It is no longer a seller’s market in J&K, which it used to be in pre-abrogation of Article 370 period.
Street Talk
Expert Opinion
A few months back, I came across a news report claiming a notable shift in investment patterns in Kashmir. The report, which appeared prominently on the front page of a local daily newspaper, claimed a boom in the real estate market in Kashmir quoting some young couples in Srinagar turning to immovable property business to secure their financial future. To be precise, the report, contrary to the ground situation, projected rising prices of properties attracting local investors into the real estate business when actually there was no such trend existing. The sale/purchase of properties, especially for investment purposes, has witnessed a slump and it continues even today.
In other words, the real estate market in Jammu and Kashmir is no longer a seller’s market now, which it used to be in pre-abrogation of article 370 period. Even as sellers peg a high price for their properties, be it land or any building, the buyers mostly overlook such deals, particularly in the context of investment purposes and hardly a deal materializes. For quite some time now, the prices have remained stagnant in many areas dropped for lack of demand. In the given slump situation, the local real estate companies have started diversifying their activities to stay afloat in the business. You will find most of these companies taking to sale/purchase of second-hand cars and other automobiles, which is evident from their social media ad (advertisement) campaigns. Even the individual property brokers are facing the heat and social media platforms such as Facebook remain flooded with short video clips of properties on sale. The scenario is contrary to the situation when a few years back, there was a boom in the real estate market in the region as the prices were going up significantly. It used to be a sellers-market before experiencing a bubble.
Notably, the bubble in the housing market is a condition where there is a dramatic surge in prices in a comparatively shorter period leading to a situation where the prices are no longer sustainable and experience a crash. In other words, the situation witnesses real estate prices rising in a short period and then facing a steep fall once the hype is over or the bubble bursts. Factors such as easy credit facilities, speculations, artificial demand, and abnormally high investment in real estate lead to a rise in property prices and cause a housing bubble.
In the context of J&K the housing bubble took a longer period to explode as the ground situation was not favourable owing to lack of accountability on the back of decades long violence in the region. However, things took a turn after the abrogation of article 370 and invoking of central laws in the region. During the period we witnessed a massive crackdown on the parallel economy which was floating here under the nose of authorities at the helm of affairs at that time. Surprisingly, economic experts at that time had pegged the parallel economy much stronger than the formal economy. Today, the flow of money to each and every sector of the economy finds its route through the formal system alone and almost every transaction has necessarily to be transparent and is loaded with accountability factors.
Basically, there are certain factors which have put the real estate market in Jammu and Kashmir in a dilemma. Property deals have come under the close scrutiny of the government, especially after the digitization of land records. Today, a system is in place which tracks real estate transactions in the region. This tracking has enabled the government to net the sale and purchase of property transactions through the tax lens. In other words, accountability in real estate transactions where the source of funds involved in such deals has to be transparent, has put most of the buyers on back-foot. Under these circumstances, those who were looking at real estate as the most profitable avenue for investment, no longer want hassles of accountability and are exploring other areas such as stock market etc. to let their money do the talking. The transparency in the real estate deals, which is segmented by property type as residential, office, retail, hospitality, and Industrial, has brought them under tax lens and today’s system hardly leaves an escape route for the sellers as well as buyers to evade tax liabilities.
It is worth mentioning that the transfer of immovable property involves its own tax structure. In this context, an acquaintance who is a tax consultant explained the nature of such taxes. Let me share the details.
Buyers are required to follow TDS (tax deduction at source) regulations, deducting 1% on the higher value between consideration or stamp duty value under Section 194IA. Taxation for sellers varies depending on whether the property is treated as stock in trade or a capital asset. Exemptions under sections 54, 54F, and 54EC provide relief, subject to specific conditions. A comprehensive understanding of these provisions is crucial for making informed decisions, optimizing tax positions, and ensuring compliance with applicable tax laws.
What is TDS on transfer of immovable property? As per Section 194IA of the Income Tax Act, 1961, where any person being transferee (buyer) gives consideration for the transfer of any immovable property to any resident transferor (seller), the buyer shall deduct tax at source (TDS) at the rate of 1% of the total consideration or stamp duty value of such property, whichever is higher, at the time of credit or payment, whichever is earlier.
However, no such TDS is to be deducted where both the total amount of consideration and the stamp duty value of such property are less than Rs. 50,00,000. Notably, in case of properties transferred by way of gift, no tax is to be paid.
One more aspect to understand is the duration of ownership of the property, as this factor is used to assess tax on capital gains from assets. Capital gains tax is a tax imposed on the profits realized from the sale of property. It is the tax applied to the difference between an asset’s purchase price (or “cost basis”) and its selling price. For instance, when you sell a property for more than the price you paid for it, you have a capital gain. This tax is typically only applied to capital gains, not to the total amount received from the sale.
In the given scenario, the sale/purchase of properties needs to be done after thorough consultation with tax consultants who have the ability to guide the parties not only to comply with tax rules governing real estate transactions, but will also help to save tax in a most prudent way.
Meanwhile, the current slump doesn’t mean the investment in the real estate market was worry-free. Prior to this scenario, there were already a host of risks associated with this kind of investment. The problem with this sector remains that even a commoner tries his hand in real estate investment to make quick and big bucks in a single deal. What I have observed is that these raw real estate investors get themselves into negative cash flow for a period that is not sustainable. This immediately forces them to resell the property at a loss. In many such cases I have seen people going bankrupt.
Negative cash flow is an investment situation where cash expenditures to maintain an investment (taxes, maintenance, etc.) exceed the cash income received from the investment. In other words, when a company spends more than it receives during a set period of time, the company is said to have a negative cash flow. This is often viewed as an indicator of financial ill health.
So, for the lack of knowledge about the real estate market dynamics, these investors make big losses instead of accumulating big bucks!
Take the case of investing in a piece of land. It is not as simple as it appears. There are risks associated with it and may remain hidden till an investor falls into a trap. The first thing which an investor has to bear in mind is that there might be a series of legal requirements to meet and procedures to follow before a piece of land is converted into a saleable item.
Let me explain – we have agricultural and non-agricultural land. As far as agricultural land is concerned, you cannot construct any kind of structure on it. It’s simply banned. For non-agricultural purposes, you still need clearance from the various authorities to build on it.
You also need to avoid investing in land which is included in some other developmental plan drafted by the government. You can own the land but will have no right to do anything with it. Even, maybe, you cannot sell it.
Precisely, the investment in real estate turns into a nightmare when an investor is not able to sell it on time to meet any exigency. While most of the investors will be aware of this risk, it is something they haven’t felt the impact of, until they are confronted head-on with unpleasant circumstances.
(The author is a veteran journalist/columnist. He is former Head of Corporate Communication & CSR and Internal Communication & Knowledge Management Departments of J&K Bank).