NRI Real Estate and Property Investment in India
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Hurdles for Property Purchase in India by NRIs
Wednesday, March 12, 2008

For many globetrotting Indians, owning property in India may be a cherished dream. For others who have set up permanent homes abroad, selling whatever property they own here might be more meaningful. Few others may have been born under a lucky star to be gifted property; still others may inherit property and may want to pass it on to their grandchildren. This is a familiar situation in this property quadrangle, reading through the myriad rules and regulations governing acquisition and transfer of property can be mind-boggling. All this was discussed at a recent NRI investor's seminar held in New Delhi. Mr. Tejinder Singh educated the gathering about some do's and don'ts of NRI investing. Some briefs of the seminar are enumerated below.

It's FEMA that matters

Living outside India, you first need to be aware of the Foreign Exchange Management Act (FEMA) and its applicability to forex transactions in India. The acquisition and transfer of immovable property too has financial implications and falls within the ambit of FEMA. Hence, the place to get first hand information on this is the RBI notification under FEMA. These guidelines permit both Non-Resident Indians (NRIs) and Foreign Nationals of India Origin (PIOs) to enter into property transactions.

That takes us to the next question: Who is an NRI or a PIO? Had you been a student of income-tax law, you might recall the '182 days in India' rule for determination of residential status and may even furiously start your calculations. But, wait… you are governed by FEMA here, as well as the Income-Tax Act; and they don't see eye to eye in this case!

Under FEMA, a person becomes a non-resident simply by leaving India for employment or for any other purpose that would indicate his intention to stay abroad for an indefinite period. It defines a PIO as an individual who, at any time, has held an Indian passport or who, or either his father or grandfather, was a citizen of India by virtue of the Constitution or Citizenship Act, 1955.

Once you have passed this first test and determined your eligibility, you can move on to taking a look at the law.

Property Acquisition

As an NRI or a PIO, you are free to acquire any number of properties (residential/commercial) in India, under the general permission granted by the RBI. No documents to be filed; no forms to be filled. Believe it or not, it is as simple as that.

Like a purchase, a gift from anyone, be it a resident Indian, another NRI or a PIO, is perfectly acceptable. After all, would anyone (law-makers included) want to say 'no' to such a fortune?

But the law treats inheritance with more caution. As history proves, that's where most disputes arise, isn't it? Let's take the case of Anshul, who migrated to the US in the 1990s and has since been an NRI. His parents, on the other hand, have not moved out of Hyderabad all their lives. His parents being resident Indians, Anshul can freely inherit the ancestral house in Hyderabad.

What if Anshul's father migrated to the US in the 1960s? By law, his father may be an NRI (if he still holds his Indian passport) or a PIO (if he is now a US citizen but at one time held an Indian passport). If they have still retained their ancestral house, Anshul cannot freely inherit the house from his father, as in the first case.
Inheritance of a property in India from a person resident outside India needs specific approval from the RBI and will be permitted only if the bequeather had acquired such property in accordance with the provisions of foreign exchange law at the time of acquisition, or under FEMA regulations.

Transfer of Property

An NRI or a PIO is free to transfer his property by way of sale or by way of gift. But the catch lies here. In case of a gift, the property can be gifted to any person, whether he is a resident, non-resident or a PIO. But, in case of a sale, a PIO alone needs prior approval of the RBI to sell it to another NRI or PIO.
If he sells it to a resident Indian, the need for prior approval does not arise. An NRI need not get prior approval even if he is selling the property to another NRI or a PIO.

Agricultural Land

While you can freely acquire residential or commercial property, you need to remember that, as a rule, agricultural land, plantation property and farmhouse in India can neither be purchased nor be obtained by way of gift by an NRI or a PIO.

It can only be inherited. On the other hand, you can freely sell or gift these properties, but only to someone who is a citizen of India and who stays in India.

Payment, Repatriation and Remittance

An NRI / PIO may purchase property in India by remitting funds into India from his bank account abroad or from funds held in his NRE / FCNR (B) / NRO account held with a local bank. Suppose you don't have enough money, nothing prevents you from taking a home loan readily offered by various banks in India.
Similarly, in case of a sale, the amount may first be credited into any of your accounts in India and the proceeds may later be repatriated abroad.

Repatriation may be by way of inward remittance or by debit to NRE/FCNR (B) account. But there is a cap on how much you can send back. If you had purchased the property for, say, $1,25,000 (Rs 50 lakh, approximately) through a dollar remittance or through your FCNR(B)/NRE account, you can repatriate only so much, although you might have sold the property for Rs 75 lakh.

You could have also credited the sales proceeds to your NRO account. If so, the amount to be taken overseas cannot exceed $1 million per calendar year. (Normally, the balance in NRO account is not repatriable. Repatriation of sales proceeds of immovable property is allowed on an ad hoc basis). The remittance from the NRO account was previously subject to a lock in period of 10 years. The RBI has now removed this restriction.
The proceeds of property received by way of gift can be credited only to the NRO account. Hence, repatriation of the same will come under the $1-million limit.

Subject to the production of documentary evidence in support of inheritance and tax clearance certificate/no objection certificate from the Income-Tax authority, sales proceeds (up to a maximum of $1 million per calendar year) of property acquired by way of inheritance can be taken overseas. In case this property has been inherited from an NRI or a PIO, along with documentary evidence and no objection certificate, prior approval of the RBI may be necessary.

Taxman Watching

As the cliché goes, wherever we go, two things are certain in life - death and taxes. As per the income-tax law, when you become a non-resident, income received, accruing or arising or deemed to be received or accruing or arising in India will be taxed in your hands. Let us assume you have invested in an apartment in India.
If you have let out the flat, the rent you receive is an income arising in India from a property situated in India. Hence, it is chargeable to tax under the head 'Income from House Property'. In case you've taken a home loan, any interest on that loan is available as a deduction from your income.

If you sell your Indian property too, the taxman will come knocking at your door. This time, to claim a part of the tidy sum you made, under the head 'capital gains'. Tax planning on this front as specified in Sections 54 or 54EC or 54F of the Income-Tax Act will help you shield a substantial portion of that sum from taxes.



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