While fractional models unitize access, treat them as illiquid diversifiers, not high-yield gambles.
Fractional real estate is an investment approach where multiple investors pool funds to jointly purchase a high-value property, dividing the total value into smaller, more affordable shares. Each investor owns a fraction, earning a fractional share of the capital appreciation.
The property is typically purchased under a limited liability partnership (LLP), a private entity created solely for that specific asset. For instance, a Rs 10-crore commercial property might be split into 100 shares of Rs 10 lakh each, granting 1 percent ownership per share.
Investors gain proportional capital appreciation upon sale, typically after a holding period of two or three years. This approach democratises access to Grade-A assets in high-growth areas such as Gurugram, Noida and Bengaluru, previously reserved for ultra-high-net-worth individuals or institutions.
Performance varies by market but such investments target 12 percent to 18 percent IRR through appreciation and rentals. Minimum investments start at Rs 10 lakh. Ideal for high-net-worth individuals (HNIs), professionals, Non-Resident Indians (NRIs), and those seeking portfolio diversification without full-property commitment.
“Fractional real estate is a modern investment model that allows multiple investors to collectively own a high-value property by dividing its ownership into smaller, more affordable shares,” Ekmmeet Singh, CEO & Co-founder of Per Annum, a platform for alternate and fixed income investments, said.
Tax treatment and compliance
Profits from sales are classified as business income at the LLP level, taxed at approximately 34.94 percent (including surcharge and cess).
“Once the LLP pays its applicable tax on profits, the distributed income becomes tax-free in the hands of investors,” Singh said. Distributions to investors are exempt under Section 10(2A) of the Income Tax Act, avoiding double taxation.
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Capital gains depend on the holding period. Property held beyond two years attract 12.5 percent long-term capital gains tax, while one held for under two years follows regular income slabs.
Since LLP-level taxes are already applied before profits are distributed, investors usually receive net, post-tax returns, ensuring minimal further liability.
Compliance requires meticulous records of acquisition costs, holding durations, and distributions. Investors must report interest income separately and reconcile any capital gains during asset churn.
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Challenges
Illiquidity poses a major challenge, with two-four year lock-ins unsuitable for those needing quick exits. Over-the-counter transactions lack exchange transparency, leading to pricing discrepancies — even similar properties in one location vary widely.
Disputes with builders, unforeseen property taxes, repairs or structural issues burden investors. High advertised IRRs signal elevated risks, including title defects or clearance flaws that could escalate to litigation, delaying returns.
Tax reconciliation complicates matters, blending interest income and gains. Without expertise, verifying documents risks total loss.
Strategies to mitigate risks
Select platforms with shorter payment plans (three-four years) matching liquidity needs. Conduct due diligence on titles, clearances, and builder’s track-record via independent audits.
“The holding period for such assets, typically two to three years might not suit investors looking for quick liquidity,” Singh said.
Real estate is inherently less liquid than stocks or mutual funds, so investors should be comfortable with a medium-term lock-in.
Spread investments across timelines and locations to enhance flexibility. Budget for maintenance via reserves. Consult tax advisers early to model scenarios and ensure accurate filings. While fractional models unitise access, treat them as illiquid diversifiers, not high-yield gambles.
This approach balances high-value exposure with prudent risk management, yielding sustainable post-tax gains.