In previous years, the weakening Indian Rupee and the almost stagnant growth rate of real estate in India have proved lucrative for NRIs investing in real estate in India. With the weaker rupee yielding a higher value on currency conversion and land, being an asset with limited supply, NRIs are armed with larger funds to make higher value purchases and get the best deals.
Though the Indian real estate market has fared better than its counterparts abroad, all is not rosy about this sector. The real estate growth depends largely on the location and its proximity to operational infrastructure. The real estate sector in India has been severely affected by litigations, ownership disputes and constructive frauds, leaving investors in the lurch.
What type of properties can NRIs buy?
NRIs can buy any number of residential and commercial properties in India, but they are not permitted to buy agricultural, plantation or farm lands. However, they can own an agricultural or farm land if it was inherited or if it was gifted from a relative. They are also permitted to own such properties if they had purchased them before becoming NRIs for tax purpose.
Residential Property Buying for NRIs
The purchasing power of NRIs has enabled them to invest in the Upper-segment and Luxury residential properties in Indian cities. However, NRIs have to decide their purpose of a property purchase – Do they intend to return and stay in that property? Or do they want to return and settle in that home after retirement? Or are they just looking for good returns on their investment?
If a residential property is bought to be used on returning, it is recommendable to invest in a luxury project with good amenities. The surrounding localities should have better infrastructure or at least good potential for development after some years. This may fetch a lesser rent initially, but in the due course of time, the locality may develop well to support a comfortable living, on return.
If a residential property is bought for investment, an NRI has the option to rent it out till the investment property is ready to be sold. To get a better rent/returns, the location of the property is the utmost important thing. Properties close to office spaces, transport facilities, shopping malls and educational institutions fetch better rent and appreciate faster in India. Also, the additional costs of furnishing the house to make it suitable for tenant occupancy should be borne by the NRI investor. However, the rental yield on residential properties is as low as 3%-6%.
Commercial Property Buying for NRIs
NRIs are looking to diversify their real estate holding by investing in commercial properties like retail and office spaces in Tier-1 and Tier2 cities of India. With the NRIs having a higher budget, commercial spaces selling at a higher cost, are attractive investments as the growth rate and rental yield is as high as 10%-12% in India. To facilitate NRI investments in high-ticket commercial properties at an affordable cost, many developers offer smaller units of space for sale in high-end properties.
But before investing, an NRI investor has to understand the worthiness of the location for commercial use and the demand/supply of such properties. Unless sufficient due diligence is done, the investor might end up with properties having high vacancies. For e.g., A property located in a large mall may not fetch tenants immediately if the footfall is very low.
Charges involved in buying a property
Any property bought in India has to be registered with applicable stamp duty and registration charges paid. These charges vary from 2%-8% of the total cost of the property, depending on the rules of individual States and municipal bodies for both residential and commercial properties. Once the ownership of a property is taken, the tax on the property should be paid by the NRI to the municipal body every year.
If a residential property bought, is either an apartment or a villa in a gated community, the builder might charge a maintenance cost every month to the owner.
Property Loans for NRIs
NRIs are allowed to obtain loans for a property purchase or construction in India from banks registered in India or their overseas branches. The loan eligibility largely depends on an NRI’s income in the country of residence and factors like qualification, the number of years of employment abroad and future income earning capacity. However, the loan tenure offered for an NRI is usually between 11-15 years. A processing fee is charged by the sanctioning bank for all NRIs obtaining a loan. The loan has to be compulsorily paid-off by remitting money to India from earnings abroad or from funds in Non-Resident Accounts which adhere to the regulations made by the Reserve Bank of India (RBI).
Repatriation of Sale Proceeds and Rental Income
Sale Proceeds: NRIs are allowed by RBI to repatriate only $1 million per fiscal year if the purchase was made through funds in Non-Resident Ordinary (NRO) account. The entire sale proceeds of a property can be repatriated if the purchase was made through funds in either Non-Resident External (NRE) account/Foreign currency Non-Resident (FCNR) account.
RBI permits an NRI to repatriate the sale proceeds of only two properties in a lifetime. Also, repatriation will be permitted only if the NRI held the property for more than 3 years.
Rental Income: Rental Income from both residential and commercial properties are allowed to be repatriated from both NRE/NRO account subject to the regulations specified by RBI.
Restrictions for NRIs on Purchase/ Sale of Real Estate
NRIs are allowed to purchase multiple properties in residential and commercial categories. They are not allowed to buy any agricultural land, plantations and farmlands, but can be inherited or received as a gift. RBI allows joint ownership between other NRIs for residential and commercial properties. However, Joint ownerships between an NRI and a resident is prohibited, even if it is inherited.
NRIs are allowed to sell their properties to either Residents or other NRIs or Persons of Indian Origin (PIOs). However, if the purchaser is an NRI or PIO, the funds for the purchase has to be mandatorily from inward remittances to India from their earnings abroad.
Taxability on Sale Proceeds/Rental Income
Taxability of Sale Proceeds: According to the Budget 2017 amendments, from the Financial Year 2017-18, gains made from the property sale, with a holding period of minimum two years, is subject to Long Term Capital Gains (LTCG) Tax at the rate of 20% of the total gains made. If a property is sold within two years of purchase, the marginal rate, which is the tax slab rate under which the NRI’s income falls in India (usually 30%), would be applied on the gains made from the sale.
The buyer of the property from an NRI is obligated to deduct 20% as Tax Deducted at Source (TDS) if the property is sold after two years of purchase. If sold within two years of purchase, the TDS has to be deducted at 30%. NRIs are not given the benefit of Indexation which would reduce the tax on the capital gains made.
Taxability of Rental Income: The rental income received by an NRI is treated as Indian income and is taxable if the income exceeds INR 250,000. The tenant is required to deduct TDS at 30% on all rent payments to an NRI. If the Indian income of an NRI is below INR 250,000, tax returns can be filed and a refund of the TDS obtained. If the Indian income exceeds INR 250,000, an NRI is required to pay taxes and file a return also. The TDS deducted can be adjusted against the total tax liability to arrive at the exact tax payable. However, rental income might be taxable in the NRI’s country of residence also as income earned abroad.
How to reduce tax liability on Capital Gains from the sale of a property?
There are provisions in the Income Act to save on capital gains tax on the sale of a property, for both NRIs and residents.
- If a residential property is sold three years after purchase and the NRI seller invests the gains in buying/constructing another residential property within three years from the date of sale of the property under consideration, or if the NRI seller has bought a residential property one year prior to the sale of the property under consideration, the entire capital gains are exempted from tax. However, such exemption can be claimed only for one residential property.
- If any capital asset, such as commercial property is sold three years after purchase and the NRI seller buys/constructs a residential property from the capital gains, within three years from the date of sale of the capital asset, or if the NRI has bought a residential property one year prior to the sale of capital asset under consideration, in such cases the capital gains are exempted from tax. However, it is applicable only for the purchase of first residential property in India by the NRI.
- Alternatively, an NRI can invest long-term capital gains from the sale of a residential property by investing in Capital Gain Bonds issued by the Rural Electrification Corporation and the National Highway Authority of India. The investment in aforesaid bonds must be done within six months from the date of sale and is redeemable after three years.
Should NRIs invest in Indian Real Estate?
Investing in Indian Real Estate makes sense for NRIs who hope to return to their motherland and settle in their own nest. If buying real estate as an investment, Indian real estate market has given considerable good returns in the past two decades. With plenty of choices and affordability, it is an excellent choice for NRIs looking to diversify their asset portfolio. But a lot of thought and research should go before purchasing one, in terms of aspects like
- Reputation of the developer.
- Legal title deeds and documents.
- Tax implications in India and country of residence, for both capital gains and rental income.
- Expenses for brokerage, property maintenance etc.
- Repatriation rules and regulations.