Freehold Property: Meaning, Rights, Pros, and Cons

Estimated reading time: 9 minutes

In the realm of real estate, freehold property stands out as a particularly desirable form of ownership. Whether you’re a first-time homebuyer or an experienced investor, understanding what freehold property entails can help you make informed decisions. Below is a comprehensive overview of freehold properties, their advantages, and essential factors to keep in mind.

Freehold Property Meaning

It refers to real estate that is “free from hold” of any entity except the owner. In essence, this means you have complete ownership of the property and the land it stands on, indefinitely.

There’s no expiration date on your ownership, and you have the right to use the property for any legal purpose, without needing permission from any external authority.

Suggested Read: What is Leasehold Property?

Freehold Property: Title and Ownership

1. Absolute Ownership: The owner has full rights over both the property and the land.
2. Perpetual Tenure: Ownership has no expiration date.
3. Freedom of Transfer: Freehold property can be sold, leased, or transferred without significant restrictions.
4. Investment Potential: Easier to sell and higher in demand due to clear ownership titles.

Checkout: Investment vs. Loan Prepayment Calculator

Advantages and Disadvantages of Freehold Property

Advantages	Disadvantages
Complete legal ownership of the land and any structures on it.	Freehold properties generally have higher upfront prices compared to leasehold properties.
Ownership is permanent and can be passed down to heirs.	The owner is solely responsible for all maintenance and repairs.
Ability to modify, renovate, or demolish structures with necessary permissions.	Property values can fluctuate, impacting investment stability.
Owners are not required to pay ongoing ground rent or lease renewal fees.	Committing to a property long-term may limit flexibility to move or invest elsewhere.
Freehold properties are often more sought after, potentially leading to better resale value.	The initial cost and associated fees (e.g., legal, taxes) can be substantial.
Potential for property value appreciation over time, offering financial security.	Property taxes may be higher for freehold properties compared to leasehold.

Suggested Read: Leasehold vs. Freehold Property

Rights of a Freehold Property Owner

• Full and Indefinite Ownership: A freehold property owner enjoys complete control over the land and any structures on it, with no fixed time limit.
• No Special Restrictions: There are typically no unique constraints on how the property is used, as long as the owner abides by local laws and regulations.
• Easy Transfer of Ownership: The property can be freely transferred, inherited, or sold by registering the required transaction documents.
• Apartment Ownership: In the case of a flat or apartment, the owner effectively becomes a shareholder in the overall property, although some apartments in India may still be sold on a leasehold basis.
• Growing Preference: While many houses in India are sold as freehold properties, more buyers are now seeking freehold status for flats and apartments, recognizing the long-term benefits of full ownership.

Freehold Land Meaning

A freehold land title represents the highest form of property ownership recognized by law. When you hold a freehold title, you own the land and any structures on it indefinitely, without any time restrictions.

This means that the ownership is perpetual, allowing you to use, transfer, or bequeath the property as you see fit, without concerns about the ownership reverting to another party after a set period.

Suggested Read: What is Leave and Licence Agreement?

Freehold Land Does Not Depreciate

• Freehold Land:
  • Does not depreciate due to its unlimited useful life.
  • Retains value indefinitely, unlike assets like buildings or equipment with finite lifespans.
    
• Leasehold Properties:
  • Depreciation is not applicable as leaseholders do not own the land outright.
  • Ownership reverts to the freeholder after the lease term expires, negating long-term asset depreciation.
    
• Key Advantage:
  • Freehold land is a stable and enduring investment, maintaining value without depreciation.

Can the Government Reclaim Freehold Land?

Yes, the government can reclaim freehold or private land under the Land Acquisition Act. This authority is exercised for purposes such as:

• Industrialization
• Infrastructure Development
• Urbanization Projects

When the government decides to acquire land for these reasons, it is required to provide fair and adequate compensation to the affected landowners. This ensures that property owners are suitably reimbursed for their loss, maintaining a balance between public development needs and private property rights.

Suggested Read: How to Invest in a Distressed Property?

Freehold Property: Capital Gains Tax

Owning a freehold property in India entails various tax responsibilities and benefits, both during ownership and upon sale. Understanding these tax aspects can help property owners effectively manage their finances and optimize returns.

a. Short-Term Capital Gains (STCG):

• Definition: Profits from selling a freehold property within two years of acquisition.
• Tax Rate: 30% plus applicable cess and surcharges on the profit earned from the sale.

b. Long-Term Capital Gains (LTCG):

• Definition: Profits from selling a freehold property after holding it for more than two years.
• Tax Rate: 20% plus applicable cess and surcharges.
• Indexation Benefit: Adjusts the property’s purchase cost for inflation, reducing the taxable amount.

c. Exemption under Section 54:

• Eligibility: Reinvesting capital gains into purchasing a new residential property.
• Benefit: Exempts the tax on LTCG, provided the investment is made within the specified time frame.

Freehold Property: Property Tax

• Liability: Annual payment to the local municipal corporation or urban local body.
• Calculation Factors: Property area, location, and usage (residential or commercial).
• Obligation: Timely payment is essential to avoid penalties and interest.

Suggested Read: Transfer of Property Act, 1882

Freehold Property: Home Loan Deductions

a. Section 80C:

• Deduction: Up to ₹1.5 lakh per annum.
• Applicable To: Principal repayment on home loans for purchasing the freehold property.

b. Section 24(b):

• Deduction: Up to ₹2 lakh per annum.
• Conditions:
  • Self-Occupied Property: Maximum deduction of ₹2 lakh on interest paid.
  • Rented Property: Entire interest paid can be deducted, subject to certain conditions.

Freehold Property: Stamp Duty and Registration Charges

• Applicability: Payable during the purchase or transfer of a freehold property.
• Variation: Rates differ by state.
• Tax Treatment:
  • Non-Deductible: These costs are added to the acquisition cost.
  • Capital Gains Calculation: Included in the cost basis when determining capital gains upon sale.

Suggested Read: Personal Loan vs. Loan Against Property

Freehold Property: Tax Benefits on Renting Freehold Property

• Income Classification: Rental income is taxed under “Income from House Property.”
• Deductions:
  • Standard Deduction: 30% of rental income for repairs and maintenance.
  • Home Loan Interest: Deductible from rental income if a loan was taken to purchase the property.

Freehold Property: Tax on Inherited Freehold Property

Inheritance:

No Immediate Tax: Inheriting a freehold property does not trigger immediate tax liability.

Upon Sale:

• Capital Gains Tax: Calculated based on the sale price minus the fair market value at the time of inheritance.
• LTCG Benefits: Eligible for indexation, reducing the taxable gain.

Suggested Read: Who is a Power of Attorney?

Freehold Property Insurance

Freehold insurance is a policy designed to provide financial protection for both freehold properties and land. It covers damages caused by natural disasters, accidents, and other unforeseen events, ensuring that owners are not burdened with high repair costs.

Key Benefits

• Covers damage to the freehold property or land from events like storms, fires, theft, and vandalism.
• Helps manage the costs associated with repairs or rebuilding, reducing the financial strain on the owner.
• Provides compensation for lost rental income if the property becomes uninhabitable due to damage.

Difference Between Freehold and Leasehold Properties

Aspect	Freehold Property	Leasehold Property
Ownership	Complete and indefinite ownership of the property and land.	Rights to use the property for a specific period; ownership remains with the freeholder.
Duration	Permanent ownership with no time limit.	Ownership rights last for a predetermined lease period.
Renewal	No need for renewal; ownership is perpetual.	Must renew the lease or pay to extend rights after the lease expires.
Modifications	Full freedom to make changes, renovations, or demolish structures.	Changes require permission from the freeholder.
Maintenance Costs	Sole responsibility of the freehold owner.	Typically managed by the freeholder; leaseholder may have limited responsibilities.
Common Use	Primarily residential properties.	Commonly commercial properties such as offices, factories, and shops.
Bank Loans	Easier to secure loans due to full ownership.	More challenging to obtain loans as banks may be hesitant to lend.
Transfer of Ownership	Can be transferred freely without needing additional permissions.	Requires permission from the state or freeholder to lease or transfer.
Financial Commitment	Higher upfront cost but no recurring lease fees.	Lower initial cost but involves recurring lease payments and possible renewal fees.

Suggested Read: What is Capital Gains Tax?

How to Convert Leasehold Property to Freehold Property?

To convert a leasehold property into a freehold property the following documents and steps are required:

Required Documents:

1. General Power of Attorney (GPA): A valid and clear GPA document.
2. Sale Deed: A clear and unambiguous sale deed.
3. No-Objection Certificate (NOC): Required if the property is rented or mortgaged.

Additional Requirement:

• Conversion Charges: The applicant must pay the applicable conversion charges to the DDA.

Tax Implications on Freehold Properties

The Income Tax Appellate Tribunal (ITAT), Allahabad Bench, has ruled that freehold property conversion charges, along with associated costs such as stamp duty, are tax-deductible.

In this case, the assessee argued that the expenses incurred for converting a leasehold property into a freehold property, including conversion charges and stamp duty, constituted an improvement to the property. These costs were claimed as deductions under “cost of improvement” while calculating long-term capital gains tax.

The tribunal agreed with the assessee’s contention, stating that:

• The conversion from leasehold to freehold enhances the title of the property, thus qualifying as a significant improvement.
• Once converted, the property grants the lessee complete ownership rights and facilitates its transfer or sale without restrictions.

This judgment affirms that freehold conversion expenses directly contribute to property enhancement and can be legitimately claimed as deductions for tax purposes.

Suggested Read: ITR Filing Guide

Properties Ineligible for Freehold Ownership in India

• Government Properties: Includes government offices, public infrastructure, and defense establishments.
• Agricultural Land: Restricted by laws on agricultural use and transfers to non-agriculturists.
• Forest Land: Reserved for conservation under the Forest Department.
• Ecologically Sensitive Areas: Includes wetlands, wildlife reserves, and coastal zones.
• Defence and Border Areas: Restricted due to security and strategic considerations.

Conclusion

Owning a freehold property is a hallmark of financial stability and independence. It offers unparalleled benefits, including absolute ownership, higher market value, and ease of transactions. Whether you’re a first-time buyer or a seasoned investor, opting for freehold property ensures a secure and profitable investment for the future.

Frequently Asked Questions