Non-resident Indians (NRIs) have been a significant segment of investors, in the Indian real estate market. NRIs generally buy properties in India for investment purposes or out of their emotional connect with their country and for settling back, once they retire. According to Amit Wadhwani, director of Sai Estate Consultants, India has emerged as a lucrative spot for international capital. “Overseas investments have surged 137 per cent, from USD 3.2 billion during 2011-13 to USD 7.6 billion during 2014-16. According to a survey, almost 30 per cent of the total global real estate transactions in India, will be cross-border,” he adds.
Important FEMA rules that NRIs must keep in mind
In order to attract more foreign investment, the Reserve Bank of India has made the rules simple for NRI investments. Real estate transactions fall under the purview of the Foreign Exchange Management Act (FEMA).
“An NRI or person of Indian origin (PIO), as defined in FEMA, can acquire by way of purchase, any immovable property in India, other than agricultural land/plantation property/farm house. This is under a general permission that has been given by the government of India. However, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, shall acquire or transfer immovable property in India, other than lease, not exceeding five years, without prior permission of the Reserve Bank,” explains Amarjit Bakshi, managing director, Central Park.
Types of properties where NRIs can invest
An NRI is allowed to invest in both residential and commercial properties in India. However, any agricultural land, farm house and plantation property can be owned, only if it is inherited or gifted to the NRI.
Financial transactions by NRIs
When it comes to property transactions in India, NRIs/ PIO can make payments out of:
- Funds remitted to India through normal banking channel.
- Funds held in NRE/ FCNR (B) / NRO account maintained in India.
- No payment can be made either by traveller’s cheque or by foreign currency notes.
- No payment can be made outside India.
Loan eligibility for NRIs
Bakshi elaborates that “Like normal Indian citizens, NRIs/PIOs too can avail of home loans in Indian rupees for their property purchases, up to 80 per cent of the property value, depending upon individual eligibility. Such a loan can be repaid:
- By way of inward remittance through normal banking channels.
- By debit to his NRE / FCNR (B) / NRO account.
- Out of rental income from such property.
- By the borrower’s close relatives, as defined in Section 6 of the Companies Act, 1956, through their account in India, by crediting the borrower’s loan account.”
How NRIs are taxed, for profit earned from real estate investments
NRIs can earn returns from their investments in real estate, in the form of rental income and short or long-term gain.
The rental income earned from a property asset in India, falls under the income accrued in India and is taxable, irrespective of residential status.
Short-term capital gains
Short-term capital gains apply on the profit earned through the sale of a property, within two years of its purchase. The capital gains for such property are calculated as the difference between the sale proceeds and the cost of acquisition. It is taxed as per the applicable slab rate for the NRI.
Long-term capital gains
Long-term capital gains (applicable when the property is held for more than two years) are taxed at 20 per cent. However, unlike short-term capital gains, exemption can be claimed under sections 54, 54 F and 54 EC.
If an NRI opts for an under-construction property, they may have to give a power of attorney to a trusted associate, for completing the deal. Hiring a lawyer to prepare the document, is also crucial, to ensure that there is no forgery and the investment is secure.