Stocks Vs Real Estate- Which Is The Better?

India is a growing market for first-time homeowners and having your own home is like a milestone or a dream come true for a majority of Indians even today. But when it comes to locking your funds in real estate for investment purposes, the market becomes narrower. So what is a better investment option between the more popular and aggressive option stocks or the relatively safer yet expensive real estate? Check out this blog to understand the nuances of real estate and stock market investments and how to choose between them to have a robust investment portfolio tailored to your financial goals. 

Investment in the Stock Market

Investing in the stock market means buying shares of publicly traded companies, effectively owning a small part of these businesses. This type of investment is suitable for a wide range of investors, from beginners to seasoned professionals, who are willing to take on more risk for potentially higher returns. It is ideal for people who have a good understanding of market trends, can stay updated with financial news, and have the patience to ride out market fluctuations. Key factors influencing stock market investments include company performance, economic conditions, political stability, and market trends. Understanding these factors is essential for investors as it can help in making informed decisions, balancing risks, and capitalising on growth opportunities in the ever-evolving market landscape.

Pros and Cons of Investing in the Stock Market

Stock market investments are a popular form of investment with growing retail participation in the country. However, if you are a new investor, check out the key pros and cons of investing in stock markets before taking the plunge. Here is a brief list of the advantages and disadvantages of stock market investments.

Pros of investing in stock markets

Some key advantages of investing in stock markets are,

• High Returns Potential - Investing in the stock market can yield high returns over the long term, especially if stocks are chosen wisely and investors stay invested for the long haul. Historically, stocks have outperformed other investment avenues like bonds and real estate.

• Liquidity - Stocks are highly liquid assets which means they can be bought and sold quickly without much hassles. This makes it easy for investors to access their money when needed.

• Diversification - By investing in different companies across various sectors, investors can diversify their portfolios. This helps spread risk and can lead to more stable returns.

• Ownership and Dividends - Owning stocks means investors have a stake in the companies they invest in. Some companies also pay dividends, providing them with a regular income in addition to potential capital gains.

Cons of investing in stock markets

A few disadvantages of investing in stock markets are,

• Market Volatility - Stock prices can fluctuate significantly in the short term due to market sentiment, economic factors, or global events. This volatility can lead to potential losses if investors need to sell during a downturn.

• Risk of Loss - There's always a risk of losing money, especially if the companies investors invest in perform poorly. Unlike fixed-income investments, stocks do not guarantee returns.

• Requires Knowledge and Time - Successful stock market investing requires a good understanding of the market, company performance, and economic indicators. It also demands time to research and monitor investments regularly.

• Emotional Stress - The ups and downs of the stock market can be stressful, especially for new investors. It requires a calm mindset and discipline to avoid making impulsive decisions based on short-term market movements.

Investment in Real Estate

Investing in real estate involves purchasing property, such as land, residential, or commercial buildings, with the expectation of earning rental income or benefiting from property value appreciation. This type of investment is suitable for individuals seeking long-term stability and those who prefer tangible assets over more volatile investments like stocks. Investors in real estate typically look for steady cash flow from rental income, potential tax benefits, and the prospect of property value increasing over time. Several factors influence the decision to invest in real estate such as location, property condition, market demand, interest rates, and economic conditions. Furthermore, trends such as urbanisation, government policies on housing, and infrastructure development also play a significant role in determining property values and investment opportunities.

Pros and Cons of Investing in Real Estate

Real estate has been a traditional investment for investors in India way before stock markets even became an option. However, investment in real estate is not straightforward and comes with a few pros and cons. Here is a brief list of the same for informed decision-making.

Pros of investing in real estate

The advantages of investing in real estate include,

• Steady Income - Real estate can provide a reliable source of income through rental payments. This can be especially appealing for investors looking for consistent cash flow to support their financial needs.

• Tangible Asset - Real estate is a physical asset that can be managed and used. Unlike stocks, which are intangible assets, real estate or property offers a sense of security and can be leveraged for various purposes.

• Long-Term Appreciation - Properties generally increase in value over time, particularly in growing cities or regions with strong economic development. This appreciation can lead to significant profit when investors sell their property.

• Tax Advantages - Investing in real estate offers tax benefits such as deductions on mortgage interest, property taxes, and depreciation. These advantages can enhance the overall returns on the investment.

Cons of investing in real estate

The disadvantages of investing in real estate are,

• High Initial Cost - Buying real estate requires a significant upfront investment, including the down payment, closing costs, and other expenses. This can be a major barrier for many potential investors.

• Ongoing Expenses - Property ownership comes with ongoing costs, such as maintenance, repairs, and property management. These expenses can add up and affect your overall profitability.

• Market Risk - Real estate markets can be affected by economic fluctuations, interest rates, and local market conditions. This can impact property values and rental income, leading to potential losses.

• Liquidity Challenges - Real estate is less liquid compared to other investments like stocks. Selling a property can take time and incur additional costs, making it harder to access the capital quickly if needed.

How can investors save capital gains tax on the sale of real estate or stocks?

The recent amendments to capital gains taxes in the Union Budget 2024-25 have created huge waves among the investor class. The tax rates for STCG and LTCG on financial and non-financial assets have been revised to 20% and 12.5% respectively with the increase in exemption limit on LTCG up to Rs. 1,25,000. However, this comes at a cost, i.e., eliminating the indexation benefit on the sale of long-term assets. This will increase the absolute value of long-term gains leading to more tax liability even though the tax rate has been reduced for capital assets like land and buildings.

However, taxpayers can still explore a few more provisions of the Income Tax Act to save taxes on long-term assets like stocks and real estate. Section 54 and section 54F come into play in such cases which helps investors in saving tax liability on the sale of real estate or the sale of any other property other than real estate respectively. These provisions provide an exemption from the capital gains tax provided the amount of capital gains or net proceeds, as the case may be, is re-invested in designated assets. 

Here is a brief snapshot of these provisions to help investors rescue their tax liability and take maximum advantage of the Income Tax provisions.

These provisions can help investors leverage reinvesting the gains in specified assets to reduce their overall tax liability. However, the exemption will be revoked if the new residential property is sold within 3 years of its purchase or construction among other conditions. 

Apart from these sections, taxpayers can also deposit their capital gains in the Capital Gains Account Scheme (CGAS) through designated banks in case the assessee is unable to purchase or construct property before the due date of furnishing of return of income for the year of transfer. The amount deposited has to be withdrawn within 2 years (for the purchase of a new house property) or 3 years for the construction of new house property) as the case may be which will allow the taxpayers to avoid taxation on their gains and still acquire a new residential property at a later date within specified conditions. 

The government, however, has been receiving huge backlash for removing indexation benefits which can potentially give rise to cash transactions, especially in sectors like real estate. Therefore, it has been exploring the grandfathering clause to give relief to investors and avoid such cases. This clause will allow the investors who have sold their property before 23rd July 2024 to have the flexibility to use indexation benefits and tax rates as per the previous rules or adhere to the revised rules, whichever is beneficial to them. 

Which is a better investment - Real Estate or Stock Market?

Choosing between real estate and the stock market as an investment depends on an individual's financial goals, risk tolerance, and investment horizon. Real estate investments, such as purchasing property, can provide stable rental income and potential appreciation in value over time. It is typically less volatile and offers a tangible asset that can be managed physically. However, it usually requires a larger initial investment and ongoing expenses like maintenance and property taxes. Conversely, investing in the stock market involves buying shares in companies or mutual funds, which can yield higher returns, particularly with high-growth stocks or well-performing funds. Stocks are more liquid, allowing for easier buying and selling compared to real estate, but they are also more volatile and influenced by market fluctuations. Therefore, a balanced approach, which is investing in both real estate and stocks along with considering factors like taxation and economic conditions, can be advantageous, providing diversification and risk management while targeting long-term financial growth.

Conclusion

Comparing real estate and stocks is like a choice between apples and oranges, which means it is choosing between two diverse classes of assets with different features and risks. Therefore, the ultimate choice between the two will depend on the investment goals, risk profile, and the return expectations of the investors. 

This article sheds light on two diverse investment options - stocks and real estate helping investors choose between the two. What is your preferred option among the two and why? Let us know your thoughts or reach out to us if you need more details on the exemption sections mentioned above and we will take it up in our coming blogs in detail.

Till Then Happy Reading!