What are the relevant laws both from regulatory and tax perspective that could be of aid prior to making investment in immovable property, surveys Ajay Rotti.
The real estate sector in India has come a long way from being unorganized to being fairly organized. The real estate sector typically comprises of four sub-sectors viz. housing, retail, hospitality and commercial. All the sub-sectors have embraced professional standards and transparency with open arms. The Indian real estate sector has witnessed high growth in recent times with the rise in demand for commercial as well as residential spaces. It is not only successfully attracting resident Indians, but Non-Resident Indians as well. While the markets see a healthy rise in the value invested, giving a good return, it is nonetheless very important for the NRI investor to get an understanding of the regulatory compliances and India tax implications relating to investing into immovable properties in India. The author, in this article has made a conscious attempt to highlight comprehensively the relevant laws in India both from regulatory and tax perspective, which could be of immense aid to the NRIs for decision making prior to making an investment in an immovable property in India.
Foreign exchange regulations
Any foreign investment in India is governed by the policies framed by the Central Bank of India i.e. Reserve Bank of India . RBI has set liberal policies for a NRI investor in relation to acquisition and transfer of immovable properties in India and repatriation of the sale proceeds thereof.
Persons who can invest in immovable properties and nature of properties
Both a NRI and a Person of Indian origin can acquire an immovable property in India. A NRI is defined to mean an individual resident outside India who is a citizen of India or is a person of Indian origin. PIO is an individual who is a citizen of any country (except Bangladesh, Pakistan, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan) and (i) who held an Indian Passport at any time previously or (ii) he or either of his parents or grandparents was a citizen of India.
Both NRIs and PIOs have been granted general permission by RBI for purchase of residential and commercial immovable properties in India without obtaining any specific permission from RBI. However, NRIs and PIOs have not been permitted to invest in agricultural property, plantation or a farm house.
There is no restriction as to the number of residential or commercial property an NRI can acquire
Modes for Acquisition of immovable property
General acquisition by payment
The payment for purchase of permitted property by an NRI/PIO can be made by way of remittance through:
- normal banking channels by way of inward remittance from any place outside India or
- through debit to Non-Resident Ordinary Rupee Account (NRO) or Non-Resident External Rupee Account (NRE) or Foreign currency Non-Resident Account (FCNR (B)).
It may be noted that payment in the form of traveller's cheques or foreign currency is not permitted.
Acquisition by way of gift
Both NRIs and PIOs are also allowed to acquire the residential and commercial properties by way of gift from a Resident Indian or an NRI or a PIO resident outside India.
Acquisition by way of inheritance
Both NRIs and PIOs can acquire immovable property by way of inheritance from:
- A person resident in India; or
- A person resident outside India.
It should be ensured that the person from whom the property is inherited should have acquired the same in accordance with the then exchange control regulations.
Acquisition by way of loan
Both, NRIs and PIOs are permitted to acquire immovable property in India by way of loan from Indian Authorized Dealers or Housing Finance Institutions in India subject to conditions. For acquiring loans, NRIs and PIOs would need to satisfy various conditions under regulatory laws.
Modes of Transfer of Immovable Property
Transfer by sale
NRIs can transfer the immovable property acquired by him either to a person resident in India or to another NRI / PIO.
PIOs can transfer the immovable property to a person resident in India.
Transfer by gift
An NRI or a PIO may gift residential or commercial property to a person resident in India, or an NRI or a PIO.
Repatriation of sale proceeds
RBI, over a period of time, has made it very easy for NRIs to transfer funds into and out of India. The following are the modes of repatriation:
Repatriation on NRE/FCNR account
In the event of sale of immovable residential and commercial property in India by a NRI / PIO, the Authorised Dealer may allow repatriation of the sale proceeds outside India subject to the following conditions:
The property was acquired in accordance with the provisions of the exchange control regulations prevailing at the time of acquisition;
Funds for acquisition of such property were transferred from overseas or were funds from the NRE or FCNR (B) accounts.
The amount repatriated cannot exceed the amount that was paid initially for acquisition of the property.
In the case of residential property, the repatriation of sale proceeds is restricted to only two properties. The balance amount, if any, can be credited only to NRO account and can be repatriated up to USD one million per financial year.
Repatriation on NRO account
If the immovable property is acquired by the NRI or PIO out of the funds in NRO accounts, then the entire sale proceeds (including the profits i.e. amount above and over the acquisition price) of the immovable property can be credited to the NRO account of the NRI / PIO;
NRIs/PIOs are allowed to repatriate an amount up to USD 1 million per financial year out of the balance in the NRO account, for all the bonafide purposes to the satisfaction of the Authorized Dealer bank and subject to tax compliance; and
Remittances exceeding US$ 1 million in any financial year requires prior permission of the RBI.
Sale proceeds of inherited property or property received by way of gift or inheritance
The sale proceeds of residential and commercial property received by way of gift by NRIs or PIOs should be credited to the NRO account only. Further, the NRI/PIO may remit up to US$ 1 million, per financial year; subject to the satisfaction of Authorized Dealer and payment of applicable taxes.
The sale proceeds of the immovable property inherited from a person resident in India can be repatriated up to an amount not exceeding US$ one million, per financial year. In this regard, the NRI or PIO would be required to comply with various other conditions which inter alia includes production of documentary evidence in support of acquisition / inheritance of assets, undertaking by the remitter and certificate by a Chartered Accountant, original deed of settlement and a tax clearance / No Objection Certificate from the Income-Tax Authority.
Other important aspects
Any person who had bought the residential / commercial property / agricultural land/ plantation property / farm house in India when he was a resident can continue to hold the immovable property without the approval of the Reserve Bank even after becoming an NRI/PIO. The sale proceeds on such transfer of such property may be credited to NRO account of the NRI /PIO.
NRI/PIO can rent out the residential or commercial property without the approval of the RBI. The rent received can be credited to NRO / NRE account or remitted abroad. The same can be repatriated and such repatriation would be monitored by the Authorized Dealers. In case the NRIs or PIOs do not hold any NRO account in India, the repatriation would be allowed on production of an appropriate certification by a Chartered Accountant.
Income-tax implications for NRIs/PIOs looking out for investment in properties in India
Certain tax compliances under Indian Income-tax Act, 1961 (IT Act') would need to be done while an NRI/PIO acquires an immovable property in India, holds such property in his name and generates income by letting it out and on transfer of such properties. It may be noted that the NRI or PIO would need to comply with the Indian tax laws in all the circumstances in view of the fact that the situs of the immovable property is in India.
Tax withholding obligations would arise if the immovable property is acquired by a NRI/PIO from a Resident Indian, if the consideration payable exceeds INR 5 million. In such cases, NRI or PIO is required to withhold tax at the rate of 1% on the value of the consideration and deposit it to the treasury of the Indian Government. As a prerequisite, the NRI or PIO must have a Permanent Account Number (PAN) issued by the Indian Income-tax authorities. If the NRI or PIO are acquiring the immovable property from a person other than resident Indians, then the above withholding obligations would not arise.
Tax implications with respect to property acquired by way of loan:
As per the Income-tax laws, where the property is self-occupied, an NRI or PIO can claim deduction of INR 150000 in respect of interest paid from the Indian Income.
In cases where the property is let out, there is no cap on maximum amount of interest that can be claimed as deduction. Further, where a property is let out, the NRI and PIO are eligible for a standard deduction of 30% from the gross value of rent received.
In addition to the above tax benefits, the NRI and PIO shall also be eligible to claim deduction up to maximum of INR 150000 in respect of principal repayments to the lender.
Tax implications on transfer of immovable property
Immovable property in India constitutes a Capital Asset for the purpose of IT Act. Depending upon the period of holding of the property, it can be either long term capital asset (LTCA) or short term capital asset (STCA). The same would qualify as a LTCA if held for a period of more than 36 months, else it would be regarded as a STCA. The properties qualifying as LTCA if sold would be subject to Long term capital gains (LTCG) at the rate of 20%. Otherwise, they would be taxed as Short term capital gains (STCG) as per the individual slab rates. Further, a non-resident under the IT Act is eligible to claim benefits, if any, for capital gains under the Double Taxation Avoidance Agreements entered into between India and his country of tax residence.
The IT Act also contains certain beneficial provisions which minimizes the tax liability provided the net sale proceeds arising from the sale of property are invested in other immovable properties or certain specified bonds.
A further point that needs to be considered is that the NRI/PIO will have to pay stamp duty as well as registration fees at the time of purchase of the property in India which varies between various states.
Tax implications on letting out the house property
One could also consider letting out the house property in India. In such a case, the rent received from the tenants would be taxable in India as Income from House Property' and the tenants would be required to withhold taxes at the time of remitting the rent to the NRI/PIO. The Indian tax laws allow one to reduce the amount of rent received with a standard deduction of 30% and interest paid on loan taken by the NRI/PIO for acquisition or construction of the house.
Wealth-tax on immovable property
With effect from 1st April, 2015 India has abolished levy of any wealth-tax.
Investing in immovable properties in India is a good investment avenue for the NRIs/PIOs but it is extremely important to exercise caution and discretion while going ahead with the purchase. The credibility of the developer/builder/seller, the future prospects of the projects, risk of title or litigation, the completeness of the relevant approvals and documentations are some of the critical aspects that one should look at. It is always safe to go through reliable sources or seek professional advice before investing in the properties. If done wisely and with a little caution, the investors could reap benefits on appreciation of the value of their investment by sale or let out.
Ajay Rotti is a partner with Dhruva Advisors LLP in its Bengaluru practice.
Trend in NRI Remittances
Year Amount (in $ million)
FY 2002 15,398
FY 2003 16,387
FY 2004 21,608
FY 2005 20,525
FY 2006 24,493
FY 2007 29,825
FY 2008 41,706
FY 2009 44,567
FY 2010 52,055
FY 2011 53,368
FY 2012 63,500
FY 2013 70,300
FY 2014 72,000
Note: Remittances grew 24% during the last quarter of the 2011-12 as compared with 8.1% in the same period in fiscal 2010-11.
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