One of the Greatest Indian dreams of this generation is buying real estate in India. A house in India is essential, irrespective of which corner of the world you currently reside in. The Indian laws, over the years, have evolved and made this a fairly easy job. The Reserve Bank of India governs such transactions and they fall under the purview of the Foreign Exchange Management Act (FEMA).
In this section, we give you a glimpse of all the fundamentals you are supposed to know if you are an NRI wanting to buy property in India. To begin with, we need to understand the definition of non-resident Indian. Since property purchases are governed by FEMA, we need to go by the definition of NRI as stated in FEMA. According to FEMA, an NRI is a citizen of India who is resident outside India.
Now let us understand the rules and implications:
Can an NRI buy property in India?
Yes, a non-resident Indian can buy either a residential property or a commercial property in India. There is no limit on the quantity of properties that an NRI can purchase in India.
Exception: Agricultural land, plantation land or a farm house in India are properties an NRI can NOT buy. He cannot even acquire such property as a gift. He can inherit this property.
Is RBI permission required?
No. RBI permission is not required to buy residential or commercial property.
Is deemed income from house property taxed in foreign country?
You would need to look at the tax code in your country of residence. In the case of NRIs in the United States, the US tax code does not tax deemed income. However, Ganga Mukkavilli, a New York City based CPA whose firm, CPAs, Taxes & Associates PC, specialises in international accounting, taxes and small businesses says that you would still have to show the property if it is an investment property in your tax return in the US (even though you do not have any rental income ). "If you do not show this investment property, the problem will arise at the time of sale of property. Suppose you sell a property on which you had no rental income for US tax purposes but had deemed income as per India Tax code, then the amount spent on the maintenance, repairs and renovations and depreciation on this property which may be eligible for deduction or addition to your cost basis while calculating capital gains would become difficult to establish. However, if you have not declared the property in your tax returns, the US tax code may challenge the cost basis (purchase + improvements + suspended losses) to claim a tax deduction at the time of sale," he explains.
"Of course, any investment properties with rental income and related expenses must be reported on Form Schedule E in the US tax returns and rental activities by nature are always treated as 'passive' investments with restrictions on deductibility of the net rental losses. Always consult a tax expert as passive activity rules are quite cumbersome," he adds.
What are the income taxes that applicable on house properties in India?
According to the Indian Income Tax Act, if a person (resident or NRI) owns more than one house property, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property. The other one, whether you rent it out or not, will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property (based on certain valuations prescribed by the income tax rules) and pay the tax thereof.
Now, the Income Tax Act does not specify if either or both these properties must be situated only in India. Vikas Vasal, Executive Director of KPMG India explains, "At the time of drafting the Income Tax Act, one did not envisage a situation where an Indian would own properties overseas. But now, more and more Indians are settling abroad. So from the reading of the Act, the rule of 'more than one property' will apply to global properties."
What this means is that if you are an NRI and own only one property globally and that property is in India, you would not have to pay any income tax on it in India.
However, let us say you are an NRI resident in USA. You own and live in a house in USA. You also own a house property in India. Even if you do not give the property in India on rent, you would have to pay income tax on deemed rent in India. The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act.
Remember that even if you have inherited a property in India and that is not your only property, you would have to pay tax on deemed income.
NRIs have always been opportunistic in terms of investment avenues and returns. The government regularly comes up with new schemes to attract more and more investments from abroad. Real estate is one of the sectors which always grabs the attention of non-residents.
The Reserve Bank of India has also given permission to all non-residents who possess Indian passports as well as people of Indian origin to put their money in the real estate sector (residential as well as commercial property). The number of NRIs investing in real estate is increasing fast as the value of the rupee is depreciating and real estate offers better returns. A place in the homeland usually gives a sentimental support and sense of security, which is the other reason of investment in real estate by NRIs.
The RBI along with the Foreign Exchange Management Act (FEMA) has become lenient in terms of rules and regulations for non-residents who are looking for an investment in real estate. They are not only simplifying the rules but also providing the benefit of repatriation of the capital involved. The government is planning some investment growth activities through their investment promotional council, to create an environment appropriate for non-residents to put money.
How can NRIs invest in real estate?
According to the regulations of FEMA and RBI, an NRI is permitted to make specific investment in real estate. A NRI is allowed to do the following investments in property.
1: Any immovable property can be purchased by an NRI in India other than any agricultural land, farm house and plantation property.
2: He can get any immovable property as mentioned above by gift from Indian resident, Indian citizen residing outside India or person of Indian origin.
3: Obtain any property by inheritance.
4: He can transfer immovable property to any resident of India by sale.
5: He can transfer any agricultural land, farm house or plantation land to any resident of India by gift.
6: He can also transfer his residential or commercial property by means of gift to any person either residing in India or abroad or person of Indian origin.
Sources of finance:
NRIs consider financial institutions as an easy option available in India for purchasing any property. At the same time financial institutions consider NRIs as their potential clients. Financial institutions provide home loans easily, efficiently and sooner to such people as they are very much prompt at the time of repayment. Furthermore, the repayment can readily be done by inward remittance through the proper banking channel. If someone is already getting income in India from sources like rent or dividend, he/she can directly repay the loan as well.
Tax implications for NRIs looking for property in India:
An NRI has to shell out stamp duty as well as registration fees at the time of purchase. He is entitled to avail all sorts of benefits at par with Indian residents on the interest paid for the home loan. However, the tax process becomes full of twists and turns if the property is leased.
RBI has also predetermined these norms in home loans for non-residents who are looking forward to buying any property:
- A maximum of 80 per cent amount is financed by the financial institution. The rest should be given by the NRI.
- The remittance of the amount for down payment can be done from the place of residence by normal banking channels, i.e., NRO/NRE account in India.
- The NRI has to repay his principal amount as well as interest part from that similar channel only.
As the amount of income received from such action comes under the head of income from property, therefore, standard deduction is applicable as per the standard slab. In this case, the NRI will have to pay the applicable tax if he is residing in the country where worldwide income is taxable unless the country has Double Tax Avoidance Agreement with India.
The special advantage for an NRI is the amount which is paid for the interest of home loan is deductible from NRI's taxable income without any upper limit. The NRI is legally responsible for the payment of capital gains tax as prescribed under the Income Tax Act, in case he sells off the property.
Points to be considered at the time of purchase:
Investment in real estate is a simple move but there are several drawbacks as well. So, one should be cautious enough at the time of purchase to secure the deal. Few points of consideration are under:
The name of property should be clear from issues and the seller should have the required right to sell it, especially if it is inherited or any joint property.
Always check that there will be no outstanding electricity/water bills or any other authority dues pending with the property. Take a no dues certificate from the seller at time of purchase.
Bank release letter:
It is advisable to take the bank release letter from the concerned bank, if the property had been mortgaged as security in any type of loan.
- The property of sale should have all approvals and permits from the civic authorities in terms of construction
- India’s real estate growth prospect lure investors from every parts of the world and NRIs are looking to capitalize by buying property in India. However, there are various rules and norms which should be followed by the NRIs in order to own a property in India. Here are a few steps which should be followed by an NRI for property buying;
Proof of Eligibility:
If you are an NRI and are looking for investing in a property in India, you should obtain a Person of Indian Origin (PIO) certificate as an eligibility proof. In case you do not have your PIO certificate, you can always produce your mother’s/father’s birth certificate for the eligibility. However, these documents should be submitted to the Indian embassy of the particular country.
The Exchange Control Regulations:
Unlike the initial times, the restrictions relating to investment by NRIs in Indian properties have been lessened. An NRI can easily buy a property with the funds received from regular banking. Also an NRI can hold a Foreign Currency Non-Resident FCNR account, Non-Residential External (NRE) account or a Non Resident Ordinary (NRO) account to make a property purchase. An NRE account is required for the pay outs and an NRO account is required for the depositing and the transferring of money.
Once the relevant income tax and capital gains at the time of sale proceedings are deducted from the account, one can repatriate the funds from the NRE account to the foreign account.
In case if an NRI wishes to rent out a property, he/she can rent the immovable property. However, the rental income or the profit which is made as returns from the property will be eligible for repartition for payment of taxes and payment of a certificate which is produced by a chartered accountant.
If an NRI owns a property in India and wants to sell it away, he/she can sell it to another NRI or any person residing in India who is free from any legal issues. However, the purchase or sale of a farm house or other agricultural land is not permitted, but gifting of an agricultural land or a farm house or plantation land is permitted to a resident of India. The same follows with an NRI or a PIO.
The Power of Attorney:
It is advisable that an NRI should give the power of attorney to an Indian resident who is trust worthy. In case the NRI is not present in India for the legal formalities, the trusted person can complete all the formalities.
The Home Loan:
An NRI can avail a home loan in India for the purchasing of a property. A home loan of about 85-90 per cent can be taken and further the loan will be disbursed to him/her at the time of buying a property.