Investing in real estate in India as an NRI requires careful consideration of various factors. The nature of the property, taxation, and repatriation rules are crucial aspects to understand. Additionally, obtaining a home loan, managing power of attorney, staying updated on FEMA regulations, choosing the right modes of payment, and eliminating middlemen are vital elements in making informed investment decisions.
7 Things NRIs Should Consider Before Investing in Real Estate in India
Nature of Property
A real estate investment is an immovable property. While NRIs have every right to own an immovable property – be it residential or commercial – there are certain restrictions regarding the type or nature of the property.
As per the Foreign Exchange Management Act (FEMA), they cannot own agricultural land, farmhouse, or plantation property in India unless they are gifted or inherited. However, with approval from the Reserve Bank and the government, they can own these types of properties in the country.
Taxation and Tax Benefits
Like an average citizen of the country, an NRI is liable to pay taxes on the income they earn from an immovable property, be it rental income or short-term or long-term capital gains. However, a key benefit they enjoy is the Double Taxation Avoidance Agreement (DTAA), which India has signed with more than 85 countries. This allows them to work and live in one country while earning income in another through an investment in real estate or through any other modes.
If an NRI holds a property for 2 years or more, it is considered a long-term capital gain, and the same will be taxed at 20.6%. Like any Indian resident, they can apply for a refund of the TDS or tax exemption under sections 54, 54 EC, and 54 F.
An NRI can be exempted from wealth tax on the first property if it is empty and declared to be for own use. If there are multiple properties, they will have to pay a wealth tax of 1% if the taxable net wealth exceeds Rs. 30 lakh.
Home Loan
Like any Indian resident, NRIs are eligible to get a home loan of up to 80% of the value of the property. It is mandatory that the loan sanctioned is disbursed, and later repaid by the borrower, in Indian currency.
When they take a home loan, the amount is not directly transferred to their account. Instead, the loan amount is credited to the developer’s account. Just like foreign currency or travelers’ cheques are not accepted while repaying the loan, payment made outside India is also not acceptable. Obviously, the question is, how do they repay their home loan? The answers are as follows:
- Inward remittance through banking channels
- NRO/NRE/FCNR (B) account
- Rental income
- Crediting the money to a close relative’s account
Power of Attorney (PoA)
The power of attorney is a powerful legal tool that authorizes another person, usually a trusted individual, to act on the owner’s behalf. As an NRI, when you buy an under-construction property in India, giving a power of attorney to a trusted individual will make the entire process of owning the property smooth and hassle-free.
Make sure that you seek the expertise of a legal practitioner to prepare a power of attorney. Ideally, it should contain all the details about the rights you want your representative to exercise.
Repatriation of Funds Back to the Foreign Country
The term ‘repatriation’ refers to the transfer of funds across countries. For an NRI, repatriation means transferring funds from their bank account in India to the account in their country of residence.
As an NRI, when you repatriate your money obtained from the sale of an immovable property in the country, it needs to be done in adherence to certain conditions.
The property must have been purchased as per FEMA directives.
The amount repatriated should not exceed the amount used to purchase the property if the purchase is made using money remitted through banks or funds in FCNR (B) account. The exceptions to this mandate are as follows.
An NRI can repatriate USD 1 million in a financial year, based on the following conditions:
- From their NRO account if the property was purchased out of rupee source funds.
- If the property in question was awarded as a gift.
- If it was inherited from an Indian resident.
- If it is a residential property, repatriation of the sale proceeds is allowed on a maximum of two properties.
FEMA Rules Regulated by the Reserve Bank of India (RBI)
The RBI has eased the Foreign Exchange Management Act (FEMA) to make it easier for NRIs to own residential as well as commercial properties in India. With a valid passport, they can own property, except the types of property mentioned above.
If you are an NRI planning to buy a property in the country, being familiar with the latest FEMA directives will help you greatly.
Modes of Payment
As we have already seen, NRIs are eligible to get up to 80% of the value of the property they intend to purchase. Just like the loan is disbursed in Indian currency, the repayment should also be made in the same.
However, if the plan is to pay the EMI with money earned from the country you reside in, foreign exchange fluctuations can severely affect your savings. However, you can overcome such possible financial mishaps by opting to pay the EMI using your rental income from the property.