Understand FEMA Regulations
- The Foreign Exchange Management Act (FEMA) specifies that an Indian citizen dwelling outside the nation can invest in Indian real estate, stated that the property in question is not plantation property, agricultural land or a farmhouse.
- In addition, there is no constraint on the number of properties that NRIs can own in India. However, NRIs need to make informed decisions on such acquisitions. The most significant concern is that of whether the property purchase is for their own personal use or their family’s actual use, or as an investment option for rental income and potential capital appreciation.
Understand Returns on Investment
- Before the generalised market slowdown in 2015, the Returns on Investment (ROI) on residential property in India was remarkably rewarding for NRIs. Though post the slowdown which was exacerbated by RERA, and GST, there were no convincing signs of market recovery until recently.
- As a result, there was a standard shift in wealthy NRI investors’ focus – particularly, towards commercial properties, which promised far more satisfying yields. Then, 2018 saw the inception of a fairly decent recovery in the residential sector, thanks mainly to the improved transparency as well as efficiency in the real estate market.
- Historically, NRIs preferred to invest in real estate by leading developers as these offered excellent rental income and capital appreciation. Nowadays, NRI investors are more focused on affordable housing for rental income and also better long-term appreciation. However, NRI end-users with large purchasing power are still taking luxury housing sincerely as long as the price is right.
Understand NRI Property Payments
NRI needs no specific clearances or permission to invest in real estate in India. However, it is important to note that:
- All kind of monetary transactions must be done in Indian currency and through the mode of normal banking channels by an NRI account. Moreover, NRIs can use either their own funds or avail of home loans from various banks or other financial institutions in India. RBI mandates that all property buyers, including NRIs, can avail a maximum 80% of the overall property value through loans from institutions.
- NRIs must use inward remittances through NRO account or NRE account in India. They can also issue post-dated cheques or can opt for Electronic Clearance Service (ECS) from their NRE, NRO or FCNR (Foreign Currency Non-Resident) account.
NRI Home Loans in India -Sanctioning and Disbursement
- Like other Indians, NRIs are also eligible for housing loans in India. As per current laws, the loan amount cannot be credited immediately into an NRIs bank account and must be disbursed to either the seller’s or the developer’s account. Repayment of these loans is generally made through the NRO accounts, NRE accounts and FCNR accounts or from other financial bank accounts permitted by RBI. Regarding loan disbursements, NRIs need to contribute at least 20% of the property value from their own sources. The leftover amount is sanctioned funded by the financial institution, subjected to the NRIs Gross Monthly Income (GMI).
- For home loan sanctioning, preference is given to qualifications, work experience and the duration of stay overseas. Moreover, the loan process and benefits remain same as for the Indian residents, the documents that an NRI must submit would differ from Indian residents. NRIs must meet specific eligibility criteria and also issue a Power of Attorney (PoA) – a key document needed during NRI home loan processing.
Understand the Documentation
The times when NRIs had to visit India or rely on relatives for the primary property search, and interviews with property sellers, are, of course, over. Due to advancements in technology, NRIs can conduct the initial search online, including via 3D walk-throughs, and make closer inquiries through video conferencing. The primary documents needed to make any sound property purchase decision include:
- The property’s title deed
- Last tax receipts
- Approved project plan
- Encumbrance certificate, and
- Notice of commencement
- Additionally, a valid Visa, Power of Attorney and PAN Card are also required for the verification process.
Understand Income Tax Benefits and Compliances
- NRIs can enjoy all tax benefits that local Indian residents do, except the Tax Deducted at Source (TDS) rate during the property sale. Moreover, an NRI can claim a deduction of INR 1.5 lakh of the loan’s principal amount under the Section 80C of the Income Tax Act, 1961. Besides, under Section 24, the interest on a home loan is deductible to the limit of INR 2 lakh per annum.
- To avail these tax benefits, a least of two years investment is recommended. And, this is because the Indian Income Tax rules dictate that if a property is sold within the two years of purchase, the yields will be treated as short-term capital gains, and are added to an NRIs annual taxable income. If a property is sold after 2 years of purchase and ownership, there is an option to lower long-term capital gains tax by investing the returns in another property purchase.
- NRIs must file Income Tax returns in India, and all NRIs buying property in India have to pay property tax along with the appropriate stamp duty and registration charges for the property. It is hence advisable that they assess all costs before taking the plunge. Income earned through the rent in India is also subject to income tax. Hence, NRIs should obtain a PAN card prior to investing so that the related financial procedures become simpler.
Using Property Consultants
- Without professional guidance, it is challenging for NRI investors to assess the emerging trends and isolate the best investment options in India. Real estate consultants can help NRIs not only regarding shortlisting the right choices but in inspecting properties, negotiating prices and also roping in the best offers on their behalf. It is advisable that NRIs should hire a property lawyer or law firm.
- The right property management lawyer will advise NRIs on critical aspects such as the past performance of various real estate developers, individual project specifications, pros and cons of a location of the property, and also on potential rental income and capital gains. Moreover, they will also handle all related legal matters and process the necessary documentation.