What NRIs Should Consider When Investing in Real Estate

Non-Resident Indians (NRIs) are known for exploring ways to invest their hard-earned money in India. Some prefer to diversify their investments into various types of properties, while others invest in properties like homes to live in post-retirement.

Regulations and Simplifications

To increase foreign capital flow into India, the Reserve Bank of India (RBI) has simplified certain regulations for investments by NRIs. The Foreign Exchange Management Act (FEMA) governs real estate transactions for NRIs.

Here are five essential rules NRIs should know before investing in Indian real estate.

Type of Property

NRIs can only invest in commercial or residential properties. They cannot acquire agricultural land (including farmhouses and plantations) unless inherited or gifted. Additionally, citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, or Bhutan cannot purchase any immovable property in India without prior approval from the RBI. However, they can lease properties for up to five years without prior approval.

Financial Transactions

All transactions related to property purchases must be conducted through banks as usual. Transactions cannot be made outside of India.

Mode of Transactions

Transactions can be carried out using NRI-maintained NRE, NRO, or FCNR(B) accounts. These transactions cannot be done through traveler’s cheques or foreign currency notes.

Taxes

NRIs must pay taxes on income earned from properties in India. This income could be from selling the property or rental income. This income is categorized as follows:

Long-term Capital Gains

Revenue from properties held for more than two years falls under this category and is taxed at 20%. For inherited properties, the holding period is calculated from the date of acquisition by the original owner, and the property's value is based on the purchase price paid by the previous owner. NRIs can claim tax exemptions under sections 54, 54F, and 54EC of the Income Tax Act.

Rental Income

The rental income earned by NRIs and its tax calculations follow the same procedures as for residents of India.

Home Loan Eligibility

NRIs can apply for home loans up to 80% of the property value in Indian Rupees, similar to residents of India. These loans can be repaid through NRE, NRO, or FCNR(B) accounts.

Additionally, the loan can be repaid from a close relative’s bank account in India as per Section 6 of the Companies Act, 1956.

Under-Construction Property

NRIs can invest in under-construction properties by giving power of attorney to a trusted associate. To safely invest in under-construction properties, it is advisable to prepare documents with the help of a lawyer to avoid fraud.

By considering these points, NRIs can make informed decisions and securely invest in Indian real estate.