Non-Resident Indians who are interested in buying a home in India need to equip themselves for making the best-possible property purchase decisions. This includes understanding the regulations and processes related to Indian real estate purchase by NRIs.
Here’s a quick look according to Shajai Jacob, CEO - GCC at Anarock Property Consultants in a study published in January 2019.
Understand FEMA Regulations
The Foreign Exchange Management Act (FEMA) stipulates that an Indian citizen residing outside the country can invest in Indian real estate, provided that the property in question is not agricultural land, plantation property or a farmhouse.
There is no restriction on the number of properties that an NRI can own in India. However, prospective buyers obviously need to make informed decisions on such acquisitions. The most important consideration is that of whether the property purchase is for their own or their family’s actual use, or as an investment for rental income and potential capital appreciation.
Understand NRI Property Purchase Payments
NRI needs no special clearances or permission to invest in Indian real estate. However, it is pertinent to note that:
- All monetary transactions must be done in Indian currency and through normal banking channels via an NRI account. NRIs can use either their own funds or avail of home loans from banks or other financial institutions in India. RBI mandates that all buyers, including NRIs, can avail of a maximum 80% of the overall property value via loans from financial institutions.
- NRIs must use inward remittances via Non-Resident Ordinary (NRO)/Non-Resident External (NRE) accounts in India. They can also issue post-dated cheques or opt for Electronic Clearance Service (ECS) from their NRO, NRE or Foreign Currency Non-Resident (FCNR) account.
NRI Home Loans – Sanctioning and Disbursement
Like other Indians, NRIs are eligible for housing loans in India. As per current regulations, the loan amount cannot be credited directly into an NRIs bank account and must be disbursed to either the sellers’ or the developers’ account.
Repayment of these loans is generally done through the NRO, NRE and FCNR accounts or from other financial accounts permitted by RBI.
In terms of loan disbursements, NRIs need to contribute at least 20% of the property value from their own sources. The remaining amount is sanctioned funded by the financial institution, subject to the NRI’s Gross Monthly Income (GMI). For loan sanctioning, preference is given to qualifications, work experience and duration of stay overseas.
While the loan process and benefits remain the same as for resident Indians, the documents that an NRI must submit differ from Indian residents. NRIs must meet certain eligibility criteria and also issue a Power of Attorney (PoA) – a key document required during NRI home loan processing.
Understand the Documentation
The days when NRIs had to visit India or rely on relatives for the initial property search, as well as interviews with property sellers, are, of course, over. Thanks to advancements in technology, NRIs can conduct the initial search online, including via 3D walk-throughs, and make closer inquiries via video conferencing.
The main documents required to make any sound property purchase decision include:
- The property’s title deed
- Last tax receipts
- Approved project plan
- Notice of commencement, and
- Encumbrance certificate
In addition to this, a valid Visa, Power of Attorney and Pan card are also required for the verification process.
Understand Income Tax Benefits and Compliances
NRIs enjoy all tax benefits that local residents do, except the TDS rate during the property sale. An NRI can claim a deduction of INR 1.5 lakh of the loan’s principal amount under Section 80C of the Income Tax Act, 1961. Under Section 24, the interest on a home loan is deductible to the extent of INR 2 lakh per annum.
To get these tax benefits, a minimum of two years’ investment is recommended. This is because the Indian Income Tax rules state that if a property is sold within two years of purchase, the proceeds will be treated as short-term capital gains, and are therefore added to an NRI’s annual taxable income.
If a property is sold after two years of purchase and ownership, there is an option to reduce long-term capital gains tax by investing the proceeds in another property purchase.
NRIs must file IT returns in India, and all NRIs buying property in India have to pay property tax along with the applicable stamp duty and registration charges for the property. It is therefore advisable that they assess all costs before taking the plunge.
Income earned via rent in India is also subject to income tax. Thus, NRIs should ideally obtain a PAN card before investing so that the associated financial procedures become easier.
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Disclaimer: The contents of this article first appeared in a study done by Anarock Consultants that was published in January 2019.
Connected to India articles on NRI personal finance are intended to help Non-Resident Indians (NRIs) understand the increasingly complex world of financial investments. It is not a solicitation, recommendation, endorsement, of any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.