2 things to know before buying a house | Money Psychology

Summary

In this financial advice video, Abhishek initially plans to buy a home, citing reduced property tax as a reason to invest. However, he overlooks additional costs like stamp duty and maintenance fees, which inflate the 'cost of acquisition' beyond the house price. The video educates on the concept of 'indexation,' explaining how inflation affects property value and tax calculations. It concludes by advising viewers to consider all costs and not rely solely on emotional decisions or tax benefits when purchasing property.

Takeaways

• 🏠 The true cost of a house includes not only the purchase price but also additional costs like stamp duty, registration fees, and potential future improvements.
• 💼 Understanding the cost of acquisition (CoA) is crucial for property investment as it represents the total expenses incurred in acquiring a property.
• 📈 Indexation adjusts the cost of a property for inflation, which can impact the capital gains tax when selling the property.
• 💡 The new budget proposal offers a choice between a 20% tax with indexation or a 12.5% tax without indexation for property sales, depending on the property's purchase date.
• 📉 The removal of the indexation benefit can result in higher taxes for property sales if the cost inflation index (CII) value is high.
• 🤔 Investors should consider both the emotional and financial aspects of buying a house, ensuring it aligns with their life goals and financial health.
• 💼 The decision to invest in property should not be based solely on tax benefits but should also take into account long-term financial planning.
• 📚 It's important to educate oneself on the intricacies of property investment, including the impact of taxes and inflation on the investment's value.
• 🔍 The video script highlights the importance of not just reacting to news but critically analyzing its implications on one's financial decisions.
• 🏡 Buying a house can be a strategic move, especially when considering factors like nearby infrastructure development and its potential impact on property value.

Q & A

What is the main topic of discussion in the script?

The main topic of discussion in the script is the cost of acquiring a home, including various associated costs and taxes, and the impact of the 2024 budget on property investment, particularly focusing on the changes in property tax and the concept of indexation.

What is meant by 'downtime' in the context of the script?

In the script, 'downtime' refers to a period of reduced activity or a break from work, during which the character is considering buying a home.

Why does the character decide to buy a home according to the script?

The character decides to buy a home because he believes it is a good investment opportunity, citing the reduction in property tax from 20% to 12.5% as a reason.

What are some of the additional costs associated with buying a home mentioned in the script?

The script mentions stamp duty, registration fees, infrastructure and development costs, and potential future renovation costs as additional expenses associated with buying a home.

What is the significance of the stamp duty in the context of the script?

In the script, stamp duty is a significant cost that the buyer has to pay to the state, which is 4 to 7% of the property's value, affecting the total cost of acquisition.

How does the script explain the difference between the cost of the house and the cost of acquisition?

The script explains that the cost of the house is just the purchase price, while the cost of acquisition includes all additional charges such as stamp duty, registration fees, and other expenses, making the actual cost higher.

What is indexation as discussed in the script?

Indexation, as discussed in the script, is a method of adjusting the cost of an asset, like a house, for inflation. It is used to determine the actual value of an asset over time, which can affect the taxable profit when the asset is sold.

How does the script illustrate the impact of inflation on property value?

The script uses an example where a house bought for 50 lakhs sees its value adjusted upwards due to inflation, effectively meaning that the original 50 lakhs is not as valuable over time, thus affecting the profit calculation when the house is sold.

What is the new tax rule for property sold after the 2024 budget according to the script?

According to the script, the new tax rule for property sold after the 2024 budget is a flat 12.5% tax without the benefit of indexation.

What choice do property owners have regarding indexation after the 2024 budget, as per the script?

The script states that property owners have the choice between paying 20% tax with indexation or 12.5% tax without indexation when selling a property purchased before 23 July 2024.

What advice does the script give about making decisions on property investment?

The script advises against making property investment decisions based solely on tax reductions and encourages considering the emotional attachment and long-term financial implications of buying a home.

Outlines

00:00

🏠 Understanding the True Cost of Home Acquisition

In this segment, Abhishek is excited about purchasing a new home, believing it to be a wise investment due to the reduced property tax from 20% to 12.5% as per the Budget 2024. However, he overlooks several additional costs involved in acquiring a home, such as stamp duty, registration fees, infrastructure and development costs, and potential future expenditures for society contributions and parking. The discussion emphasizes the importance of considering the total cost of acquisition, which includes not only the house price but also these extra charges, to truly understand the financial implications of such a purchase.

05:03

📈 The Impact of Indexation on Real Estate Investments

This part of the script delves into the concept of indexation and its effect on the profitability of real estate investments. Abhishek sells his house for one crore rupees, boasting a 100% gain in five years. However, the reality is more complex due to inflation and the impact it has on the value of money over time. The script explores two scenarios: one without indexation, where the profit is calculated based on the original cost of acquisition without adjusting for inflation, and one with indexation, which adjusts the cost for inflation. The latter scenario, while it may seem to offer a lower profit, actually reflects the real value of money over time. The new budget proposal allows for a choice between a 20% tax with indexation or a 12.5% tax without indexation for properties purchased before a certain date, highlighting the need for investors to understand and calculate the true impact of taxes and inflation on their investments.

Keywords

💡Downtime

Downtime refers to a period of inactivity or rest, often used in the context of machinery or systems. In the video, it is humorously used to refer to the speaker's personal time, suggesting a break from work or routine. It's a metaphor for taking a moment to reflect on personal decisions, such as investing in real estate.

💡Cost of Acquisition

The cost of acquisition in real estate includes all the expenses incurred in purchasing a property, not just the purchase price. It encompasses stamp duty, registration fees, and other charges. The video script uses this term to illustrate the total expenses one must consider when buying a home, which is higher than the listed price of the house.

💡Stamp Duty

Stamp duty is a tax levied on legal documents, often required when purchasing property. The video explains that this is an additional cost on top of the house's price, typically a percentage of the property's value, and varies by state. It's a crucial component of the cost of acquisition, highlighting the hidden costs in property investment.

💡Registration Fees

Registration fees are charges paid to a government authority to register a property transaction, making it legally valid. The video script mentions this as a part of the cost of acquisition, emphasizing that these fees, while sometimes overlooked, are a necessary expense in the home-buying process.

💡Infrastructure and Development Cost

Infrastructure and development costs refer to expenses related to the development of the property's surroundings, such as roads, utilities, and common areas. In the script, it's mentioned as an additional cost that homeowners in a group housing society might have to bear, contributing to the overall cost of acquisition.

💡SIPs

SIPs, or Systematic Investment Plans, are a way to invest in mutual funds by contributing a fixed amount regularly. The video discusses stopping SIPs to fund the purchase of a house, illustrating a trade-off between long-term financial investments and immediate real estate investment.

💡Indexation

Indexation is an adjustment made to the cost of an asset to account for inflation, effectively increasing the base cost to reflect the current value. The video uses this concept to explain how the tax on property sales is calculated, showing that without indexation, the profit appears higher, leading to potentially higher taxes.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video script uses the concept of inflation to explain how the real value of money decreases over time, affecting the perceived gains from selling a property.

💡Compounding Growth

Compounding growth refers to the process by which an investment's earnings are reinvested to generate additional earnings. Although not explicitly detailed in the script, the concept is relevant to the discussion of SIPs and long-term investment strategies, which can benefit from the power of compounding.

💡Safety Net

A safety net is a financial reserve or strategy designed to protect against financial hardship or loss. The video script alludes to this concept when discussing the importance of having a financial plan that includes both investments and a buffer against potential risks.

💡Cost Inflation Index (CII)

The Cost Inflation Index is a statistical measure that reflects the change in prices over time. In the context of the video, it's used to demonstrate how the adjusted cost of a property due to inflation can affect the calculation of capital gains tax, showing the impact of the new budget on property taxes.

Highlights

Abhishek is considering buying a home, believing it's a good investment opportunity due to reduced property tax in Budget 2024.

The dialogue introduces the concept of 'downtime' as a period for making significant financial decisions.

Abhishek plans to sell the property after 10-15 years, indicating a long-term investment strategy.

The discussion reveals the hidden costs of property acquisition beyond the purchase price, such as stamp duty and registration fees.

The importance of understanding the total cost of acquisition, which includes additional charges, is emphasized.

Abhishek is unaware of the societal costs associated with group housing, like maintenance and development fees.

The conversation highlights the need to consider parking costs as part of the property ownership expenses.

A detailed breakdown of the cost of acquisition is provided, including the purchase price, stamp duty, and other fees.

The video offers a practical exercise for viewers to calculate the actual acquisition cost of their dream home.

Indexation is explained as an adjustment for inflation, affecting the perceived value of an asset over time.

Abhishek's investment strategy is critiqued for not accounting for inflation, which could erode his profits.

The video presents two scenarios for property tax calculation: one with and one without indexation.

The impact of the new budget on property taxes is analyzed, showing potential tax benefits and drawbacks.

Homebuyers are given the choice between two tax rates depending on whether they apply indexation, post-Budget 2024.

The video concludes with advice to consider emotional and financial factors when deciding to buy a home.

A cautionary note is given against making financial decisions based solely on emotions or tax benefits.

Transcripts

Sir.

Abhishek.

What's wrong with you?

Everything.

But I have something good.

I have a very good news.

This is my downtime.

What time?

Downtime.

That's no time.

Look at this.

This home.

This is my home.

I'm buying this home.

Sir.

This is my home.

Why are you buying this home?

What about the investing?

We did all these episodes.

I talked about compounding growth, safety net.

Sir didn't you watch the Budget 2024?

The property tax has gone down from 20% to 12.5%.

It's so simple.

It's the best time to invest.

So you're going to invest in property?

Correct.

It's a long term investment.

I'll sell it.

Maybe after 10-15 years.

Where will the money come from?

So I'll stop my SIPs.

The goal is this.

So you will stop your SIPs because this will give you a better return.

I don't think you really understood this budget properly.

There is one or two things you're completely missing.

Let's begin.

So, question to you.

What does this house cost?

50 lakhs.

Absolutely wrong.

I know!

No, you actually don't know the cost of acquisition of this house.

1st is Stamp Duty. How much are you paying for that?

4 to 7% of this that goes to the state.

Okay!

Then there is registration fees.

How much are you paying?

1% of the entire cost of the house also varies a little bit of.

Then there's infrastructure and development cost.

What cost?

Infrastructure and development cost.

I am buying this.

What all other costs are there?

So when the society, because it's group housing, will want to repaint everything, build a new clubhouse.

This is my house, I'll paint it.

But you are also part of the society.

So you will have to contribute to that.

Do you get it?

How much do you pay for the parking in the mall?

Rs. 20 per hour.

You will have to pay for the parking even at your home.

It's my home, sir!

What are you saying?

So you'll have to either buy the parking space or rent it from someone else.

Because it's also real estate.

Right?

When you go and see a house,

you think 50 lakhs is the house.

That's the cost.

That's not.

That's the cost of the house.

The cost of acquisition is when you add all these other charges to find out what it's actually going to.

Cost of house.

Cost of acquisition.

Now what's that?

Just like the difference in b/w CTC v/s In-hand where you get less, this is the opposite.

We think of 50 but it's actually 55.

Okay, cool.

So let's understand how cost of acquisition works.

Now, cost of acquisition is different from the cost of the house.

The difference is basically this.

That in a cost of acquisition, you'll add all the other charges it costs to well, acquire the house.

So first, let's start with the purchase price of the house.

That's 50 lakh rupees.

Usually people assume this is the cost.

But it's actually not.

We're taking a loan over here.

The 50 lakhs is divided from a ten lakh down payment and a 40 lakh rupee loan.

And he'll repay this loan over the next ten years with interest.

Next he has to pay stamp duty and this will be about 5% of the purchase price.

Of course, this can differ from state to state.

In this case, it will be 2.5 lakh rupees.

Registration fees of Rs. 50,000, brokerage and legal fees of another Rs. 50,000.

Now we also need to consider that the house may require some improvements in the future.

You might need to renovate

You might want to spend on the house.

And this is actually called capital expenditure.

So if you spend five lakhs here, it means you've improved the house.

It's important to note that the expenditure on the furniture and home decor is not

added to the cost of acquisition of the house.

So let's add all these costs together and the total cost of acquisition of the house is 58.5 lakh rupees.

Please note that this is a simplified calculation of the CoA.

So let's jump back to the episode and see if he's got a grip on what CoA is.

So now you understood cost of acquisition?

Yes.

Go to the description right now.

Pause this video, download this sheet, make a copy of this sheet and put in all the numbers

and tell us what was the original price you thought your dream house is going to be and what's the actual acquisition cost?

That will give us a better reality check.

Let's talk about indexation.

Indexation is basically saying if you bought a house for 50 lakhs and inflation went up by 100%.

I'm oversimplifying over here.

The cost of this house is not 50 lakhs right now.

The cost is 25.

No, it's double.

It's one crore & on top of that If we sell the house and make some money that is taxed.

Did you actually understand?

I'm trying to understand something.

It's a little confusing, right?

Meet Abhishek, the owner of this great mansion of 50 lakh rupees.

And obviously, this mansion is Abhishek's strategic investment to make heavy cash in the future.

He had predicted the completion of this nearby metro rail project and prices went up.

Construction of malls, prices went up.

Schools and highways also prices went up.

And all this increased the demand for the houses.

So finally, after five years of enjoying this beautiful bungalow,

Abhishek now feels he has a good time to sell it.

He was able to sell it for one crore rupees.

Yes.

I mean, who else would have been better at investing in real estate than me.

Hundred percent gains in five years.

Even sir could not have done it.

Inflation.

Now it's time to bring him back to reality.

Hi Abhishek.

Long time no see.

I'm going to take my share of your share.

That's my share.

My innocent student actually left with just a gain of ten lakhs.

Abhishek.

Abhishek.

This is what we call inflation adjustment or indexation.

What's Indexation?

Another fancy term.

I have eaten into your profits.

Which means your 50 lakhs today is not as much as it was worth five years ago.

This is the problem with inflation.

It keeps on rising and the power of your money to buy stuff just reduces.

So lets help Abhishek understand the changes in real estate taxes after the new budget.

Lets suppose he bought a house in 2021-22 for Rs. 58.5 lakh.

Now basically this is the cost of acquisition.

And I've already told you how that works.

And he decides to sell this house now in 2024-25.

Now we have two scenarios.

One without indexation that's post budget and one with indexation, that's pre budget 2024.

So first let's look at the one without indexation.

The cost of buying the house stays at 58.5 lakhs.

No, indexation means we don't adjust for inflation.

So that makes us a profit of the selling price minus the cost price giving us 21.5 lakh rupees.

This is 2.68 lakh.

Very simply put we bought a house for this much, sold it for this much and we paid 12.5% on the profit which is 2.68 lakhs.

Now there is another scenario which used to exist before the budget where you would adjust the cost by inflation.

Let's try to do that.

So the cost of 58.5 lakhs changes and we add some inflation to it.

And this inflation comes from the cost inflation index.

That's right here.

Now if we add it to the cost we assume the cost of the house is now 70.54 lakhs

because we've adjusted it to inflation.

So now the profit is 9.45 lakh which is lower than the first scenario we showed you.

But the tax rate here is not 12.5%.

It's 20%.

It's 1.89 lakhs.

So in this case you can see in scenario one that's the new budget.

We actually paid more tax than was there before.

Now this less tax or more tax is dependent on the value of the CII.

So this scenario could drastically change over the next four years.

So we don't really know which is better, the new budget proposal or the old,

but you should know how they work at least.

Hey wait.

Apparently a lot of people were not happy with the indexation rule being removed.

Obviously, who wants to pay more taxes?

So now you actually have a choice.

When you sell your property, you could either go with 20% tax with indexation or 12.5% tax without indexation

on your ghar, Bangla, Zamin or any property that you have purchased before the 23 July 2024.

But if you purchase any property on or after the 23 July 2024,

the tax rule is 12.5% without indexation benefit now let's get back to the episode.

So what did we learn?

Save money.

Don't just look at the news, actually calculate and see, is it good or bad?

You know, don't just read it and decide what to do.

So now the question is, do you want to buy this house or not?

And this question is for you too.

Do you really want to buy this house or not?

We talked about two things.

Cost of acquisition, which you never knew about probably.

And second is this new indexation thing.

Now if you are buying because the tax has reduced, that's not a good reason to buy.

But if you want to buy a house because you want to live in it, is.

When your life dream, it's an emotional attachment.

Your family can be together.

Of course you should buy.

Just make sure you don't overextend yourself financially.

Don't make decisions based on your emotions,

or else you won't get promoted in life.