Buying a plot might seem like a simple exchange of money and land between a buyer and a seller. However, the real picture is a bit hazy. Rampant corruption, cases of multiple buyers, and people selling the wrong land with forged documents are the factors to weigh before you go ahead with the decision. Buying a plot in India can be a complex affair and thus, needs due diligence to ensure a safe investment.

Here are a few must-check things before making an investment in a plotted development.

Establish the identity of the seller

  • Before buying a land parcel, a buyer must check and verify the identity of the seller.
  • Nationality and residence certificate of the seller and whether the consent of the authorities is required to sell the land.
  • If the property is held jointly, the identity of all the sellers must be established clearly.
  • If the seller is a company, verify its ability to own and sell a property.

Documentation

Paperwork is an essential component of the land purchase process in India. Once you have finalised the plot, the following documents must be checked keenly, to avoid conflicts later.

Title deed

For an undisputed transfer and legal ownership of the land, you must check for a clear and unambiguous title deed (Also known as 7/12 document in some States) of the land. A deed, the ownership of which is questionable, must be looked with suspicion and consulting a property lawyer is prudent in this case. Ensure that the original documents are available with the seller. Be doubly sure that all the documents are duly stamped and registered at the sub-registrar of assurances.

NA order

By default, every land in India is classified as agricultural land. If you are purchasing land for non-agricultural use, ensure that you have the ‘NA- Residential’ order.

Encumbrance certificate

Encumbrance certificate verifies that the land is free from all legal dues. The document is essential to establish that there are no pending dues or litigation on the property.

Release certificate

If you are purchasing a plot from the resale market, there are chances that the plot may have been pledged to get a bank loan. When the loan is repaid, a release certificate is given by the bank confirming that all the dues have been cleared. Make sure you procure a copy of this before proceeding with the purchase.

Receipts of property tax

To stay away from the taxman woes, it is wise to ask for the tax receipts of the past months. This helps in establishing that there are no pending tax dues on the property.

FSI of the plot

Floor Space Index (FSI) refers to the ratio of the covered areas allowed to be constructed on the plot to the total area of the plot. For example, if the FSI is two on a plot sized 1,000 sq ft, the area of the covered structure can be 2,000 sq ft, i.e. twice the size of the land.

Conversion and land use approvals

With the increasing urban populace and merging of revenue land in urban areas, conversion of land from agricultural to non-agricultural use is important. Many State laws restrict the practice; however, the buyer must check the master plan of the city and ensure that the property is in accordance with the zoning plans of the city. One must clearly identify the R zone/L zone of the selected property before signing the dotted line. 

Construction approvals

A buyer must check the building and layout plan as approved by the municipal body. Approvals issued by the government for providing amenities like water, electricity, sewage treatment and parks are essential to check before going ahead with the purchase.

Connectivity issues

Before buying a plot, it is better to check the present and proposed connectivity options. Functional connectivity with the metro, buses and other means of transport will enhance the livability and the resale value of the property in future.

Physical verification 

What might look good in a brochure, might not be the same in reality. It is a sine-qua-non to go and physically verify the property before investing in it. Also, checking the documents physically and to get them verified from the authorities is essential.

Maintenance issues

After buying the plot, there is an annual amount to be paid for the maintenance of  basic amenities. Know the yearly maintenance charges beforehand so that it does not come as a surprise later.

Buying a piece of land is emotionally as well as a financially heavy decision. Do not believe the salespeople blindly. Visit the plot and be doubly sure about everything that can save you from severe trouble later.

Types of Plots

While investing in plots, an investor might look for different kinds of plots, as per the requirements and goals of the investments. Residential, commercial, agriculture, institutional and industrial plots are the main categories in which plots can be divided per type.

Agriculture land

As the name suggests, agricultural land is designated for the use of agriculture and related activities. The rules for buying agricultural land differ across States. As a large section of our population is engaged in agriculture, some States keep restrictions for the same. A few states in India also restrict people from outside the State to buy agricultural land. Also, the size of such plots is much larger than other types of properties. State norms also determine land ceilings and how much land an individual can buy.

Raj Sabharwal, Owner, Sabharwal Properties, adds, "While purchasing agriculture land, also consider the standing crops which would have been grown on it. Either you will have to pay extra for it, or an agreement would have to be reached with the seller wherein the seller would keep the crops post-harvest. This should be clearly negotiated at the time of purchase."

Residential plots

Residential plots are parcels of land meant for the construction of houses. The buyer needs to seek necessary approvals from the concerned authorities if the land was previously agricultural and change the land use to residential. Alternatively, an investor can invest in a residential plot. The process for applying for a change in land use varies across States. Also, loans against residential plots are eligible for relief under Section 80C.

Commercial plots

As per a master plan of a particular city, commercial areas are earmarked for setting up offices, shops and other trades. These types of plots generally carry higher government fees and taxes. A lot of such properties are developed through shared ownership models, where a group of investors pool in their resources to build a plot. While purchasing a commercial property, it should be carefully studied that the land has been zoned as commercial. Otherwise, there would be problems in developing the property. An important consideration while investing in commercial land is the available Floor Space Index (FSI). Typically, FSI determines the scope of development on the land

Zoning laws

Local zoning laws regarding development should be considered as many commercial plots have to be developed as vertical structures. For example, if the land is near an airport, there could be restrictions on heights when the property is developed. All these factors should be taken into account at the time of purchase of the plot. 

Taxation and finance

The finance of commercial plots is also expensive. It is advisable to confirm the funding requirements before finalising the purchase. Also, if an agricultural land is purchased for commercial development, it needs to be converted to commercial before proceeding with the development. You have to seek a land conversion certificate from the authorities. To do so, an application has to be submitted to the concerned authority, at some places the District Collector, who after verifying it with the area-based Tahsildar issues the Certificate. In most cases the period of Certificate issuance is around a month.

In terms of taxation, an investor should understand that no income tax benefit is available for commercial plots loans. Also, at the time of sale of a commercial plot, the seller shall be taxed for capital gains, which is a fixed rate of 20 percent. Moreover, most local bodies charge a higher property tax rate for commercial properties.

Fractional ownership

A popular concept of ownership of commercial assets is fractional ownership. In simple terms, fractional ownership is a model where a group of people contribute funds to purchase an asset or a property. They are passive investors who otherwise would not have been able to afford or invest in the property as a single owner. This model helps them diversify their risks and gives them an opportunity to buy shares in multiple properties. Commercial properties, which are known to have a better return on investments, are a preferred asset class for fractional ownership.

Institutional plots

These are plots reserved for particular purposes, like setting up a college, school or headquarters of an organisation. A local government authority authorises such plots and permits sale or transfer as per norms. 

Industrial plots

Government authorities generally develop industrial plots to promote industrial corridors in a region. These types of plots are meant for warehousing and logistics, factories and cold storage set-ups, among others.

Special permissions might be required to acquire a plot for an industry. This is more so because of the environmental impact an industrial unit might have on the neighbourhood. Permissions are also necessary from an industry-specific body for licenses to set up an industrial unit. The owner should look into these aspects and other permits required before buying an industrial property. The approach roads are also considered while designating land as industrial because of the expected traffic of heavy vehicles. 

What do different land zones mean?

In India, at the time of zoning, the land is divided into colour-themed zones to specify what they are used for. The following are the colours that are used to denote a specific land use in maps and master plans -

Red zone

Red zone lands are meant for specific purposes like schools, hospitals, places of worship or similar social infrastructure. Such lands cannot be developed as high rises and are also termed semi-developmental lands.

Green Zone

A green zone land is notified for open and green spaces. Such land parcels can be used for agricultural or horticultural purposes or setting up plant nurseries.

Yellow zone

Yellow zone land is the land classified for  mixed-use development, i.e. both commercial and residential development can be carried out on it. A lighter shade of yellow specifies that the land can be used only for residential purposes. In contrast, a darker shade of yellow means that only commercial development is allowed on such land areas.

Blue zone

Blue zone land denotes commercial and retail spaces on a map. While a darker shade indicates retail and hospitality spaces, a lighter shade represents areas where office and business centres could be developed.

Grey zone

A grey coloured zone is designated for setting up heavy industries and manufacturing facilities.

Purple zone

Also referred to as a violet zone in some regions, this colour represents factory establishments and general industries. A darker shade is at times reserved for technology-oriented industries.

What experts have to say?

Apart from due diligence and multiple verifications, the advice of real estate developers might come in handy before investing your hard-earned money. Sharing his input on the importance of documents, Harvinder Sikka, MD, Sikka Group, says, "Prospective investors or homebuyers are often aware of the basics, such as the Title Deed and the Encumbrance Certificate. However, they must not only be satisfied with photocopies but also inspect the originals of the same."

"In addition to these, buyers also must check any bills related to the plot including property tax receipts. If there was a loan on the land, the buyer also must ensure that the issuing bank has provided a Release Certificate for the plot. Apart from checking these documents from the seller’s end, the buyer— having bought the plot must also ensure that they are well aware of all the documents they will need to furnish like the receipt of payment of stamp duty charges as well as House Plan Approval. Since its the buyer who is spending a huge sum of money, they must adopt due diligence and make sure everything is legal and documented."

In a nutshell, hurriedly going about plot hunting is a big NO. Take time and research before you zero in on a plot to invest. After all, an investment for life deserves research and patience.