An NRI, who wishes to purchase a property using a home loan, in India, should be aware of the taxation and foreign exchange regulations prevalent in India.
Look at the do’s and don’ts for NRIs who want to avail of home loans in India.
The Indian real estate market offers a profitable investment opportunity for non-resident Indians (NRIs). Like resident Indians, NRIs are also permitted to buy properties in India, with the aid of home loans. However, the home loan rules are not precisely the same for NRIs and resident Indians. Hence, it is essential to know the crucial differences.
1. Who is an NRI, as per the Income Tax Act and the FEMA?
An Indian, who has not resided in the nation for 183 days or more and is living in another country, is defined as an NRI. While, In the Budget for 2020-21, this time period has been proposed to be increased to 245 days. Experts identify that the Foreign Exchange Management Act (FEMA) will determine whether you are eligible to invest as an NRI or an ordinary citizen, whereas, the Income Tax Act defines the tax obligation related to such investment.
2. What is the eligibility criteria for an NRI home loan applicants?
An NRI home loan candidate should fulfil the following criteria:
- A minimum of two years of work experience in the nation where he or she is residing, in that period of applying for the loan.
- The maximum loan tenure granted, is approximately 20 to 30 years.
- The utmost age allowed for servicing the home loan is generally up to 60 years.
- The loan-to-value (LTV) ratio will mostly depend on the applicant’s age as well as income.
3. Home loan repayment norms for NRIs
An NRI can transfer money from a foreign countries bank account through regular banking channels, issue an Electronic Clearance Service (ECS) or post-dated cheques, or cheques from a local relative’s bank account, to repay the loan.
4. Power of Attorney (PoA) requirement for NRIs
Lenders need a Power of Attorney (PoA) while extending home loans to NRIs because they live overseas and the lender requires someone in India to deal with.
5. Taxation laws regarding the home loan
The primary difference between an NRI and an Indian resident buyer is:
- NRIs need to plan for taxation in India and their nation of dwelling.
- NRIs have to manage foreign currency price variations, as their house investment will be in Indian rupees (INR) and their income will be in an international currency.
- NRIs have to stay updated on tax, finance and foreign investment policies (FEMA) related to property purchase.
- They require to have sufficient means to purchase their home, based on the loan terms extended to them.
6. Cost of ownership for Non-Resident Indians
It is the price to be paid to the developer or seller in Indian rupees, plus foreign exchange losses or gains (forex losses or gains) during the purchase of the assets, plus statutory dues to be paid in India as well as abroad, plus the total cost of capital (bank loan interest).
In case the Indian currency strengthens over the US dollar, the cost of ownership will rise each year, for projects under construction. Depending upon an individual’s requirement, availability of capital and loan terms, it may be best to purchase a ready house, in order that the cost of ownership is locked down in Indian rupees.
7. Should an NRI avail of home loans in India or in a nation of residence?
It may also be possible for NRIs to obtain a home loan from a bank that is located in their country of residence, which also has a branch in India. This option should be widely explored. Usually, as the cost of debt usually is cheaper in most countries outside India, foreign banks, through the corresponding relationships and branches in India, are able to grant loans at attractive rates, without worrying regarding forex. NRIs buying a property in India with a loan will be exposed to currency fluctuation risks. They should, therefore, explore the options to hedge the currency fluctuation risk, to avoid escalation in the cost of the loan.
Read More: List of documents required for a home loan