Non-Resident Indians (NRIs) who are interested in buying a property in India need to equip themselves for taking the best property purchase decisions.

FEMA: What’s & How’s

The Foreign Exchange Management Act (FEMA) defines that an Indian citizen residing outside the nation can invest in Indian property, provided the property is not a plantation property, an agricultural land, or a farmhouse.

There is no restriction on the count of properties that an NRI can own in India. But, proposed property buyers require to make informed decisions on such acquisitions.

The most crucial consideration is that of whether the property purchase is for their own personal use or their family’s actual use, or as an investment for rental income and potential capital appreciation.

Property Payments: What to choose?

An NRI needs no specific clearances or permission to invest in Indian property. However, it is pertinent to note that:

• All monetary transactions need to be done in Indian currency and through normal banking channels using an NRI account. An NRI can use either their own funds or take home loans from banks or other financial institutions in India. RBI mandates that all property buyers, including NRIs, can avail of up to 80% of the overall property value via home loans from financial institutions.
• NRIs should use inward remittances via Non-Resident Ordinary (NRO) and Non-Resident External (NRE) accounts in India. They can issue post-dated cheques or also opt for Electronic Clearance Service (ECS) from their NRE account or NRO account or Foreign Currency Non-Resident (FCNR) account.

NRI Home Loans: Your guide to home sweet home

1. Understanding Payments:

Firstly, like other Indians, NRIs are eligible for taking home loans in India. As per current regulations, the loan value cannot be credited directly into an NRIs bank account, and it must be disbursed to either the sellers’ or the property developers’ account.

Repayment of these loans is usually done through the NRO account, NRE account and FCNR account or also from other financial accounts authorized by RBI.

• Getting loan sanctioned: Key factors

In terms of loan disbursements, an NRI needs to contribute at least 20% of the property value from its own funds. The remaining amount of value is sanctioned by the financial institution, subject to the NRIs Gross Monthly Income (GMI). For loan sanctioning, preference is always given to qualifications, work experience and the duration of stay abroad.

While the loan process and interests remain the same as for resident Indians, the documents that an NRI must submit are different from Indian residents. NRIs have to meet specific eligibility criteria and also issue a Power of Attorney (POA) document – an essential document required during NRI home loan processing.

Document Checklist:

The basic documents needed to make any sound property purchase decision involve:

• The property’s title deed
• Last tax receipts
• Approved project plan
• Encumbrance certificate
• Notice of commencement

Besides this, a valid Visa, Power of Attorney and Pan Card are also needed for the verification process.

Essential Recommendations

NRIs have all tax benefits that a local native do, except the TDS rate during the sale of a property. NRIs can claim a deduction of INR 1.5 lakh of the total loan’s principal amount under Section 80C of the I-T Act, 1961. Under Section 24, the interest on a house loan is deductible to the limit of INR 2 lakh per annum.

To receive these tax benefits, a minimum of two years of investment is recommended. It is because the Indian Income Tax rules state that if a property is sold within two years of purchase, the proceeds will be named as short-term capital gains, and are therefore added to an NRIs annual taxable income.

In case, a property is sold after two years of purchase and ownership, there is a choice to reduce long-term capital gains tax by investing the proceeds in another property purchase.

Every NRI must file Income Tax (IT returns) in India, and all NRIs buying property in India must to pay property tax along with the applicable stamp duty as well as registration charges for the property. 

Income earned by rent in India is also subject to income tax. Hence, NRIs should ideally get a PAN card before investing so that the associated financial procedures become easier.