NRI Money: Real Estate Investment in India
Thinking about buying property in India? This ready reckoner walks you through the fundamentals of real estate transactions for Non Resident Indians (NRIs) and PIOs (Persons of Indian Origin).
Real estate investment or investment in immovable properties is one of the most sought-after investment options available for NRIs. A number of NRIs and foreign funds have invested in real estate in India, either directly in commercial or residential properties or as a foreign direct investment (FDI) in real estate development projects. If you’re thinking about investing in real estate in India, this primer will help you understand the basics of what you need to know before making crucial decisions.
But first, are you an NRI? Or a PIO? Regulations related to the acquisition and transfer for immovable property are different for each category. For the purpose of this article, an NRI means a citizen of India who resides outside India. A PIO means an individual (not being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan) who at any time held an Indian passport, or who or either of whose parents/ grandparents/ great-grandparents was a citizen of India, or who is a spouse of a citizen of India or a PIO.
Purchase of Immovable Property
The Reserve Bank of India (RBI) has given general permission for NRIs and PIOs to invest in immovable property in India other than agricultural land/plantation property or a farm house. As a result, prior approval from RBI for acquiring immovable property in India is not required and an NRI or PIO is not required to file any documents with RBI.
For a PIO, there are two other avenues open to acquire immovable property in India:
• By way of gift from a resident, NRI, or PIO. This pertains to immovable property other than agricultural land, plantation property, or farm house).
• As inheritance from a person resident in or outside India who had originally acquired such property as per the provisions of the Foreign Exchange Management Act (FEMA). This includes agricultural land, plantation property, or farm house.
The investment can be made both on a repatriable or a nonrepatriable basis. Further, there are no restrictions on the number of residential or commercial properties that can be purchased.
Transfer of Immovable Property
There are several rules applicable to NRIs/PIOs that govern the transfer (sale, gift, inheritance, or any other way of transfer) of immovable property in India.
An NRI is allowed to transfer any property (residential, commercial, agricultural, plantation, farm house, etc.) to a person resident in India.
However, an NRI may transfer only immovable property other than agricultural land, plantation property, or farm house to another NRI or PIO.
A PIO can sell any immovable property in India other than agricultural land, plantation property, or farm house to an Indian resident. He can gift a residential or commercial property in India to an Indian resident, NRI, or PIO. However, he can give a gift or sell agricultural land, plantation property, or farm house in India only to an Indian resident who is also a citizen of India.
Value of sales consideration if lower than Stamp Duty Value
If an immovable property is sold at a price lower than the value accessible for stamp duty (a.k.a. circle rates), the property is assumed to be sold at the stamp duty value and capital gain would be calculated accordingly.
However, if the property is sold on or after April 1, 2018, the sale value may be taken as sale consideration provided the difference between the stamp duty value and the sale value is not more than 5% of the amount received.
To clarify, here’s an example:
Mr. Prakash, a PIO from Chicago, sold a residential property in Pune for Rs.50,000,000 in March 2018, which was originally purchased for 45,000,000 in December 2016. The Stamp Duty value of the Property in March 2018 was Rs. 51,750,000.
As the stamp duty value of the property is higher than the sale price, the stamp duty value is considered as the sale consideration for F.Y. 2017-18. And, as the property was sold within 24 months, the sale would result into short term capital gain of Rs. 6,750,000 (51,750,000 – 45,000,000).
Had he sold the property in April 2018, as the difference between sale price and stamp duty value is less than 5% of the amount received, the sale price would be considered as sale consideration for F.Y. 2018-19 and the short term capital gain would be Rs. 5,000,000 (50,000,000 – 45,000,000).
Understanding the provisions by the type of Property
The provisions related to the acquisition and transfer of property can be easily understood by the type of property as follows:
Residential or Commercial Property
• NRI/PIO can buy a residential or commercial property in India from a resident or NRI.
• NRI/PIO can receive a gift or inheritance of a residential or commercial property in India from a resident, NRI, or PIO.
• NRI can sell or give a gift of a residential or commercial property to a resident, NRI, or PIO.
• PIO can sell the residential or commercial property only to a resident.
• PIO can give the residential or commercial property as a gift or inheritance to a resident, NRI, or PIO.
Agricultural land, plantation property, or farm house
• NRI or PIO cannot buy or receive a gift of “Agricultural” property.
• NRI or PIO can inherit an “Agricultural” property.
• NRI can sell or give a gift of an “Agricultural” property to an Indian resident.
• PIO can sell or give a gift of an “Agricultural” property to an Indian resident who is a citizen of India.
Complying with RBI provisions
To determine whether you are allowed to undertake any transaction, please answer the following 4 questions:
1. Who are you? - Resident, NRI, or PIO.
2. Who is the counter party? - Resident, NRI, or PIO.
3. What is the nature of the property?- Agricultural or other than Agricultural.
4. What is the nature of the transfer? - Purchase/ Sale, Gift, Inheritance.
Once you answer these four questions, it will become very clear whether the transfer is allowed under the general permissions of RBI or not.
Mode of Payment
The payment for the acquisition of immovable property can be made out of funds received in India through normal banking channels by way of inward remittance from abroad or out of funds in NRE (NonResident External), FCNR (Foreign Currency NonResident), or NRO (NonResident Ordinary rupee) accounts. The payments cannot be made by travelers check, foreign currency notes, or by any other modes not specifically mentioned for acquiring immovable property.
repair, renovation, and/or improvement
Mortgage or Housing Loan
An NRI or PIO is allowed to obtain a loan for acquisition, repair, renovation, and/or improvement of a residential property from a bank or a housing finance institution. The loan amount cannot be credited to the NRE or FCNR account or remitted abroad.
The loan should be fully secured by equitable mortgage on the property, and the loan amount, margin requirement, and period of repayment should be at par with those for Indian residents, and the rate of interest should comply with the RBI norms.
Repayment of loan can be made out of inward remittance, NRE, FCNR, NRO accounts, or out of rental income.
Repatriation related to Immovable Properties
If the property other than agricultural land, farm house, or plantation property was purchased out of inward remittance or from a debit to the NRE or FCNR account, the amount paid for the acquisition of the property can be repatriated and credited to an NRE account at the time of selling the property. If the property is a residential property, the repatriation of the sale proceeds is restricted to maximum of two such properties. However, there is no such restriction for repatriation on the number of commercial properties.
Any profit on the sale of these properties can only be credited to an NRO account and can be remitted abroad up to the overall ceiling of US $ 1 million per financial year. The sale consideration from any other properties can only be credited to the NRO account and can be remitted abroad under US $ 1 million facility.
Where the funds have been raised by way of loans from authorized dealers or housing finance institutions, repatriation is allowed to the extent of such loans being repaid in foreign exchange.
Refund of purchase consideration
An NRI or PIO is allowed to credit the refund of the application money or purchase consideration on account of cancellation of booking or nonallotment of a flat or plot for the purchase of residential or commercial property to an NRE/FCNR account, together with interest, (net of income tax), provided the original payment was made out of NRE/FCNR (B) or an inward remittance and the bank is satisfied about the bona fides of the transaction.
Jigar Patel, CFA (USA), MBA-Finance (USA), CA (India),
specializes in NRI investments, taxation, and wealth
management to serve clients from across the globe. He is an
author of the book NRI Investments and Taxation: A
Small Guide to Big Gains, and his NRI advisory has received
the Customer Centric Business of the Year award in
India by Intuit and Bloomberg TV India. He can be reached at
Disclaimer: This information has been prepared solely for general information purposes and is not intended to constitute a recommendation, offer, or advice.
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