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NRI Property Investment – 11 Important Guidelines to Follow

NRI Property Investment
NRI Property Investment

NRI Property Investment is the most discussed but least understood topic. The reason being, it is perceived to be too complex. The rules and regulations governing NRI Property Investment are different. In this post, a reference to NRI includes PIO (Person of Indian Origin) and OCI (Overseas Citizenship of India) until unless specified. Till date, i have observed two key reasons for NRI Property Investment. The primary reason is NRI’s would like to settle in India after retirement. Secondly, they still feel safe and secure to invest their hard earned money in India compared to the country of residence or Home country. The biggest deterrent for NRI property investment is TDS at the time of SALE. I would like to clarify that the processes are simplified and time to get a refund is now 2-3 months. Lastly, to save capital gain, capital gain bonds is the best option.

Whenever i discuss NRI property investment with my NRI clients, the second complaint is related to the attitude of the builder and other professionals. Overcharging is very common. Therefore, i always suggest the clients to front end their relative or friend staying in India. In one of the cases, a very reputed builder organized property fair in Dubai. He sold an apartment for Rs 8000 psf. Whereas he was selling it for Rs 6500 psf to Indian clients. Even the professionals double their fees in case of NRI clients. Through these cheap tactics, we create a negative image of our country. In few cases, i observed that NRI clients dropped the idea of property purchase after they came to know about differential pricing. It is important to do a proper research before committing your hand earned money. Let’s check some of the imp guidelines for NRI Property Investment.

NRI Property Investment – 11 Important Guidelines to Follow

1. Definition of NRI/PIO/OCI: Usually, there is a confusion on the definition of NRI. On the other hand, the definition of PIO and OCI is very clear. Quite surprisingly the definition of NRI is different under Income Tax and FEMA. A person can be resident Indian for Income Tax purpose whereas he might be NRI under FEMA. In my opinion, for the sale/purchase of property, the definition of FEMA supersede the definition under Income Tax. This discussion is a topic in itself and will discuss it in one of the future posts. From NRI Property Investment purpose, the imp point is that Non-Resident Foreign Citizens of Indian Origin are treated on par with NRIs. It implies that PIO and OCI are treated at par with NRI’s.

2. Documents required: There is a confusion on what all documents required for property purchase. Let me clarify that PAN is a must for NRI Property Investment. Besides that, NRI’s require passport whereas OCI/PIO card is required in case of OCI/PIO. Other documents required are proof of address in the home country, POA (If any), Work permit etc.

3. Citizenship: The PIO of following countries are NOT ALLOWED to purchase any type of Property in India. The point to note is that even if they are PIO still not allowed based on the status of citizenship. The list of countries includes Pakistan, Bangladesh, Srilanka, Afghanistan, China, Iran, Nepal, and Bhutan. The citizens of these countries need the permission of RBI. In some countries, the local laws restrict the purchase of property outside the home country. You may need approval from local tax authorities/central bank.

4. RBI Approval: NRI/PIO/OCI cannot purchase agricultural land/plantation property/farm house in India. RBI has provided general permission that includes the purchase of residential and commercial property in India. There is confusion in the case of the farm house. Under an income tax, the residential farm house is considered as residential property. In the case of NRI property investment, it is not clear whether residential farm house will be treated as residential or not. Special Permission of RBI is required in case NRI/PIO would like to purchase agricultural land/plantation property/farm house in India.

5. Income Tax in India: The income generated from NRI property investment is treated at par with resident Indian. In short, taxation rules of income from house property and capital gain are same for resident Indian and NRI. The only difference is on TDS rate at the time of sale of the property.

6. Income Tax Return: If NRI/OCI/PIO is earning an income in India then it is mandatory to file the Income Tax Return. It also includes rental income. An Income tax return cannot be filed without PAN therefore, it is mandatory to apply for PAN. You can also apply online and trust me to get a PAN is a most simplified process. You will get it in 2-3 weeks time at your overseas address. In the case of capital gains, it is mandatory to file income tax return even if the gains are below basic exemption limit of 2.5L during FY. If the TDS is deducted on capital gains and you are not claiming any refunds/set off against capital loss then you need not file income tax return.

Not many NRI’s are aware that you can file income tax return in India by giving Power of Attorney to Resident Indian (Indian Citizen).

7. DTAA: DTAA is Double Taxation Avoidance Agreement. India has signed this treaty with many countries like USA, UK, Canada, UAE etc. In layman terms, what it means is that you will not be taxed twice on the same income. Income from India is also treated as an Income in your Home Country. Assuming, you sold a property in India. It will be taxed in India and also in your home country. DTAA allow capital gains to be taxed in India against the sale of property in India. NRI/PIO/OCI can avail tax credit in their home country against taxes paid in India.

In simple language, if the long term capital gain tax in India is 20% and in your home country it is 25%. You will pay 20% tax in India and balance 5% in your Home country. In case, long term capital gain tax in your home country is 15% then you need not pay any tax in the home country. These are general guidelines, rules may vary. Under some DTAA treaty, 100% tax credit is not allowed. Therefore, kindly check DTAA between India and your home country for exact rules and regulations. It also depends on the respective tax laws of the home country like FATCA in the USA. For rented properties, income is taxed only in India. Rental income is repatriable subject to certain conditions.

8. Repatriation of Funds: It is again a bit complex subject. It depends on the source of funds for the acquisition of the property. If the property is acquired from income outside India and remitted to India i.e. foreign exchange sources. In this case, amount to be repatriated should not exceed the amount paid for the property. The channel of repatriation should be same i.e. NRE/FCNR(B). I will discuss it in detail in future posts. For capital gain, there are separate rules.

9. No of Properties: There is a misconception on the ownership of no of properties in case of NRI property investment. Let me clarify that you can buy any no of residential and commercial properties in India.

10. Lease Properties: If an NRI/OCI/PIO is acquiring a property through a lease for a period not exceeding 5 years. In this case, none of the restrictions will apply. I came across cases wherein NRI would like to start a business in India and prefer to lease the property. You can lease the commercial property for 5 years. Even in the case of residential property, lease of 5 years is exempted from the restrictions.

11. Change in Status after the acquisition of the property: Another concern of NRI’s is related to property acquired when they were resident Indian. The IT professionals have apprehensions if their status change in future to NRI from resident Indian then what will happen. You need not worry in such cases. RBI permission is not required and there will not be any retrospective change. As a thumb rule, the rules and regulations depend on the residency status at the time of sale and purchase. If you purchased property being a resident Indian then rules applicable to resident Indian will apply. But if you sell the same property being an NRI. In this case, the rules applicable to NRI’s for the sale of property in India will be applicable. The converse of this is also true.

The topic of NRI property investment is vast. I will keep covering important aspects in my future posts.

Copyright © Nitin Bhatia. All Rights Reserved.

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adir kumar
adir kumar
8 years ago

Hello Sir !

1) I am an NRI , in mumbai, bought 2 adjoining under construction flats under joint name with my mother, my being the first name on allotment letters in april 2014 . Now project is about to complete and at the time of registry, can i just register both the flats in my mother name only , she is resident indian. payments have been made from our both accounts for both flats.

2) for long term capital gain, the date of allotment(when first part payment made ) will be considered or from date of registry(possession ) ? based on this i have to decide to keep it or sell.

3) i plan to register them in mid may 2016. if i sell it in first week of may 2017 , what capital gains will be applicable and also would i be able to claim my stamp duty amount from buyer if i am eligible for long term capital gains ?

4) is there a way after sale of the flats( before or after registry) , after tax ,transfer from sale receipts my portion of paid funds to nre account .

Regards

Adir

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  adir kumar

1. In builders record, you need to transfer your share to your mother then both the flats can be registered in your mother’s name only.
2. There are two school of thoughts. Till you receive possession, date of allotment will be considered as date of acquisition.
3. It will be short term capital gain
4. It depends on source of funds for acquisition.

adir kumar
adir kumar
8 years ago
Reply to  Nitin Bhatia

thank you Sir . A errorfrom my end for point 3)
i plan to register in may and sell in first week of June 17 . Will it be long term capital gain ?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  adir kumar

If you consider date of allotment then it will be long term capital gain tax.

Ref to point 4, your query is not clear. As i understand you repatriated money to India for purchase of property through NRE account. It will depend whether you want to repatriate sale proceeds or not. Secondly, if you gift your share to your mother then if she gifts back sale proceeds to you then it will raise suspicion.

adir kumar
adir kumar
8 years ago
Reply to  Nitin Bhatia

i always remit my salary and transfer them in nre account and whatever money my mother has and whatever she has paid to builder , was actually transferred by me in her account over the last few years.

Now after making payments, also from my nre accounts, recently i realised of 30% TDS and all hassles which NRI have to face. so my idea is to have them in mothers name. and if we sell in her name it will be less complicated as she is a resident. Once she gets the sales receipts , she will pay all taxes applicable. after that, Can she return my share of money ( not profits, even if any ). which may be deposited in my normal indian account and from there i can transfer to nre account ?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  adir kumar

This arrangement may create taxation issues in future. It is basically round tripping of money. Income earned from India should be deposited in NRO account.

adir kumar
adir kumar
8 years ago
Reply to  Nitin Bhatia

Thank you so much Sir !!!

Sumita Varma
Sumita Varma
8 years ago

I have a flat in Mumbai. When my son was leaving for higher studies I bought this property in the name of myself ( mother)and my son though all the money was financed by me through housing loan. My query is now my son is a citizen of USA.
If I sell this property what will be the tax implication of this property . Somebody suggested to make a gift deed from my son to me and transfer the property in my name or my husband name. My son has no objection in doing so as we have paid the money for it.
But he is unable to come to India as he has a new born child, can power of attorney be made to execute the gift deed, spoke to lawyer and he says his presence in person is important and gift deed with power of attorney is not allowed. What is your suggestion, the ultimate aim is to sell the property and club the capital gain from 2 property. One property is in the name of myself and my husband and this property is in the name of myself( mother) and my son. Kindly help.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Sumita Varma

There are lot of ifs and buts in this transaction. It is not that easy. As your son is USA citizen therefore he may need permission of USA tax authorities to execute gift deed with proper justification. He might land in a tax trouble in USA i.e. tax avoidance. He also needs to check the provisions of FATCA. Date of acquisition, clubbing of income provisions etc may be applicable as you paid for the transaction.

In my opinion, it is imp for your son to check with USA attorney the possible solutions and then you can decide the one most suitable for you rather other way round.

I have not checked all the details therefore my opinion is subjective and based on limited information available.

Bharti parikh
Bharti parikh
8 years ago

we are Nri trying to sale property in india. if we cut tds @20% how long it will take to get our refund?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Bharti parikh

You can claim refund at the time of filing Income Tax Return.

kupendran
kupendran
8 years ago

Dear Sir,
I along with other NRIs( 10 to 15 persons) am planning to buy land in India and build housing properties on that land for selling those properties to earn profits. Is it allowed by Law? If allowed, which form of organisation, whether partnership firm or private Ltd company, is better? Please answer.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  kupendran

I have already answered this query.

kupendran
kupendran
8 years ago

Dear sir,
Is it possible for NRIs to form partnership firm/Private Ltd company to carry out activities of buying land and construct buildings on that or buying properties as such for the purpose of earning income by way rental income?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  kupendran

NRI can become partner subject of fulfillment of certain conditions under FEMA. He can also buy residential property and earn rental income.

Abhijit Palkar
Abhijit Palkar
8 years ago

Dear Sir,

For purchase of residential flat,I have issued 2 cheques to builder from my NRE account.Afterwards,due to some personal reason I cancelled this booking and builder paid me back this amount after deduction of some charges through 2 cheques.Can I deposit this amount back to NRE account from which I issued the cheques ??

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Abhijit Palkar

Yes..You can transfer the money back to NRE account but keep record of the same for future reference.

Nitin Bhatia
Nitin Bhatia
8 years ago

It depends on multiple factors whether property is in Goa or outside Goa. Secondly, whether your parents are Indian Citizen or not. Lastly, whether the property is purchased through repatriation of funds.

Andrew D'COSTA
Andrew D'COSTA
8 years ago
Reply to  Nitin Bhatia

Hi Sir thanks for the reply.yes the property is in goa n my parents are Indian citizens…plz advice

Andrew D'COSTA
Andrew D'COSTA
7 years ago
Reply to  Andrew D'COSTA

If it’s not possible can my mother take it on her name and make me as second holder? Plz advice thanks

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Andrew D'COSTA

It is possible. The contribution on your behalf will be considered as gift from mother to son in India. It will be tax free in your hands. My previous comment still holds good.

Andrew D'COSTA
Andrew D'COSTA
7 years ago
Reply to  Nitin Bhatia

Hi Nitin
My mother can take the flat in her name.but she all ready has one flat d one we staying now is on her name.will it be a problem?? From income tax???she has paid d lum sum 50 lak to d builder…..she Is a senior citizen and she has broken her fd’s…… Will it be a prob or wil we be taxed?

Thanks

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Andrew D'COSTA

I don’t foresee any issue.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Andrew D'COSTA

The rules for Goa are different then rest of the country. Prima facie, if you are not violating the section 6(3)(i) of FEMA then you will not face any problem. I suggest you to hire a local lawyer in Goa to check the same.

Pat
Pat
7 years ago

Dear Nitin, how will GST be applicable on under construction property…we have already paid VAT & service tax…pls reply…Thanks

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Pat

GST will be implemented prospectively not retrospectively.

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