While investing in a plot may not offer tax benefits, capital appreciation is the key.

In 2007, Navin Tiwari purchased 2,000 square feet of land at Alibaug -- the weekend getaway destination for Mumbaikars -- at Rs 300 per sq foot.

Last year, he sold the same at Rs 750 per sq ft, more than double the price.

Even if Tiwari had kept the plot and built himself a second home, he would have benefitted from the appreciation in land prices.

Construction on non-agricultural land is legal and works as an investment strategy.

Land prices appreciate and more so when the location is closer to already thriving cities.

"Most cities amalgamate the surrounding areas within the city limits while expanding. Plots in these locations are sought after as suitable second home destinations," says, Pranay Vakil, chairman, Knight Frank.

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Any expected infrastructure development in and around the area will also see a rise in prices.

For instance, land prices in and around Navi Mumbai have risen by 40-50 times in the past three years, ever since the plans for an airport were announced.

Areas near the Bengaluru and Hyderabad airports also witnessed a similar rise.

However, one is advised against borrowing money to invest in such plots as there is always an uncertainty regarding projects taking off on time.

If your interest meter is ticking, it can take a heavy toll on your finances.

According to Pinkesh Teckwani, head, land & industrial services (west India), Jones Lang LaSalle India, "If one has an investible surplus, one could look at investing even moderate sums of Rs 800,000-1 million in a good location for 7-10 years."

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Loans

In any case, it is difficult to avail loans for plots unless they are for self use.

Even as banks and housing finance companies finance land sold by government bodies, they may not always agree to fund those sold by private developers.

Lenders like HDFC restrict the loan to 70 per cent of the cost or value of the land if it is located outside the city limits.

For those within city limits, the same is restricted to 80 per cent In some cases, lenders who fund individual land deals may ask for extra collateral in the form of property, besides the one being bought, say realty watchers.

Interest rates for financing plots are higher than the regular home loan by around one per cent. Banks also restrict the tenure of such loans to a maximum of 7-10 years.

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If you already have the bank's approval, you could opt for a composite loan that funds both the acquisition of land as well as the construction.

Treating it as a housing loan, the lender will disburse the amount in accordance with the proportion of construction completed.

Some buyers opt for plots with a basic concrete housing structure to ensure they can get a home loan instead of one for the plot.

It also proves economical as home loans, apart from being cheaper, are for a longer tenure.

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Taxes

There are no tax benefits on the principal amount of loans for land.

However, the interest on the loan is tax deductible if the land is rented out and generates income.

The rent would be treated as business income.

When the land is used for residential purposes, one can avail of the usual tax benefits associated with a home loan, that is, a deduction of Rs 150,000 on the interest paid on the loan and repayment of up to Rs 1 lakh towards the principal amount.

However, one could claim these deductions only when the construction is complete and the property possessed.
When retained for more than 36 months, one can avail of the long term capital gain  benefits.

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Exiting plots

Land is not always easy to sell as it is not a very liquid asset. "One should have a time frame of at least six months if one wants to exit such investments. More so, if one has invested in places with low connectivity," says Balwant Jain, chief financial officer, apnapaisa.com.

It could get worse in case of encroachments on the land or changes in the zoning law. "It is easier to sell if one has bought a clearly demarcated residential NA plot," adds Teckwani.

Even in case of plots with constructions, the fact that these investments are mainly for holiday homes restricts buyers' interest in them.