What is better ? Investment in Real Estate or investment in Stocks ?
A question might arise in the minds of a prudent investor about choosing Real Estate or the Stock Market for his forthcoming investment. In one single line the question cannot be answered as to what is better from the point of investment planning namely whether to go in for investment in the Real Estate or to go in for investment in the Stock Market. Well the correct answer will depend upon various parameters relating to a particular investor specially the age of the investor as also the amount of money available for investment.
Thus, whenever a question comes up in your mind to take a management decision relating to your investment and when you are in a fix to decide about your new investment to go in the Real Estate Sector or to go in the Stock Market, then it is time right now for you to screen some of the important parameters outlined in the succeeding paragraphs and then only take a decision on your investment. The investment in Real Estate has got tremendous opportunity of great appreciation in the years to come. Likewise, even the stocks have great opportunity of unprecedented appreciation if we are married to the stock for a considerable long time.
In most cases specially for those who are young not merely young in heart but young in age for them definitely the better course would be to make investment in the Stock Market. This is mainly because of the fact that the younger generation is competent enough to take slightly more risk relating to their investment in comparison with a person who is fairly aged and who should looking to his age profile not take big risk by making investment in the Stock Market. Hence, with the passage of time depending upon your age profile the management decision should be taken as to whether to make your investment in the Stock Market or in the Real Estate Sector. I have prepared a thumb rule whereby young persons of the age group of 20 to 40 should go in for making investment in the Stock Market in a more aggressive manner. Reversely persons who are 50 plus should avoid making investment in the Stock Market.
Also please do note that to make big money in the Stock Market you should remain married for a long time with your stocks.
Another important question which will enable you to decide your investment preference for the Stock Market relates to the quantum of your investment. Even if you have got very small little money available at your disposal, even then it is possible for you to make investment in the Stock Market. Reversely small little money will not make it possible for you to enter the Real Estate Sector. Even if you are thinking of making of purchase of some property the payment of which is to be made in installments but if you are not sure of your capability or capacity to make payment of the installment at a later point of time, then even if you would love to make investment in the Real Estate sector but you will have to refrain from making such investment.
Reversely, in the Stock Market whatever money you have got today you can enter the Stock Market with that money whether big money or small money. Later on the advantage of the Stock Market is as and when surplus money is available in your hand, you can enter again the Stock Market with your surplus money and buy the stocks. In the case of the Real Estate it is not that easy to enter the Real Estate Sector at a future point of time with small little money at your command. Hence, we can conclude that if you are in such a state of mind that you do not have regular inflow of your money and only small little money is available today at your disposal, then surely you will have no option other than to make investment in the Stock Market.
This is because of the fact that when you are in the Stock Market, you can even enter the Stock Market just with Rs. 1000. Likewise, Systematic Investment Planning Concept can be easily achieved by you if you want to make investment in the Stock Market. Reversely the Concept of Systematic Investment Planning cannot be achieved through your investment in the Real Estate Sector. Thus, with small little money at your command, it will be worthwhile for you to venture with your investment in the Stock Market and more flexibility you will find with your investment in the Stock Market.
If you are going for your investment in the Stock Market but the fact remains that you may not have any idea about how to go ahead for making your investment in the Stock Market, then you still have another option of travelling through the Mutual Fund route and thus entering the investment area of the Stock Market can also be achieved by you even by not directly investing in the Stock Market but just buying Units of the Mutual Fund. In the case of the Real Estate investment it is not possible for you to make the investment through the Concept of Mutual Fund specially when you want to make investment in a specific property of your choice.
When you are contemplating to make your investment, one important point which you must keep in mind and that is with reference to the desire of having fixed income from your investment. If one of the goals of your investment is to make available fixed income at regular interval, then surely the only better option available for you would be to make investment in the Real Estate Sector so that you are able to reap the benefits of earning income on regular basis because you will be able to let out your property and receive rental income on regular basis. Reversely, if you had made the investment in the Stock Market, then there is no regularity of the income in spite of your heavy big investment in the Stock Market. Hence, decide this issue in advance and only then take a decision of investing in the Stock Market or in the Real Estate Sector specially keeping in mind the money requirement for your family on regular basis.
The income arising from your investment in the Stock Market specially when it comes in the form of Dividend Income is completely exempt from income-tax. Sky is the limit for exemption of the Dividend Income. This Dividend Income is exempted for every category of tax payers. However, reversely if you were to plan your investment in Real Estate, then whatever rental income you are going to get it cannot come as a tax free income in your hands. You will be required to make payment of applicable taxes in the years to come.
This is again another important point which will enable you to decide about your investment preference whether to go in for the Real Estate Sector or to go in for your investment in the Stock Market more particularly if you are a person coming in the highest income bracket group of 30 per cent, then surely this point will be of added advantage to you which might inspire you to make your investment in the Stock Market specially because the yield on your investment from the Stock Market is going to be completely tax free.
Another very very important which has to be taken into consideration from the point of investment planning relates to the aspects connected with computation of Capital Gains tax in case of sale of your investment. In case you were to make your investment in Real Estate, then the present law is that if you sell your Real Estate by holding it for a period of less than 36 months, in that event the gain arising to you will be treated as Short-term Capital Gain and only if you sell your Real Estate investment after holding it for a period of more than 36 months, only in that situation the gain arising to you will be treated as Long-term Capital Gain.
Thus, as per the provisions existing today in the Income-tax Law in case you have a Short-term Capital Gain by selling your Real Estate, then it is liable to tax after being included with your other income which means that income-tax liability will arise as per the slab of your income which further means that if you are having other income in excess of Rs. 10 lakhs, then on every single rupee earned by way of Short-term Capital Gain on your Real Estate investment, your income-tax liability will be 30 per cent. In the case of Long-term Capital Gain on selling Real Estate, the tax liability will be at the rate of 20 per cent only.
Now when we compare the investment instrument of investment in the Stock Market with the Real Estate, we find that as per the present provisions in the Income-tax Law whenever we sell the shares by holding it for a period of less than 12 months, then the gain arising is treated as Short-term Capital Gain. The income-tax payment on Short-term Capital Gain on shares will be at the rate of 15 per cent only. However, in case you are selling your stocks specially of the listed companies by holding it for a period of more than one year, in that situation the liability of Capital Gains will not be attracted because the present Income-tax law provide for complete exemption in respect of the income arising from selling the listed security in case they are held for more than one year. This really is very very important point which will change the thinking of the investor in favour of making investment in the Stock Market.
Moreover, the period of computing Long-term Capital Gain for Real Estate investment Sector is 36 months and for calculating the same Long-term Capital Gain period for stocks is just 12 months only. Thus, we find that taxation would play a very important role in enabling you to concentrate and decide about your investment in the Stock Market or the investment in the Real Estate Sector.
Finally, when you have to decide the aspects connected with going in for your investment in the Real Estate Sector or going in for your investment in the Stock Market, do think about the time period of your investment which will help you to plan your strategy to decide about your correct goal of investment namely to go in for investment in the Stock Market or to go in for investment in the Real Estate Sector.
Another point which requires a deep thinking before venturing into your investment in the Real Estate or venturing into your investment in the Stock Market relates to the expenses incurred on acquisition of such investment. For example, if you are contemplating to make your investment in the Real Estate, then be prepared to make the payment of the stamp duty whereas when you make your investment in the Stock Market you have to pay Security Transaction Tax which is very very nominal. Once when we understand that whenever we make purchase of the property, we are required to flush out money for stamp duty, then it makes it crystal clear that it is not that easy to shuffle your Real Estate investment because each time you make the investment, then pay stamp duty and again get out of the investment say after a short period only and you want to buy another property, then again go in for making payment of stamp duty.
Reverse is not the true with regard to your investment in the Stock Market. Hence, if you are contemplating to make your investment either in Real Estate or in Stock Market, make sure you ask one question to yourself namely your desire to shuffle and reshuffle your investment. If the desire is in favour of reshuffling the investment again and again and again and again, then better it would be for you to go in for your investment in the Stock Market only.
After having analysed the various pointers which will enable you to think and decide about your management decision to go in for your investment whether in the Real Estate or in the Stock Market, one thing is crystal clear namely that one should before taking a management decision on investment, sit down calmly and coolly and concentrate on one’s own facts, circumstances, the age group, the money requirement on regular basis and finally the ultimate objective of holding that asset and only then take a management decision of investing either in the Stock Market or investing in the Real Estate Sector.
In case you have surplus funds available with you for making investment then best option would best option would be to go in for investment a plot of land.
I would rather say that both the investment options are pretty very good but the answer relevant for one person cannot be relevant for another person because of the various parameters outlined in the above mentioned paragraphs. Hence, if you have got big money available at your disposal, then think carefully and only then invest either in Stock or in the Real Estate Sector. It may also be noted here that getting tax benefit in the sphere of interest on the housing loan on a yearly basis on interest payment up to Rs. 1,50,000 also would be an important deciding factor to decide the investment option in favour of Real Estate investment.
Subhash Lakhotia
Subash Lakhotia is a Tax and Investment Consultant and Tax Guru in CNBC Awaaz.
The views expressed in this article are the author´s own.
