NRI Real Estate Investment in India: Don’t Make a Move Until You Read This!

1. Who Qualifies as an NRI?

According to the Indian government, an NRI or Non-Resident Indian is an Indian citizen with a valid Indian passport, living outside India for more than 182 days. A person of any nationality will be considered an NRI as long as they retain their Indian citizenship, if they are a registered OCI (Overseas Citizen of India) or PIO (Person of Indian Origin).

2. Types of Property You Can Buy

The guidelines devised by RBI specify that NRIs can make a purchase of commercial and residential properties in India but with certain restrictions on the type of properties they can own.

NRI real estate investments in India do not have any restrictions on the purchase of multiple residential properties. They can also purchase residential properties for their personal use.

NRIs can also purchase any kind of commercial property including shops, office spaces, or any other type of commercial real estate as investment.

However, there are prohibitions in place for the purchase of agricultural land, farmhouses, and plantations. RBI guidelines state that the purchase of these types of properties are reserved only for Indian citizens. However, some exceptions can be made in case of inheritance.

3. Legal Framework Governing NRI Investments in India

The Foreign Exchange Management Act 1999 (FEMA) replaced the earlier FERA, 1973, and regulates foreign exchange transactions in India. Current and capital transactions, foreign investments and remittances, compliance with Indian economic policies are all governed by FEMA.

The promotion of external trade, maintaining forex market order, and managing India’s foreign exchange reserves are objectives outlined as part of FEMA. It also facilitates the seamless inflow and outflow of foreign exchange, simplifying the process of foreign transactions.

Focused on liberalization and modernization that align with India’s open economy goals, FEMA aims to focus on civil penalties instead of criminal liabilities. It is administered by the RBI and the Directorate of Enforcement.

4. Funding Your Investment

The RBI has clearly specified guidelines for how NRIs finance the purchase of their properties in India. Whether it is via NRE/NRO accounts, or home loans, there are certain conditions and differences that are applicable for NRI real estate investment in India.

Funds via NRE/NRO Accounts: When purchasing a property as an NRI, the funds must be transferred via an NRE (Non-Resident External) or NRE (Non-Resident Ordinary). Both are special bank accounts that can be opened and managed by NRIs to handle their savings, income, and investments.

• NRE Account: Mainly used to deposit earnings from abroad, NRE Accounts are tax-free in India. NRIs can also transfer this money back to an account in their country of residence including both the principal amount and interest.
• NRO Account: Income earned in India via investments such as rent, dividends, pensions and any other sources can be saved in an NRO account. Unlike an NRE Account, the principal amount is not repatriable – meaning it cannot be transferred to your country of residence. Additionally, the interest your savings earn from an NRO Account is taxable in India.

Home Loans: Besides NRE and NRO Accounts, home loans are another means via which NRIs can fund their property purchases. An NRI can apply for a home loan from Indian banks, and these loans can be taken against income earned abroad, or in India. However, there are some restrictions placed on home loans for NRIs. The tenure of these loans can be limited to 15-20 years only depending on the policies of the bank.

Repayment of home loans taken by an NRI must be done in Indian Rupees, and you can make these payments through your NRE/NRO Accounts.

5. Taxation and Compliance

A crucial aspect of NRI investment in India and in general is taxation, and understanding the tax implications can help you avoid any legal issues by making better plans for investments and income. There are a few key tax considerations for NRIs including:

Income Tax on Rental Income: Any rental income accrued from an NRI real estate investment in India is taxable under Indian tax laws. The applicable tax slab will be applied to your total income although you can also claim deductions for any expenses such as maintenance, repair, and property taxes. This can help lower your taxable income.

Capital Gains Tax: You are liable to pay capital gains tax upon selling any property in India. The amount of time for which you held the property determines how much tax you will be liable to pay.

Short-Term Capital Gains (STCG): Upon selling a property within just two years of purchase, the profit is taxed at 30% since it is considered a short-term profit.

Long-Term Capital Gains (LTCG): You are liable to pay 20% tax with indexation benefits if you sell a property two years after purchase since it is considered a long-term profit.

Repatriation of Funds: The repatriation of the proceeds from the sale of your property can be conducted by your NRE/NRO account subject to certain terms and conditions. Taxes will be payable on the funds, and repatriation is only allowed up to a limit of USD 1 million per year.

6. Registration and Stamp Duty

The registration of a purchased property with the local authorities is mandatory in India. The local sub-registrar is required to register the property transaction in order to make it legally valid. A stamp duty is levied upon the property purchases in India and it varies from state to state. The stamp duty charges may vary anywhere from 4-8% depending on the location.

For an NRI, they can choose to either be personally present for the registration process or deputize a person they trust with PoA (Power of Attorney) in order to act on their behalf. It is not necessary for the Power of Attorney to be a family member. Even a trusted friend or relative can be appointed as the Power of Attorney, however it should be registered to be legally valid.

7. Power of Attorney (PoA)

On account of residing in another country, NRIs often face challenges with being present in India for any property transactions they intend to make. Power of Attorney is given to someone to handle their real estate affairs, and this grants the authorization to act on their behalf which can include signing documents, registration, and even the management of rental agreements.
There are two types of Power of Attorney commonly used for property transactions:

Special Power of Attorney (SPA): This type of Power of Attorney is given for a specific task such as buying or selling a property/properties.

General Power of Attorney (GPA): A General Power of Attorney gives broader powers, allowing the holder to undertake multiple transactions, like managing the property, paying taxes, or handling rental agreements.

8. Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts, also abbreviated as REITs, are an excellent alternative for NRIs who do not wish to directly own a physical property. Companies that exclusively own, operate, and/or finance real estate that generates income are known popularly as REITs. Investing in a REIT enables NRIs to own shares in a commercial property, eliminating the complexities associated with direct ownership.

REITs allow for lower entry costs, diversification, and the prospect of higher returns via rental income. This kind of investment must be thoroughly researched beforehand in order to avoid any fraud, losses, or underperforming REIT.

9. Risks and Considerations

Much like the profits and lucrative returns, there are a number of risks associated with real estate investments. Owing to not being in proximity to their real estate investments in India, NRIs are presented with some unique challenges and risks that they must take into consideration. These risks and challenges may include things such as:

Legal Risks: Issues like property disputes, unclear titles, or fraudulent dealings are possible. Ensuring that the property has a clear legal title and all necessary approvals is crucial.

Market Volatility: The real estate market in India can fluctuate, with property values sometimes dropping due to factors like economic downturns or oversupply in certain areas.

Currency Risks: Exchange rate fluctuations can affect the returns on NRI investments in India since they earn in foreign currency. This can be a good or bad thing depending on positive or negative fluctuation.

NRI real estate investments in India can be a lucrative prospect however it is imperative to have an understanding of the RBI guidelines, and legal framework devised by the Indian government.

You can make a successful and profitable investment if you follow the guidelines on property types, funding methods, registration procedures, and tax implications. Employing the services of a professional expert to help guide you is also a good idea. A legal advisor, real estate consultant, and chartered accountant would be able to help you navigate any part of the investment process that you are unfamiliar with. They can also help you avoid any potential pitfalls.