Important rules for NRIs investing in Indian real estate

A non-resident Indian who wishes to buy a property in India, should be aware of the regulations that govern the acquisition and sale of property, as well as income earned from the property.

Important FEMA rules that NRIs must keep in mind

• In order to attract more foreign investment, the Reserve Bank of India has made the rules simple for NRI investments. Real estate transactions fall under the purview of the Foreign Exchange Management Act (FEMA).
• “An NRI or person of Indian origin (PIO), as defined in FEMA, can acquire by way of purchase, any immovable property in India, other than agricultural land/plantation property/farm house. This is under a general permission that has been given by the government of India. However, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, shall acquire or transfer immovable property in India, other than lease, not exceeding five years, without prior permission of the Reserve Bank,”

Types of properties where NRIs can invest

An NRI is allowed to invest in both residential and commercial properties in India. However, any agricultural land, farm house and plantation property can be owned, only if it is inherited or gifted to the NRI.

Financial transactions by NRIs

When it comes to property transactions in India, NRIs/ PIO can make payments out of:

• Funds remitted to India through normal banking channel.
• Funds held in NRE/ FCNR (B) / NRO account maintained in India.
• No payment can be made either by traveler’s cheque or by foreign currency notes.
• No payment can be made outside India.

Loan eligibility for NRIs

“Like normal Indian citizens, NRIs/PIOs too can avail of home loans in Indian rupees for their property purchases, up to 80 per cent of the property value, depending upon individual eligibility. Such a loan can be repaid:

• By way of inward remittance through normal banking channels.
• By debit to his NRE / FCNR (B) / NRO account.
• Out of rental income from such property.
• By the borrower’s close relatives, as defined in Section 6 of the Companies Act, 1956, through their account in India, by crediting the borrower’s loan account.”

How NRIs are taxed, for profit earned from real estate investments

NRIs can earn returns from their investments in real estate, in the form of rental income and short or long-term gain.

Rental income

The rental income earned from a property asset in India, falls under the income accrued in India and is taxable, irrespective of residential status.

Short-term capital gains

Short-term capital gains apply on the profit earned through the sale of a property, within two years of its purchase. The capital gains for such property are calculated as the difference between the sale proceeds and the cost of acquisition. It is taxed as per the applicable slab rate for the NRI.

Long-term capital gains

• Long-term capital gains (applicable when the property is held for more than two years) are taxed at 20 per cent. However, unlike short-term capital gains, exemption can be claimed under sections 54, 54 F and 54 EC.
• If an NRI opts for an under-construction property, they may have to give a power of attorney to a trusted associate, for completing the deal. Hiring a lawyer to prepare the document, is also crucial, to ensure that there is no forgery and the investment is secure.

Can a non-resident repatriate the sale proceeds of immovable property in India?

Answer:

a) A person who has acquired the property U/s 6(5) of FEMA or his successor cannot repatriate the sale proceeds of such property without RBI approval.

b) Repatriation up to USD 1 million per financial year is allowed, along with other assets under (Foreign Exchange Management (Remittance of Assets) Regulations, 2016) for NRIs/ PIOs and a foreign citizen (except Nepal/ Bhutan/ PIO) who has

1. inherited from a person referred to in section 6(5) of FEMA, or
2. retired from employment in India or(c) is a non-resident widow/ widower and has inherited assets from her/ his deceased spouse who was an Indian national resident in India.

c) NRIs/ PIOs can remit the sale proceeds of immovable property (other than agricultural land/ farm house/ plantation property) in India subject to the following conditions:

1. The immovable property was acquired in accordance with the provisions of the foreign exchange law in force at the time of acquisition or the provisions of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations 2018;
2. The amount for acquisition of the property was paid in foreign exchange received through banking channels or out of the funds held in foreign currency non-resident account or out of the funds held in non-resident external account;
3. In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.

Section 6(5) in The Foreign Exchange Management Act, 1999

A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.

What is the meaning of transfer?

Answer: As per section 2(ze) of FEMA transfer means, sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.

Sale of Immovable property by NRI

• An NRI can only sell residential or commercial property in India to a person residing in India or to an NRI or a PIO (Person of Indian Origin).
• Under general permission, an NRI can sell his agricultural land/plantation property/farm house in India only to a person who is a resident of India and is an Indian citizen.
• An NRI can also transfer his/her residential or commercial property to an authorized dealer or housing finance institution in India through mortgage.
• An NRI should not transfer by way of mortgage their residential and commercial property in India to a party abroad. For this purpose prior approval of the Reserve Bank of India (RBI) is required.

TDS Deductible

When an NRI sells property, the buyer is liable to deduct TDS at 20%. In case the property has been sold before 2 years (reduced from the date of purchase) a TDS of 30% shall be applicable.

How to save tax on capital gains?

NRIs are allowed to claim exemptions under section 54 and Section 54EC on long term capital gains from sale of house property in India.

Exemption under Section 54

• It is available when there is a long term capital gain on sale of a house property of the NRI. The house property may be self-occupied or let out. Please note – you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains.
• However, your exemption shall be limited to the total capital gain on sale. Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale.
• In the Budget for 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Also starting assessment year 2015-16 (or financial year 2014-15) it is mandatory that this new house property must be situated in India. The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. (Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase).
• If you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it.

Exemption under section 54F

It is available when there is a long term capital gain on the sale of any capital asset other than a residential house property. To claim this exemption, the NRI has to purchase one house property, within one year before the date of transfer or 2 years after the date of transfer or construct one house property within 3 years after the date of transfer of the capital asset. This new house property must be situated in India and should not be sold within 3 years of its purchase or construction.

Also, the NRI should not own more than one house property (besides the new house) and nor should the NRI purchase within a period of 2 years or construct within a period of 3 years any other residential house. Here the entire sale receipts are required to be invested. If the entire sale receipts are invested then the capital gains are fully exempt otherwise the exemption is allowed proportionately.

Exemption is also available under Section 54 EC

• If you can save the tax on your long-term capital gains by investing them in certain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 5 years and must not be sold before the lapse of 3 years from the date of sale of the house property. Note that you cannot claim this investment under any other deduction. You are allowed a period of 6 months to invest in these bonds – though to be able to claim this exemption, you will have to invest before the return filing date. The Budget for 2014 has specified that you are allowed to invest a maximum of Rs 50 lakhs in a financial year in these bonds.
• The NRI must make these investments and show relevant proofs to the Buyer – to make sure TDS is not deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.