Govt Goes Cracking On Schemes Offering Assured Returns On Property Investment

Reports by global and domestic research giants invariably speak of the insatiable hunger Indians have for real estate. This leads many of them to invest in options that are risky proportions, to say the least. When a developer, for instance, promises you an assured return of 12 per cent an annum on your property investment till you get possession — this primarily happens in the commercial property segment — you find the offer too lucrative to ignore since no investment option promises you that kind of returns. In the residential real estate segment, similar schemes existed in the form of interest subvention plans and 80:20 payment plan offers.

The sentiment to make quick money is so strong that other important factors involving this sort of investment are often overlooked. This is why the number of offers in real estate promising unbelievable assured returns has increased tremendously in the past decade amid the Reserve Bank of India tightening norms to fund projects by real estate developers.

The arrival of the real estate law might have to a great extent curbed the number of such offers in the residential segment, small builders are even today offering you assured return on your investment in the commercial segment. The truth is they have no other option to collect funds since banks may not be willing to lend them money.

Now, the government has decided to go after such developers. The Union Cabinet on February 20 approved the Unregulated Deposit Schemes and Chit Funds (Amendment) Bill, 2018, with an aim to "protect the savings of the investors". The Bill will soon be tabled in Parliament. After the Bill becomes the law, here is what will happen.

Cash-seeking developers of all scales and size will have to register themselves with a designated authority provided under the proposed law. States will be responsible to set up the designated authority. Developers who are already regulated will also have to register themselves. The same would apply to jewelers. Those who fail to register themselves with the authority and offer Ponzi schemes might have to serve a jail term of up to seven years.

While the law would soon be there to protect the interests of investors, here are certain things that you ought to consider before you fall for some too-good-to-be-true offer:

*Rates of property that offer assured returns are invariably much higher than rates of similar properties — according to market experts, you may have to pay Rs 1,000 more per square foot (psf). Basically, the builder is taking your own money only to give it back as assured return. Also be mindful of the fact that you might find it enormously difficult to exit this investment because of the money factor. Not many people would be willing to pay Rs 1,000 extra psf.

*The lucrative offer would start looking much less lucrative if you calculated the tax implications. The money you earn through such schemes is counted as your income from other sources. On this income, you cannot claim any deductions. The same is not true of the rental income you earn otherwise. Also, interest offered on an under-construction project would attract the Goods and Services Tax, too.

*This is certainly not an opportunity the salaried class or the financially not-so-good class of investors should explore. Only those investors who have a high-risk appetite should venture into this investment option. In case the developer knocks at the doors of banks, he will be paying 15-18 per cent interest on the money he borrows. The bank is actually making more money than you are.

*Since almost all the money comes from your own pocket (such plans are not construction-linked payment plans and the money must be paid upfront), make sure the assured return comes in the form of bank guarantee and not in the form of cheques (these bounce a great deal, past instances show.)

*You will have little control over who is living in a space owned by you. The idea of ownership would primarily be psychological than anything else.

*Project delays are the key reason behind the mess India’s real estate sector is still clearing. Before investing in under-construction projects, it is advisable you check the developer brand and his track record.