NRI Real Estate Investment in India – What should you know?
A significant chunk of the real estate investors in India are NRIs. Let us evaluate the financial implications as well as the rules and regulations to determine whether NRI Real Estate Investment in India is profitable.
What types of properties can NRIs buy?
NRIs can invest in both residential and commercial properties anywhere in India. but they are restricted from buying agricultural land, plantation or farm land. However, if they receive such properties through inheritance or as a gift, they can own it.
If you had purchased such properties before you became an NRI, your ownership remains valid.
What should be the source of funds for the purchase?
For all financial transactions related to property purchase, NRIs have to make payments from:
- Funds remitted to India through normal banking channel.
- Funds held in NRE/NRO/FCNR account in India.
You cannot make any transactions using:
- Traveler’s cheques.
- Foreign currency notes.
No financial transaction is allowed to be carried out of India.
Tax Benefits on Purchase
NRIs can claim tax benefits for house purchase provided they have taken a home loan. If the property is rented out, the rental income will be taxed in India.
You can claim the tax deduction for the interest paid on loan to set off the tax on rental income.
Sale of NRI Real Estate Properties
NRIs can sell their properties to either Residents or NRIs. Capital gains tax applies to the gains made from the sale.
If the property is held for more than two years, it is treated as long-term capital gains and taxed at 20% of the profits. If the property is sold within 24 months of purchase, it is treated as short-term capital gains and taxed at the income tax slab rate.
Though the process of buying and selling is smooth for NRIs, there are many restrictions for repatriation of the sale proceeds.
Below are some of the guidelines for repatriations:
- The property must have been purchased in accordance with the FEMA directives applicable at the time of purchase.
- If the property was acquired through funds remitted from abroad through normal banking channel or from funds held in FCNR account, the amount repatriated cannot exceed the original amount paid for the property.
The above regulations make it difficult for an NRI to repatriate the gains made by property sale in India.
To avoid tax on the gains, you can either choose to invest in another property within 3 years of sale or invest in NHAI or REC bonds which are locked for 3 years.
However, there are certain circumstances under which an NRI is allowed to repatriate a maximum of 1 million USD per financial year.
- If the property was purchased from Rupee source of funds such as funds in NRO account.
- If the property was received as a gift, then the sale proceeds should be credited to an NRO account and then repatriated.
- If the property was inherited, sale proceeds can be repatriated by providing documentary evidence proving inheritance. You would need the services of a CA to obtain the certificates in the required format prescribed by CBDT.
- Irrespective of the source of funds, repatriation of the sale proceeds is restricted to less than or equal to two properties, in case of residential properties.
Rental Properties of NRIs
NRIs are allowed to rent out their properties in India and the rental income is taxed at the applicable income tax slab rate.
Like residents, NRIs can also claim a deduction for municipal taxes paid, claim 30% standard deduction and deduction for interest paid on the home loan, if any.
Rental income can be repatriated provided all taxes are paid and the total repatriation amount per year does not exceed 1 million USD per financial year.
Power of Attorney (PoA) in NRI Real Estate
Traveling back and forth between Indian and their country of residence is cumbersome and expensive for NRIs. Also, they cannot claim the tax deduction for the travel expenses incurred during property purchase or for property maintenance.
So, a special provision has been given to NRIs in the form of a Power of Attorney.
As an NRI, you can grant PoA to any trusted person to perform the following actions:
- Mortgage, sell, lease and collect rent on your behalf.
- Sign any documents required by banks during the purchase of the property.
- Manage or settle property disputes.
Special regulations applicable for buying or renting properties from NRIs
It’s important to note that if you purchase a property from an NRI or choose to rent a property owned by an NRI, the procedure and compliances are entirely different from that of a resident Indian.
Buying property from NRIs
The most important point to look at while buying a property from NRI is the actual capital gains made and the applicable TDS on it.
The buyer also has to obtain a TAN number (Tax Deduction and Collection Account number) to deduct and deposit the TDS applicable on the sale.
If you are an NRI selling a property, you should get a certificate from the Income Tax Officer which mentions the computation of Capital Gains. The buyer has to deduct 20% TDS on it, irrespective of the value of the sale. TDS has to be mandatorily deducted and deposited for every payment made to the NRI seller.
Renting a property from NRIs
If you are an NRI who has rented out property in India, your rental income is taxable in India and to facilitate that, your tenant has to mandatorily deduct 30% of the rent and deposit as TDS.
For both buying and renting a property from an NRI, the onus is on the buyer/tenant of the property to deduct TDS and deposit the same in the name of the NRI for all financial transactions made. Non-compliance by the buyer in deduction and deposit of TDS may result in penalties levied on the buyer and subsequent recovery from him from the Income Tax department. The seller is not bound to deposit TDS in his name during such transactions and may not be held guilty in case of non-receipt of TDS.
Also read: RNOR Tax Status – A boon for returning NRIs
Should NRIs invest in Indian Real Estate?
Holding a tangible asset in India, no doubt gives an emotional connection to NRIs. Also, like most people with India, NRIs also are oriented towards physical assets such as gold and real estate.
The Indian real estate market is largely unregulated, and the sector has been affected with large-scale frauds, litigations, defaults by builders and ownership disputes, leaving even the resident investors in the lurch. The growth of real estate sector has mostly been stagnant over the last couple of years, and the rentals have fallen in most Tier-1 cities.
There are plenty of upcoming real estate projects which target NRIs and promise a high return on investment. Many NRIs fall prey to such properties and end up buying multiple properties in India.
Though the entire process of buying and selling is rather smooth these days, you might not be easily able to repatriate the gains to your country of residence and enjoy the fruits of your investment because
- investments in multiple properties are allowed, but repatriation of sale proceeds can be done only for two properties.
- Amount of repatriation allowed is equal to the amount that is remitted from abroad for house purchase. This means that if you have bought a property in India from earnings abroad, on selling the same you can only repatriate the capital you invested and not the gains.
- Even if the property was bought with income arising in India, the repatriation is restricted to USD 1 million per financial year and you have to clear a lot of legal hurdles before you can enjoy the profit you made.
Also, unless there is a DTAA agreement between India and the country of your residence, you have to pay tax on the gains you have made or on the rental income, you have earned, in India as well as in the country of your residence.
Many people choose to hire property managers who manage all their properties in India for a fee. However, the fees paid cannot be deducted to reduce the tax outgo.
All said and done, you have to find a buyer to sell your property or a tenant to rent out your property. With tighter norms introduced by the government to check tax evasion, most Indian residents hesitate to buy NRI-owned properties as it results in additional legal procedures and costs. Even finding tenants for NRI-owned properties are difficult due to legal compliances required.
With real estate being one of the highly illiquid asset classes, the added legal compliance procedures make it more difficult to find suitable buyers or even tenants.
If you plan to return to India sometime shortly, it makes sense to buy a property for you to reside. If you want to settle down abroad and have no intention of returning, investing in multiple properties in India makes no sense as you cannot enjoy the profits you make in the country of your residence.
It makes sense to invest in other investments like mutual funds, direct equities etc., where the liquidity is higher, the returns are better and the repatriation restrictions are less.