NRI investment

NRI investment in Indian
Real Estate Market

The presence of NRI's is omnipresent across the globe and they have also been able to garner a sizeable portion of the wealth. These NRI's may be well settled abroad and may be earning big, but at the end of the day, most of these NRI's want to come back to India, as their love for their hometown still exists at the core of their hearts. And with Real Estate in India giving better returns than western countries, NRI Investment in India has started increasing. Moreover, with many NRI's wanting to settle in India in the future, NRI Investment in India in Real Estate is witnessing new highs. It gives a good return on investment and gives them a cushion for settling in India.

There are some significant tax and regulatory considerations that non-residents should take note of before making investments in this sector, as generally, these investments are from a long-term perspective.

Loan eligibility for NRIs

NRIs can avail a loan up to 80 percent of the property value depending on the individual eligibility. The loan will be granted and disbursed in Indian rupees.
To pay back the loan amount, NRIs can do it either by inward remittance through banking channels, a debit from NRE/NRO/FCNR (B) account held in India, rental income accrued from the property, or any close relative of the borrower. According to Section 6 of the Companies Act, 1956, any close relative of the NRI can transfer the amount in the NRO account on behalf of the NRI to remit the loan.

Who can invest: Investments in Indian real estate can be made by NRI, i.e., an Indian citizen outside India, and an Overseas Citizen of India (OCI), i.e., a person resident outside India who is registered as an OCI Cardholder.

Types of permitted real estate:
An NRI/ OCI can invest in any immovable property in India other than agricultural land, plantation property, or a farmhouse.

Ways to invest:
Investment in real estate may be in different forms. This includes, by way of direct purchase or as a gift from a person resident in India or a gift from an NRI/ OCI relative. 'Relative' as per foreign exchange regulations means husband, wife, brother or sister or any lineal ascendant or descendant of an individual.
Real estate may also be received by way of inheritance from a person resident in India or from a person resident outside India who would have acquired the said property following the provisions of the foreign exchange law in force at the time of acquisition.

Mode of payment:
Investment in real estate by way of purchase should be necessarily made through regular banking channels. The acquisition could also be by way of debit to the Non-Resident (External) Rupee Account Scheme (NRE Account) / Non-Resident Ordinary Rupee Account (NRO Account) / Foreign Currency (Non-Resident) Account (Banks) Scheme (FCNR Account) held by the NRI/ OCI in India. Payment cannot be made by any other mode, for example, traveler's cheque or foreign currency notes.

Whether spouse of NRI/OCI can invest:
Investment is permitted in joint name in only one immovable property. Such property is required to be jointly owned in the name of the NRI/OCI and their spouse. It is pertinent to note that the marriage should have been registered and subsisted for a continuous period of not less than two years immediately preceding the acquisition of such property.

Repatriation of rental income:
Rental income can be repatriated freely from India without taking any specific permission.

Transfer/sale of immovable property:
NRI/OCI can transfer any immovable property to a resident in India or another NRI or OCI. If the transfer is by way of a gift, the transferee NRI or OCI should be a relative. Further, agricultural land, plantation property, or a farmhouse received by inheritance can be transferred only to Indian residents.

Repatriation of sale proceeds outside India:
In case the transferred property was acquired when NRI/OCI was resident in India, or such property was inherited from a person resident in India, and then the NRI/OCI is permitted to remit up to $1 million per financial year out of the sale proceeds. Any remittance of an amount over the aforesaid limit would require specific approval from the Reserve Bank of India (RBI).
In cases where the property is acquired from remittances made from outside India while the person was an NRI / OCI, the funds can be freely remitted from India on transfer/sale of such property, provided that the acquisition was made following the foreign exchange regulations existing then. It is pertinent to note that in the sale of residential property, the repatriation of sale proceeds is restricted to not more than two such properties. Any repatriation for more properties would require approval from the RBI.

At the time of investment in an immovable property:
There will be no income tax implications at the time of acquisition if the consideration paid for acquiring the property is equal to or more than the stamp duty value of the property. However, if the stamp duty value is higher than the consideration, such difference between stamp duty and purchase consideration is higher than the following. The differential shall be taxable in the hands of the buyer.

  • 5% of the consideration
  • ₹50,000
The above tax implication shall not arise in case the property is received from a relative or on the occasion of marriage or under a will or inheritance or in contemplation of death of the payer or donor. The term 'relative' as per the tax laws includes spouse, brother, sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant of self or spouse, and spouse of the aforesaid persons.
Further, a person buying immovable property (other than agricultural land) from an Indian resident (resident as per the domestic tax laws of India) is required to withhold tax at source @ 1% of the sale consideration if it exceeds ₹5 million.

Lease rentals:

Under the domestic tax laws of India, any lease rent earned on a property situated in India is generally liable to tax under the head's income from house property. Accordingly, tax is required to be paid on the lease rentals.
As specified, certain deductions are allowed from the lease rental income, such as a standard deduction @ 30%, property taxes paid, and mortgage interest paid during the year. The net lease rental amount would be subject to tax as per applicable slab rates based on which individuals are liable to pay taxes in India.
Recently, a new personal tax regime has been introduced, which provides for lower tax rates; however, the aforementioned interest deduction shall not be available as per this regime. A taxpayer can calculate their tax liability under the old and new tax regimes and choose the more beneficial ones.
At the time of sale of immovable property: On the sale of immovable property, tax is required to be paid on capital gains in India. The rate of tax would depend on the period for which the property is held. Gain arising on a property owned for less than 24 months is treated as a short-term capital gain, which is taxable as per applicable slab rates in the seller's hands. Long-term capital gain is taxable @ 20%.
Also, one can optimize tax on long-term capital gains by re-investing the same, as per the provisions of the Income-tax Act. For example, long-term capital gain from the sale of a residential property can be re-invested in the purchase or construction of another residential property located in India, subject to certain conditions.
Lastly, in addition to income tax, implications under the goods and services tax and stamp duty laws should also be considered.
Real estate continues to attract investments from NRIs. As it's a long-term investment, necessary care and caution must be exercised, along with complying with various requirements under India's tax and regulatory regime.

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