The real estate sector in India attracts many investors, including non-resident Indians (NRIs). Some of the reasons that draw NRI investors to the Indian property market include attractive exchange rates, a proper regulatory framework established through RERA, and emerging realty hotspots that offer opportunities to earn high returns. The property market comprises the primary market, comprising of new or under-construction units, and the secondary market, which includes resale properties. NRI property ownership is significantly contributing to the resale property market.
An NRI may choose to sell his house for various reasons such as relocation, challenges in managing the property, diversification of investment portfolio, etc. The process of buying a property from an NRI can be more complex, and buyers need to be more careful when finalising such transactions. One should look at several aspects, from tax liabilities to documentation. In this article, we will discuss the legal and financial considerations when purchasing a property from an NRI seller.
Why is checking seller’s residency status important when buying a property?
Purchasing a property involves due diligence, which involves checking the ownership and the seller’s identity, nationality and residential status. It is important for a property seller to disclose their residential status, whether they are a resident of India or a non-resident Indian (NRI). This is crucial because different tax rates are applicable when deducting TDS (tax deducted at source) for a resident and NRI sellers. Sellers may fail to disclose their residential status, intentionally or unintentionally, which could pose legal issues before the buyer. Therefore, property buyers must check these details before purchasing a property.
When checking the seller’s identity, here are a few things buyers need to check:
- Identity of all owners, in case of jointly owned properties
- If the person executing and registering the sale deed is duly authorised
- If approval has been sought from the relevant authority, permitting the sale of the property
Who is an NRI?
Citizens are classified as residents and non-residents for taxation purposes. An Indian citizen living abroad will be a non-resident Indian (NRI) if their stay outside India is more than 182 days in a financial year. The reason for staying abroad could be education, employment, business or any other valid reason.
Things to keep in mind when buying a property from an NRI
Verify property title and ownership
When purchasing a property from an NRI, a buyer can request documents such as a title deed to verify the person’s rightful ownership over the property and the seller’s authority to transfer the ownership. The title deed contains the complete ownership history. The buyer should verify the nature of the title – leasehold, freehold, or development right and ensure the title is clear and marketable.
Get a checklist of other important documents
There is a list of documents buyers should check with the seller, including:
- Identity and address proofs: The buyer should ask for the seller’s identity proofs such as Aadhaar card, PAN card, passport, income tax returns, salary certificates, etc. Besides Aadhaar card, documents such as Voter ID card, utility bills or bank statements serve as residential proof.
- Sale deed: This document is a proof of the sale transaction between the owner and the seller.
- Encumbrance Certificate: This document, issued by the relevant government authority, helps ascertain whether the property is free from financial liabilities (loans) or legal disputes.
Verify the Power of Attorney (POA)
If the NRI property owner has authorised an agent or representative to manage the property transactions, buyers must check for the Power of Attorney (POA). It is a legal document that entitles an authorised person to act on behalf of the seller and carry out the transaction, complete registration formalities and handle all property-related matters.
It is advisable that the transaction is finalised with the NRI seller being physically present in India. However, typically, NRIs may find it difficult to travel to India to complete the transaction and legal formalities, which may take weeks to complete. Thus, most NRIs consider selling their property through a Power of Attorney (PoA).
Validity of POA
Property buyers should check if the PoA is legally valid. If the POA was executed overseas, it must be attested by the Indian Consulate or Embassy in that country. The POA should be registered in the sub-registrar’s office. A notarised PoA is not considered legally valid in India. Moreover, the POA should be used within three months from the date of execution.
Know about taxation guidelines
TDS payments
According to Section 195 of the Income Tax Act, the property buyer is required to deduct tax on the capital gains of the seller. This is known as Tax Deducted at Source (TDS), which is deducted from the property’s sale value. The tax at the rate of 20% is applicable on the sale and purchase of a property owned by an NRI. On the other hand, a TDS rate of 1% is applicable in case of purchase or sale of a property from a resident Indian.
There is no tax if the property value is less than Rs 50 lakh and the seller resides in India. On the other hand, if the owner is an NRI, a TDS of 20.80% is applicable for properties with a value less than Rs 50 lakh and 22.88% for properties with a value between Rs 50 lakh and Rs 1 crore. The applicable tax rate is 23.92% for property value of above Rs 1 crore. A surcharge is also applicable based on the different TDS rates.
The buyer must also file for the deposit of TDS using Form 26QB as per section 194IA of the Income Tax Act, 1961. After depositing the amount with the tax department, the buyer must issue Form 16A to the seller.
TDS rates based on different property transaction values
| Sale Consideration Range | TDS Rate (%) | Surcharge (%) |
| Up to Rs 50 lakhs | 20.80% | Nil |
| Rs 50 lakhs to Rs 1 crore | 22.88% | 10% |
| Rs 50 lakhs to Rs 1 crore | 23.92% | 15% |
| Rs 50 lakhs to Rs 1 crore | 26% | 25% |
| Above Rs 5 crore | 28.496% | 37% |
Importance of TAN account
A property buyer must have a Tax Deduction and Collection Account Number (TAN), which is required for deducting TDS. Deducting the TDS without the TAN can result in a penalty levied by the Income Tax Department on the buyer. If there is a co-buyer or the seller includes more than one individual, they all must possess the TAN or PAN, as required. When buying a property jointly with another person, both individuals should have a TAN account.
Tips for making payments: FEMA guidelines
Enacted in 1999, the Foreign Exchange Management Act (FEMA), lays down rules for foreign exchange transactions in India. The law also governs property-related transactions, including acquisition, transfer or repatriation of sale proceeds.
When dealing with NRIs, it is essential for buyers to understand the FEMA laws. Homebuyers must ensure that they deposit the sale proceeds in the seller’s Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) or Foreign Currency Non-Repatriable (FCNR) account. NRI sellers may ask buyers to deposit the money in their savings account in India, but this should be avoided in order to avoid any legal consequences.
Further, here are a few other crucial points to remember:
- The sale agreement must be written elaborating on all points, including TDS details and seller account number. This would ensure no misinformation is made on the part of the NRI.
- Buyers should ensure the NRI property owner has a valid PAN (Permanent Account Number)
- In case the property is jointly owned, the payment should be made as per each co-owner’s share in the property.
- Moreover, in the case of multiple owners, buyers should ensure that all parties are ready to sell the property. This will help prevent any legal disputes in future.
Housing.com News Viewpoint
Purchasing a resale property has its advantages, especially since it would be in ready-to-move-in. While there is a plethora of things to check before purchasing a property, from location and neighbourhood facilities to property’s condition and documentation. One of the most crucial points to note is the seller’s identity and residential status.
In case the seller is an NRI, they must conduct proper due diligence to verify the seller’s ownership rights. More importantly, they should pay attention to the tax considerations and have a proper understanding of the TDS requirements and potential capital gains tax for the NRI seller. Further, buyers should be aware of any changes in regulations governing immovable properties owned by NRIs.
For hassle-free property buying, buyers must approach a legal professional and tax experts who can assist with property matters involving NRIs.
FAQs
How many properties can NRIs own in India?
In India, there is no limit to the number of properties an NRI can own.
Can NRIs avoid TDS when selling a property?
Deducting TDS is mandatory for buyers purchasing property from NRI sellers. However, the NRI property owner can file an application with the Income Tax Department for a lower deduction in case there are no capital gains or if capital gains are lower than TDS to be deducted.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |