Real estate basics: What is a freehold property?

A freehold property is one, where the owner/society/residents’ welfare association owns the building and the land that it stands on outright, in perpetuity. A freehold land is generally bought through an auction or lottery. The completed project, thus, will include the cost of the land incorporated in the final cost of the units.

A freehold property, hence, is any real estate that is legally ‘free from hold’ of any entity other than the owner. The owner of such a property has the right to use it for any purpose, in accordance with the regulations of where it is located. The sale of a freehold property requires significantly lesser paperwork, as it is not necessary to request authorisation from the state. However, this also means that a freehold property is more expensive to purchase than a leasehold property.

What is freehold land title?

Freehold land title refers to a property title by which the owner of the land owns it for perpetuity (free from hold). In other words, freehold land title ownership has no limit in time for the landowner and its beneficiaries.

Can the government take back freehold land?

Under the Land Acquisition Law, the government has the right to acquire all types of private land for the purpose of industrialisation, development of infrastructure facilities or urbanisation of the private land, after compensating the affected land owners suitably.

Comparison between leasehold and freehold property

Advantages of freehold property vs leasehold property

Rights of the owners of freehold properties

There are no restrictions on the right of an owner of a freehold property to transfer it further and it can be inherited. There is no encumbrance to the absolute title of the property and it can be transferred, by registration of a sale deed. When you purchase a freehold property, you also own the land it was built on, along with the house itself. If the property is an apartment, the home owner becomes a shareholder in the property. You have the right to live in the house as long as you wish and you can also make changes to it.

While most houses in India are sold as freehold properties, apartments are also sometimes sold on lease. However, this is gradually changing, as buyers feel more confident in purchasing a property that is freehold.

Home loan for a freehold property

Banks are generally more willing to extend a home loan for a freehold property, as compared to a leasehold property. This is because it is considered a safer investment, as the registration of a freehold property is done and it is also expected to increase in value. Banks are also willing to sanction a larger home loan amount for a freehold property with a high market value (where the loan-to-value ratio can be 80 per cent of the market value of the freehold property).

What is leasehold property?

A leasehold property is usually more affordable than a freehold property, because the ownership rights are for a limited period, after which the lease expires. Once the lease expires, the ownership of the property is given back to the original owner. Most of the time, the leases are for 99 years but can be extended up to 999 years. A buyer can also purchase the leasehold property by converting it to freehold property.

Difference between leasehold and freehold property

Converting a leasehold property to freehold

A leasehold property can be converted to a freehold property through a clear sale deed, a general power of attorney and a no-objection certificate (if the land is under mortgage or rent). Additionally, you would also need to pay a conversion charge, to the relevant authorities. In Delhi, a property owner can get the status changed, using only the registered agreement to sell and the general power of attorney. In Maharashtra, the state government has set the rate for the conversion of leasehold property to freehold at 25% of the ready reckoner (RR) rate.

What is better, leasehold or freehold?

Usually, buyers prefer buying a freehold property as its prices increase more gradually as compared to leasehold properties. Moreover, it is easier to get a mortgage against a freehold property as compared to leased ones. If you invest in a leasehold property, the ownership will remain with the developer who bought the land to construct the project or the state authority who constructed the flats on its land.

Pros and cons of freehold land

Why is freehold land not depreciated?

Freehold land is not depreciated, because such land is assumed to have an unlimited useful life. Other long-life assets, such as land improvements, buildings, furnishings, equipment, etc., have limited useful lives. Since the owners of leasehold assets cannot sell the property, the depreciation is not factored in leasehold property.

Is it hard to sell leasehold land?

Selling or transferring a leasehold property or land is not difficult. However, for the transfer of the lease, you would need to acquire permission from the concerned authority. Moreover, as a mortgage or loan may not be easily available, buyers who do not have financial assistance may avoid such properties altogether. Also, the land where leases are short, are harder to transfer/sell.

Freehold conversion charges are tax-deductible: ITAT

In a recent judgement, the Income Tax Appellate Tribunal (ITAT), Allahabad Bench, allowed the tax deduction on the share of freehold conversion charges, stamp duty, etc., for converting a property into freehold. The assessee had contended that the freehold conversion charges constituted improvement of the property for better title of the property and claimed the same as deductions towards the cost of improvement of the property while computing long term capital gains tax. To this, the court ruled that that the assessee had rightly claimed the deduction on account of improvement in the property being an improvement in the title of the property on being converted from leasehold Nazul land to freehold property. Also, the court agreed that making the property freehold, would grant perfect ownership rights/title in favour of the existing lessees, who would then be in a position to transfer/sell the property.

Is freehold land an asset?

For income tax filing for businesses, it is imperative to show certain fixed assets which need to be installed like furniture, office building and plant & machinery, etc. While stocks, cash on hand and debtors are considered as current assets, freehold land and building is considered as fixed assets.

Freehold property: Latest news

The Delhi State Industrial and Infrastructure Development Corporation (DSIIDC) has decided to grant freehold ownership of factories and plots allotted under the relocation scheme at Bawana Industrial Area. The allottees who have completed five years from the date of allotment and have completed the construction and started their factory, are eligible for this scheme. The freehold rights would allow the owners to take loans directly from banks. Until now, they were forced to go to money lenders.

(With inputs from Surbhi Gupta)

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