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2/17/2020

Buying Property in India: 6 Questions for an NRI

Non-resident Indians (NRIs) have played a significant role in the Indian property market. They generally prefer purchasing properties in India for investment purposes or due to their emotional connection with their motherland and for having a place back here in India, once they retire. If you are an NRI looking to invest in a property in India, there are many questions that will haunt you when it comes to purchasing a property in India. Here are some questions and answers to guide NRIs before taking a plunge in real estate in India. 

Can an NRI purchase or own a property in India?

The short answer is yes. According to FEMA (Foreign Exchange Management Act) regulations, a non-resident Indian (NRI), or a person of Indian origin (PIO), can purchase both residential or commercial properties in India except agricultural land/plantation property/farmhouse. If an NRI is willing to invest in properties from the restricted category, they need to file a special request to the Reserve Bank of India for doing so. However, an NRI with a valid Indian passport needs no prior approval unless he/she is a citizen of some neighbouring countries like Pakistan, Bangladesh, Sri Lanka, Iran, Nepal, Bhutan, Afghanistan or China. 

How many properties can an NRI own?

There is no limitation on the number of properties (residential or commercial) that NRIs can own in India.

Can an NRI gift a property?

A non-resident can freely gift a property to a person residing in India, NRIs or OCCs, except for nationals of some neighbouring countries mentioned earlier. NRIs and OCCs can also receive a property as a gift. Gifts received from a close relative as defined under the Income Tax Act—mother, father, children, brother is exempt from tax. But if a gift of property is not from a close relative, it would be taxable in the hands of the receiver based on either the sale price or stamp duty value. 

How can an NRI make the transaction while buying a property?

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

  • Funds remitted to India through regular banking channels.

  • Funds held in NRE/ FCNR (B) / NRO account maintained in India.

  • No payment can be made either by traveller’s cheque or by foreign currency notes or by another mode

  • No payment can be made outside India.

Is the power of attorney required to purchase property in India?

If the NRI does not want to travel to India for the registration of property in his own name, then he can execute a power of attorney (POA) from abroad to a trusted acquaintance such as a close relative, friend or even colleague to complete the transaction on his behalf. The POA has to be signed by the principal (who is giving the power) in the presence of the consulate officer or notary abroad, and will have to be attested by them.

How is an NRI taxed for profit earned from investments in India?

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

Rental income

Under section 195 of the IT Act, NRIs will be liable to pay tax on rental income received from a property located in India. Taxable value of the rental income shall be computed after providing deductions for Municipal Taxes, standard deduction at the rate of 30%, interest paid on loan taken for acquisition or construction and pre-construction interest (allowed in 5 equal instalments).

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.

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