's saleable value. Senior citizens and women may be eligible for discounts on these charges in certain states. It is also important to consider the annual property tax obligations and factor these costs into your financial planning.

Loan Options

Obtaining a loan specifically for buying a plot of land can be challenging. Banks and financial institutions typically provide loans for construction purposes, and you may need to opt for a composite loan covering the cost of the plot and construction. Alternatively, you may consider investing in exchange-traded funds (ETFs) or exchange-traded notes (ETNs) to access land-related investment opportunities.

Risk Assessment

Investing in land carries risks, including the possibility of encroachment or compulsory acquisition by the government. It is essential to carefully assess these risks and consider the potential impact on your investment. Additionally, raw land may not generate income and may not result in a significant capital gain when sold, making it a speculative investment.

The potential returns on land investment

Land is a finite resource, and with a growing population and ongoing infrastructure developments, the demand for it is consistently high. This makes land a good investment option, especially in a country like India, where the population is increasing and urbanisation is taking over agricultural land.

The demand for land in India is such that it has a price stability and its value is expected to increase over time. This means that investors can buy land at a low price and sell it at a higher price in the future. Land in India is also a good investment because it is flexible and has zero maintenance costs.

There are different types of plots available for investment in India, including residential, commercial, agricultural, institutional, and industrial. The rules for buying land, especially agricultural land, differ across states, and there may be restrictions on foreign buyers.

When investing in land, it is important to be aware of the various procedures and legal requirements, such as the necessary documents and approvals from authorities. It is also crucial to determine the budget and location before making any decisions.

While investing in land can be a good way to generate cash, it is important to note that it is a big-ticket and illiquid investment. It may take a long time to find a suitable buyer, and there may be high upfront costs involved. Additionally, there is a risk of encroachment or compulsory acquisition by the government, which could result in litigation and unnecessary legal costs.

Overall, investing in land in India can be a wise decision, but it is important to carefully consider the potential risks and returns before making any decisions.

Frequently asked questions