Why is investing in a second home a smart decision for NRIs?

Among the numerous investment avenues, real estate has been one of the most preferred choices for non-resident Indians (NRIs). The share of NRI investment in property purchases in India has increased from around 10% to nearly 20% in the past decade, as per industry reports. Further, there has been a growing preference by NRIs for luxury homes, which also double up as vacation homes or second homes. Many NRIs look towards India for investments, and buying a property helps them stay close to their roots and secure a place to retire if required. In this guide, we explore the key benefits for NRIs planning to invest in a second home in India. 

Benefits for NRIs investing in second homes

#1. Scope for high capital appreciation

Investing in a second home can be a profitable investment. Buying a property offers scope for price appreciation in the long term. Developing areas typically see an increase in property value over time compared to developed areas. Thus, some tier 2 cities are showing significant growth potential. Owing to the robust infrastructure development in these cities, there are strong chances of property prices increasing in the future. Further, capital appreciation is also influenced by other factors such as a rise in demand for housing due to population growth, economic growth and employment opportunities. 

Cities such as Delhi-NCR, Mumbai, Pune and Bangalore are some popular destinations for luxury property investments, witnessing a rising demand from NRI investors. Their strategic location advantages and infrastructure growth present opportunities for significant capital appreciation in the luxury housing segment. 

#2. Opportunities to earn steady rental income

One of the top reasons why second home investments have become popular is the rental income opportunities they offer. Renting out a second home can help NRIs have a steady source of passive income, which can help build funds for retirement. Moreover, second homes can be an excellent option for both long-term and short-term rentals. Locations close to employment hubs provide opportunities to earn long-term rentals, typically six months or longer, owing to the steady demand from tenants. On the other hand, NRIs buying a second home near pilgrim destinations or vacation hotspots can secure short-term rentals by capitalising on the seasonal demand. 

#3. Strategic investment for wealth diversification

Real estate is a tangible asset class that, unlike other investment options like bonds and stocks, allows the investor to build wealth. Second homes serve as an ideal medium for earning passive income through rentals. Buying a second home in India enables NRIs to diversify their real estate portfolio. Further, if they invest in other asset classes such as a commercial property, it helps spread the risks across various segments. Having a second home property lowers vulnerability to volatile markets and offers financial stability during crunch situations.  Additionally, strong foreign currencies like USD and AED make property prices in India more affordable for NRIs, thus increasing their purchasing power. 

#4. Tax advantages and home loan benefits

Investing in a second home provides various tax advantages for NRI investors, enabling them to maximise returns. If the individual purchases a second home through a home loan, they can claim tax deductions on the interest paid under Section 24(b) of the Income Tax Act. There is a maximum limit to such deduction in case of self-occupied properties. However, there is no limit on interest deductions for a second property that is rented out.

Additionally, second home investments come with depreciation for rental properties. If the house is rented out, the NRI can claim depreciation as an expense against their rental income, reducing their tax liability and maximising savings. 

Moreover, if the individual sells the property, they can look for tax savings on long-term capital gains by re-investing the proceeds in another property (under Section 54) or specific bonds (under Section 54EC).

#5. Favourable government regulations

The real estate market has become streamlined due to the implementation of RERA. Real Estate Regulatory Authorities (RERA) in various states ensure transparency in real estate dealings and protect the buyers’ interests. This is a key factor that has strengthened the trust among overseas buyers, especially NRIs.

Moreover, the Reserve Bank of India (RBI) has relaxed regulations, allowing NRIs to invest in multiple residential and commercial properties without needing approval. However, NRIs still need to adhere to the various regulatory requirements. For instance, they cannot buy agricultural land, farmhouses, or plantation properties. The Foreign Exchange Management Act (FEMA) lays down rules for NRIs investing in India. According to FEMA, NRIs can repatriate up to USD 1 million per financial year from the sale or rent of their second homes in India. Thus, property investment in India is easy for NRIs owing to a streamlined policy framework and streamlined processes such as digital property registration and online payments.

#6. Fulfilment of emotional and lifestyle needs

Many NRIs look to create a personal base in their home country and having a second home allows them to meet their temporary housing needs when they visit India. This reduces the dependence on hotel stays. Another factor that makes a second home beneficial for an NRI living abroad is the emotional connection it creates. A home in India provides them a place to stay connected to their family and cultural traditions, through family gatherings, festive celebrations and even a retirement hotspot. 

Furthermore, second home investments enable NRIs to fulfil their aspirations. This includes comfort, privacy and world-class amenities. Many buyers prefer to purchase residential properties in gated communities equipped with modern amenities. A second home near a hill station or a coastal town can serve as an ideal retreat for NRI individuals to enjoy a dream lifestyle away from the hustle and bustle of a city. 

Housing.com News Viewpoint

Purchasing a second home comes with numerous financial benefits for an NRI, including long-term capital growth, tax benefits and the opportunity to generate passive income. However, equally beneficial is the opportunity to lead a comfortable lifestyle and secure a place after retirement. India’s real estate market is witnessing an increasing demand for second home investments, especially across the top metros and tier-2 cities, providing NRIs numerous options to consider. Ultimately, the decision to purchase a second home in India should be made after careful analysis, involving strategic financial planning and evaluation of lifestyle needs.

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