Non-resident Indians (NRIs) are among the top five investor communities in to India. With their natural affinity to the region and the depreciation of the Indian rupee against the US dollar and pound sterling, the NRI community’s appetite for real estate investment appears to be increasing again. Strict visa rules in the Middle East and various regulatory obstacles in the path to property ownership in the region make India the more obvious choice.
But before you start building your property empire in India, it is worth getting organised, not only in terms of the property but also in terms of your personal documents. The right adviser can be invaluable for this, from assisting with your financial planning to organising a power of attorney or sorting out your succession planning. In the long term, not only will this save time and hassle, it can even save you money.
For those considering buying a property in India below is a general guide, based on the most frequently asked questions, which will prove useful for NRIs?
1. Who can purchase immovable property in India?
As with many other matters, there are various restrictions and requirements on who can purchase property in India. Subject to a few exceptions, a foreign national resident outside India cannot buy immovable property in India. However, the following may purchase property:
Indian citizens living outside India(NRI), including Overseas Citizen of India(OCI) card-holders and Persons of Indian Origin (PIO), can purchase residential and commercial property as long as it is not agricultural land/plantation property/ a farmhouse in India.
2. Can the purchase of a property in India be financed through loans or money from outside India?
You should always take careful structuring and specific advice before the purchase of the property as often there are updates or temporary rules in place depending on the state and time when you buy but as a general rule no payment can be made either by traveller’s cheque or by foreign currency notes or by any other mode except those specifically mentioned which currently are:
There are no upper limits for inward remittances and normal banking channels, including the usual non-resident accounts [NRE, NRO and FCNR(B)], can be used.
NRIs can also take interest-free loans from close relatives who are resident in India. The lender is subject to FEMA limits, which should be checked at the time of the transaction.
3. How many properties can a NRI/ PIO purchase under the general permission?
There are no restrictions on the number of properties that can be purchased although see below for restrictions on repatriation of funds for multiple properties.
4. Can money be repatriated from the sale of a property in India?
An NRI or PIO may repatriate the proceeds from the sale of immovable property in India on the following conditions:
The property was purchased by the NRI/PIO in accordance with the provisions of FEMA in force at the time of the purchase; and
The amount repatriated should not exceed the amount paid for the property if the property was acquired in foreign exchange remitted through normal banking channels or out of funds held in specific designated account.
It should also be noted that in the case of residential property, repatriation of sale proceeds is restricted to not more than two such properties and a foreign national may repatriate sale proceeds even if the property was inherited from a person outside India. However, prior approval of the RBI must be obtained.
Additionally, if the following circumstances apply, the NRI/PIO may repatriate a maximum of $1 million per financial year:
Out of the balances held in the NRO account if the property was purchased out of rupee sources
If the property was acquired by way of gift, the sale proceeds must be credited to an NRO account, and thereafter may be repatriated
If the property was inherited from a person resident in India, it may be repatriated on production of documentary evidence proving inheritance, an undertaking by the NRI/PIO, and a certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes
5. What are the transaction costs involved when purchasing a property in India?
It should be noted that rates vary according to state and also if the buyer is a corporate entity.
6. Are there any tax implications of purchasing property in India?
Again specific tax advice should always be sought before purchasing a property but in general terms:
Depending on total income received personal tax returns may need to be filed in India. As a general guide you need to consider your residential tax status (i.e. how long you spend in India in any one year or over a period of 4 years), and even if you are not considered resident you will need to file returns if you exceed the basic thresholds. NRI’s have a basic exemption limit of Rs 2 lakh (250,000 Rs) .
The rent may be additionally taxed in the NRI’s country of tax residence. There may be some tax relief available under an appropriate Double Tax Avoidance Agreement (DTAA) for NRIs who are tax residents in certain countries.
TDS (withholding tax) may be applicable depending on the value of the property purchase.
On a sale, there will be capital gains tax.
7. What documents and agreements are required for the purchase?
A good advocate/lawyer will advise you on all the necessary documents and it is worth consulting the appropriate advisers in the correct locations well in advance as property purchases are fraught with legal and practical difficulties. But below is a checklist of documents, some of which you can prepare prior to the property purchase and some which you should ensure your advocate is dealing with:
Pan card (Permanent account number)
OCI/PIO card (In case of OCI/PIO)
Passport (In case of NRI)
Passport size photographs
Proof of residential address
Land titles/ construction permits/ Approvals from authorities
Title clearance certificate
Income Tax clearance
Stamp duty and registration
Society clearance and membership Loan
8. Does RBI have any guidelines for loans to NRIs/PIOs?
Ans.: There are guidelines issued by the Reserve Bank of India for grant of housing loans to NRIs. The guidelines are:
The loan amount shall not exceed 85% of the cost of the housing unit.
Own contribution, which is the cost of housing unit financed less the loan amount, can be met from direct remittances from abroad only through normal banking channels, your Non-Resident (External) [NR (E)] Account and /or Non-Resident (Ordinary) [NR (O)] account and /or Non-Resident Special Rupee account [NRSR] in India.
Reimbursement of the loan, comprising of the principal and interest including all the charges are to be remitted from abroad only through normal banking channels, your Non-Resident (External) [NR (E)] Account and /or Non-Resident (Ordinary) [NR (O)] account and /or Non-Resident Special Rupee account [NRSR] in India.
9. Can authorized dealers grant loans to NRIs for purchase of a flat/house for residential intention?
Ans.: Authorized dealers have been granted permission to grant loans to NRIs for acquisition of house/flat for self-occupation on their return to India subject to certain conditions. Repayment of the loan should be made within a period not exceeding 15 years out of inward remittance through banking channels or out of funds held in the investors' NRE/FCNR/NRO accounts.
10. Can authorized dealers grant housing loan to NRIs where he is a principal borrower with his resident close relative as a co-applicant / guarantor or where the land is owned jointly by such NRI borrower with his resident close relative?
Ans.: Yes. Such housing loans availed in rupees can also be repaid by the close relatives in India of the borrower.
11. What are the documents required along with the application?
Ans.: The following documents are normally required to be submitted along with the application Photocopy of the labor contract and English translation duly countersigned by your employer
Latest salary certificate (in English) specifying the following: name (as it appears in the passport), date of joining, passport number, designation, perquisites and salary.
Photocopy of labor card/identity card
Photocopy of valid resident visa stamped on the passport
Photocopy of monthly statement of local bank account for the last 4 months
Property related documents
12. Can an NRI take loan against the security of immovable property in India? Are there any restrictions on the use of loan amount?
Ans.: An NRI can borrow against the security of immovable property from an authorized dealer subject to following conditions:
the loan should be used for meeting the personal requirements or for borrower's own business purposes; and
Loan should not be used for forbidden activities, namely;
business of chit fund, or
agriculture or plantation activities or in real estate business, or construction of farm houses, or
trading in Transferable Development Rights (TDRs)
The loan amount cannot be remitted outside India,
Repayment of loan shall be made from out of remittances from overseas or by debit to NRE/FCNR/NRO account or out of the sale profits of shares or securities or immovable property against which such loan was granted.
13. What kinds of incentive can NRIs, PIOs and foreigners look forward to in the Indian real estate industry that favours investment?
Ans.: The relaxation of FDI in the construction development sector announced in March 2006 allows NRIs, PIOs and all foreigners equal opportunity with their Indian counterparts in the Indian real estate sector. The new guidelines state that before selling, the site has to be developed, constructed upon or fulfil the criteria of a minimum of one year of development.
NRIs, PIOs and foreigners can now invest in land, buy it, construct upon it or develop it, sell constructed buildings/developed plots
FDI through automatic route can also flow in not just for the housing sector, but also for townships, housing, commercial area, and infrastructure development
Restrictions on minimum area of land, minimum number of units has been removed
Minimum constructed area required is 50, designated area is 25 acres
14. Is there any deadline to actually complete your construction development work?
Ans.: The norms are quite liberal. It allows you five years to finish at least 50% of your project from the date of getting all the clearances. Under normal circumstances the project can be completed within three years. It helps protect the customer and keeps fly-by-night people at bay.
15. How does the automatic route work?
Ans.: The automatic route has simplified much of the cumbersome investment process. Approval from the Reserve Bank is not required anymore and there is also no need to go to the Foreign Investment Promotion Board. The easing of paper work and relaxation of formalities has given a boost to overseas investor confidence for investing in India.
16. What aspects should overseas investors look at in the Indian real estate market to facilitate the suitability of their projects?
Ans.: Any NRI before investing in the Indian real estate should also focus on the particular segment that he plans to invest in like residential, retail or office space. Consulting legal firms and real estate firms providing professional NRI services can be very useful.
17. What steps should an NRI follow for getting all the clearances in a hassle-free manner? Whom should one consult in the process?
Ans.: A lot depends on the segment you want to invest in. It helps to gauge the future state and to know what utilities are available. An office market investment, for instance, requires you to:
Get in touch with consultants for advice on the city of choice
Outline your objectives, the size of your investments
Have an approximate of the returns you are expecting. The yield that has evolved from distinct parameters ranges between of 8 - 8.5% to 12% for office space and 4% - 6% in residential
Whether the land is for investment or for development is also a deciding factor, as is the local demand-supply situation. While investing in India, the availability and quality of infrastructure or utilities like power, connectivity, security and long-term future plans need to be scrutinized.
18. Is a single window clearance possible?
Ans.: Single window in a real estate project in India may be difficult because of the involvement of several authorities. If it is a multi-storeyed building, you need to get clearance from town planning authorities, clearance on design, elevators, fire fighting agencies, etc. Efforts are on to make the process simpler and transparent, though.
19. How is the sanctioning authority and monitoring authority different in India?
Ans.: In some states, the Municipal authority is the ultimate monitoring authority. In smaller states and in non-urban areas, the town and country planning corporation acts as the monitoring authority. In urban areas where most of the construction takes place, the municipal authority wields power in giving the final permission and sanctioning drawings and plans. Clearances on electricity, water supply and other utilities also come from here.
20.The new FDI norms state that the minimum investment has to be USD 5 million for 51% shareholding. Does this include funding of subsidiaries as well?
If you have a wholly owned subsidiary by a foreign company then the minimum capitalization norm is USD 10 million.
If you have a joint venture, the ratio 74:26 or 51:49 is immaterial. For a joint venture, the minimum capitalization is USD 5 million in foreign exchange.
This minimum amount of foreign exchange is required to arrive within six months from the date of commencement of business. The six months can be used to bring that money into India.