For someone looking to purchase a property, a resale property can offer several benefits, including its ready availability and relatively lower costs compared to a brand-new property. A resale property can be owned by any individual, even a non-resident Indian (NRI). According to the latest industry reports, NRIs contribute significantly to real estate investments in India, with their share ranging from 12% to 15% in residential property ownership across major cities. However, engaging in a property transaction with an NRI living abroad comes with unique challenges for a buyer who lives in India. In most cases, the buyer must deal with a third person who handles the transaction on behalf of the NRI seller. Additionally, aspects such as tax compliance and legal complexities should be carefully considered when purchasing a property from an NRI. Furthermore, there have been increasing cases of property fraud online. In this guide, we list the common mistakes that should be avoided when purchasing a property from an NRI.
Ignoring property title verification
Title verification is one of the important responsibilities of a property buyer. This is because the property may have changed hands multiple times. The title refers to the legal right of ownership over a property. A clear title implies there is no encumbrance, outstanding loan or legal claim against a property. In India, many property buyers ignore verifying the title before signing the deal and end up facing disputes or legal risks later.
Tips for buyers:
Titles are conveyed through various property documents such as Sale Deed, Conveyance Deed and Property registration certificates. Here are some important points to follow:
- Before engaging in the transaction, obtain all relevant documents related to the property, including property tax receipts, possession certificate, survey sketch, etc.
- Check title deeds and check the chain of ownership to find any discrepancies in ownership history. There should be consistency in the details specified across documents.
- Obtain the Encumbrance Certificate (EC) from the sub-registrar’s office to view the details of the registered transactions.
Overlooking RERA compliance
The Real Estate Regulatory Authority has been implemented mainly for regulating property dealings pertaining to newly launched and under-construction properties involving builders and agents. Typically, a property dealing with NRI involves the transfer of ownership between the existing owner and the homebuyer. RERA is not applicable if it is an old property. However, there are cases where RERA may come into the picture. For example, the NRI owner could be selling their property in an under-construction project. The RERA is applicable in case the resale property is in a brand-new project. Property buyers should check for RERA compliance to ensure their investment is secure and avoid potential issues.
Tips for buyers
- A new resale flat should be registered with the relevant state RERA. If this is not the case, the property may be involved in litigation and may not be a safe investment.
- Buyers must obtain relevant information from the developer, such as the project’s construction status, location, configuration, etc.
- Approach the regulatory authority in case of any issue. For example, if there are structural defects, the developer is liable to rectify them if they are within the specified timeline.
Ignoring documentation
Property buyers planning to purchase a home from an NRI seller should never neglect the need to verify key documents, including the seller’s identification. To ensure a hassle-free sale, the buyer should ask for the following documents:
- Title Deed: This is a legal document serving as proof of ownership of the property.
- Sale agreement: This is an important document containing the terms of sale, payment details and tax obligations of the parties involved.
- PAN card: Buyers should ask for the NRI seller’s PAN card, which is required for tax purposes.
- Passport and visa: These are the most crucial documents that serve as proof of the seller’s NRI status.
- Power of Attorney (PoA): NRI property sellers typically engage in property transactions through a representative in India. Hence, buyers must check if there is a valid PoA, which must not be notarised and stamped in the seller’s country of residence.
- Utility bill receipts: These are necessary to validate proof of ownership while ensuring there are no pending dues.
- No Objection Certificate (NOC): NOCs issued by the housing society or relevant authority may be required to complete the property sale.
Not checking POA validity and legalities
The Power of Attorney (POA) is a valuable legal instrument available to NRI property owners, as it enables them to manage their properties and execute transactions from abroad. The POA authorises another person to carry out the property transactions on behalf of the NRI owner. However, this is where many buyers face the risk of fraudulent transactions or legal issues. The NRI could be selling the same property to different buyers through different POA holders. Moreover, there are chances of misrepresentation of information or the agent misusing their powers or duping the seller or buyer.
Tips for buyers:
- Homebuyers dealing with buying a property through a POA executed by an NRI should exercise caution. A small error in the POA execution can render the sale deed null and void. Hence, the documents should be carefully reviewed. The POA should not be outdated. So, it is crucial to verify its validity.
- Buyers need to ensure the POA is registered and not simply notarised. A notarised POA is not considered legally valid. In addition, the buyer should check if the principal (NRI seller in this case) has a valid title to the property. In the case of co-owners, each seller should execute a separate POA.
- Moreover, legal due diligence should be done by buyers to minimise potential risks. This includes checking if the documents have proper signatures and photographs of the seller and POA holder. The buyer must ask the NRI seller to specify the reason in case of absence during the property sale.
- A buyer can insist on adding a blanket indemnity clause to the sale deed. This will safeguard them against legal or tax issues later.
Not being aware of RBI and FEMA guidelines
The Reserve Bank of India (RBI) lays down certain guidelines for NRIs selling their property in India. NRIs have the right to sell their property in India to Indian residents. However, an RBI approval may be required if the seller is residing in countries such as Nepal, Pakistan, Sri Lanka, Afghanistan, Bhutan and China. Moreover, if an NRI wants to sell agricultural land, they need to obtain approval from the RBI.
Similarly, there are rules under the Foreign Exchange Management Act (FEMA) governing property dealings involving NRIs. That is, the non-resident Indian (NRI) is bound by government regulations before undertaking any property transaction. Violation of these rules can lead to legal troubles for the seller and buyer purchasing the property.
Tips for buyers:
Before engaging in any property transaction involving an NRI, property buyers should verify if the NRI seller has secured the necessary permissions from the RBI. These regulations may be revised by the government. So, it is important to stay updated about the latest regulations.
Neglecting payment-related risks
Since the buyer is dealing with a person who is likely to be residing in another country, there may be challenges arising during payments. One of the common mistakes buyers make is believing that the payment during the property purchase should be transferred to the POA holder. Sending money to the POA holder may have tax implications for the buyer.
Tips for buyers:
- The POA holder is a representative of the NRI seller to execute the transaction. The payment should be made only to the NRI seller’s NRE or NRO account in India.
- Usually, a seller who is unable to be physically present may execute a Special Power of Attorney (POA), giving broader powers to their representatives. Even if the seller is allowed to authorise their POA holder to accept payments on their behalf, buyers must insist on sending money directly to the seller.
- In case of multiple owners, the payment must be transferred in the proportion of ownership each seller has in the property.
Not accounting for tax liabilities
Ignoring the tax liabilities can land both the NRI seller and the buyer in the wrong side of law. Violation of taxation rules can incur penalties. When undertaking any property transaction, buyers need to know the relevant tax implications. For instance, when buying a property from an NRI seller, the property buyer must deduct tax at source (TDS) before making the payment to the seller, as per Section 195 of the Income Tax Act, 1961. Further, there have been cases where the NRI property owner had concealed their status to avoid Tax Deducted at Source (TDS). So, it is the buyer’s responsibility to ensure tax compliance to avoid hassles.
Tips for buyers:
- Ensure that the NRI seller has a Permanent Account Number (PAN).
- Obtain a Tax Deduction and Collection Account Number (TAN).
- When buying a property jointly with another person, both buyers should have a TAN. It is also applicable to sellers of a property who are co-owners.
- Buyer must deduct TDS on the total sale consideration, unless there is a relevant certificate from an income tax officer specifying a lower tax liability.
- Buyers should follow the timelines. For example, the TDS must be deposited within seven days of the subsequent month following the transaction.
- They must also file a TDS return using Form 27Q and issue a TDS certificate (Form 16A) to the seller. In case of delays, a fine of Rs 200 per day and interest on the delayed payment is levied.
- TDS will be applicable depending on the residency status of the seller, not the SPOA holder. The TDS should be deducted as per the applicable rate even if the SPOA holder is a resident Indian.
- If the NRI seller has surrendered their Indian citizenship and obtained foreign citizenship, the NRI rules are still relevant for taxation purposes.
Housing.com News Viewpoint
As a property seeker, one may consider purchasing a resale flat from an NRI as a profitable investment. However, it may require the buyer to exercise additional caution owing to the seller’s residential status having additional legal and financial requirements to fulfil. Skipping due diligence or tax compliance can lead to costly mistakes for the buyer, resulting in legal disputes and penalties. It is crucial for buyers dealing with NRI sellers to maintain clear, written communication, either directly or through their POA holders. This can help prevent misunderstandings and delays. Approaching an experienced lawyer can be a wise approach, especially for first-time buyers planning to buy a property from NRIs.
FAQs
Can an NRI sell inherited property in India?
NRIs can sell inherited property in India. However, there are regulations, such as FEMA guidelines, that must be followed.
Is registration through Power of Attorney valid in India?
Registration through a Power of Attorney (PoA) is not considered valid as per the law.