By now we have already highlighted you on various financial assets which are suitable for our NRI friends and where you as an NRI investor can invest your hard earned money. One major asset class that we are still to tell you about and that has always reflected a sparkle in eyes of individuals whether Resident or Non Resident is ‘a piece of land’ or as we all call it ‘Real Estate’. In order to further diversify your portfolio it is very much imperative that you invest in real assets like real estate in India.
Why NRIs should invest in real estate in India…
India offers a huge growth potential in the Infrastructure space. With the rise in roads, rails, bridges, commercialisation etc has very much increased the demand for land in India. The high demand has surely pushed the price of land higher over the years and is now well out of reach of individuals who are looking for an economical real estate property that can suit their budget. As real estate sector plays a critical role in the development of India, this sector meets the ever growing demand of office spaces and residential properties of a growing population in the country. Moreover, with a growing young population, the growth prospects for the real estate sector are bright. Furthermore, to infuse fair business practices and transparency in this sector, the Government is aiming to soon put the Real Estate Regulator Bill in the public domain.
However, during the downturn in the Indian equity markets during (2008-09) due to global turmoil instigated by the Lehman crisis did have an adverse effect on the prices of real estate properties as well as rentals in key Indian cities like Mumbai, Delhi, Gurgaon, Noida region etc. But with the recovery in the Indian markets in the later part of 2009, the real estate prices have risen significantly in major cities. Thus, from a long term point of view, prices of real estate properties are bound to increase due to the growing demand from residential as well as commercial buyers.
Moreover, the Indian Government has undertaken steps to attract foreign investments in the real estate sector. The revised investor friendly policies encourages offshore investors to own real estate property in India, as the minimum size for housing estates built with foreign capital has dropped to 25 acres (10.12 hectares) from 100 acres (40.47 hectares). The Reserve Bank of India (RBI) too, has granted permission to foreign citizens of Indian origin to purchase property in India for residential or commercial purposes. However, it is mandated that the purchase consideration should be met either out of inward remittances in foreign exchange (which you would be doing quite often) through normal banking channels or out of funds from NRE, NRO, or FCNR accounts maintained with a bank in India. And to make things simpler and investments faster for you, the latest reforms allow FDI up to 100% under the automatic route in townships, housing, built-up infrastructure and construction-development projects.
This shows that concrete steps have been taken to make real estate investment for NRIs an easy task in India.
Regulations and Restrictions for NRIs to buy property in India
Even the rules for buying property by the NRIs have been simplified and thus it has become much easier for the NRIs to buy property in India. NRIs do not require any approvals and need not have to take RBI’s permission to buy or sell residential or commercial property in India. The NRIs purchase of property is governed by FEMA (Foreign Exchange Management Act). The new FEMA act has been widely differentiated from the old FERA act (i.e. Foreign Exchange Regulation Act), which has made a great difference for the NRIs in buying property and even selling property in India. NRIs can now easily repatriate the sales proceed if he intends to sell his property.
Indirectly at present there is a limit for the NRIs to buy residential properties in India. If an NRI buys over 2 properties from an NRE account, then he may not be allowed to repatriate for more than 2 residential properties that he had bought from his NRE account. If he wishes to route the funds from a rupee account then he will have to hold the money in the account or in India for a period of 10 years. So indirectly the NRIs are allowed to buy only 2 residential properties in India.
Though NRIs are allowed to buy residential and commercial properties in India, an NRI cannot buy any agricultural land, plantation land or a farm house in India, nor can he acquire such property as a gift. There is however, no bar on inheriting such property from his or her ancestors.
To help NRIs get funds for buying their dream home / property in India, RBI allows NRI’s to take home loans from any bank located in India. You as an NRI can also take a loan for repairs and renovations of your property in India.
Now, that you are aware of real estate as an alternative investment avenue, and the favourable regulations and restrictions to acquire this asset class, let us probe into this alternate investment asset class a little deeper.
Buying a house property in your own country where you were born and brought up can be termed as one of the greatest dream for an NRI. We are sure, you too may be looking at buying a property in India (after all it is your home country) either as a retirement planning, wherein you would like to come back to your home country to spend the rest of your life after retirement or may be as an investment avenue. Moreover, with the current levels of Rupee against the Dollar (Rs 55.46 / $ as on July 07, 2012 from Rs 44.42 / $ as on July 07, 2011) it would be all the more enticing for you to make an investment in the real estate (residential or commercial property) in India. With such a variation in the value of Indian Rupee over the past year, buying a real estate in India will be far cheaper if you intend to invest into it with your foreign currency earnings. But before you plunge into investing in the real estate market just by the fact that the currency situation is in your favour, you have to be very much cautious. As there being no regulator in the real estate sector in India, the Indian real estate sector may also carry a lot of uncertainty, malpractices and mis-selling.
So please take some time out and go through the below checklist:
- Visit the site: This is the first and the foremost step. You need to personally go and check the site before taking any final decision on buying a particular property. Decisions taken via a phone call or a presentation over the email may turn out to be hazardous for your health as well as your wealth. This initial exercise is worth it not only because you are committing a large amount of money but also because any delay in identifying the short comings and then reversing your decision may prove costly as well.
- Adopt the bank loan route: This is the safest way to make payment to the seller of the property or the developer. The advantage of undertaking a bank loan is that the developer of the property will get payments in tranches depending upon the completion of the project, as well as due diligence taken by your bank while scrutinizing the various documents and titles related to the property they intend to sanction their loan upon. Since banks are involved in the payment process you are relieved to a certain extent from any kind of fraud or forgery.
- Property title: You need to be absolutely bang on as regards information on the title of the property is concerned. Check whether the seller of the property has the appropriate authority to sell the property. This fact assumes more importance in case of joint ownership of the property.
- Statutory approvals: It is important for you to know whether the developer has acquired all the statutory approvals as regards to town planning (wherein there is no threat of a flyover at an arms-length from your balcony), water supply and sewage disposal, safety approval from the local fire department etc. It is always better to ask for the encumbrance certificate and the title deed from the builder to get a legal opinion from a lawyer.
- Any unpaid charges due to the property: This is one most crucial check which you need to do as a prospective buyer of the property. You need to check for any unpaid maintenance charges or any electricity bills or water bills or any litigation charges which the seller has defaulted on and needs to pay himself, this will ensure that you take the possession of the property without any liabilities attached to it. The best thing to do is to avail a no-dues certificate from the seller of the property to be on a safer side.
- Discharge letter: This is essential in case of the property in question is mortgaged. You need to have a discharge letter from the seller’s bank as a proof that the seller has paid his entire loan towards the property.
- Management of the house property: This is an important aspect of the whole process of buying a house property. After the property (a flat or a building) has been bought make sure that you along with your fellow occupants register a society under the Societies Registration Act, 1860. There are some society associations which support the owners of the buildings with services like maintenance and rent collection.
- Clarity in your mind: Many a times we restrain ourselves from asking certain questions thinking they may sound dumb to others. But adopting this approach while buying a property can prove to be hazardous, so instead ask more questions related to even the minor doubt that you may have and get a clear picture before taking any decision.
Now that you have cruised through the checklist of buying a property and also why you should invest in real estate in India, it would be prudent for you to know how you can generate regular income through your investment in real estate.
Yes, you are right it is through the rental income. Well, if you have bought a property in India but do not wish to utilise it for your personal use in the near future, then you may rent it, to make it an income generating asset.
Let’s see the taxation aspects that you as an NRI investor need to be abreast with before buying and holding a property in India:
Though NRIs have to pay no taxes even while acquiring property in India, there will be certain taxes as per the Income Tax Act, 1961, that has to be paid if you generate rental income or if you make a gain by selling this property.
While there is no limit on the number of residential or commercial properties that an NRI can hold in India, the NRI can keep only one property as self-occupied and that to across the globe. The Income Tax Act, 1961 does not specify if either or both the properties of the individual (considered for taxation) must be situated only in India; it means that the self-occupied rule will apply to your global properties too. So by law if an individual whether Resident or Non Resident, owns more than one house property in India along with the one that he already owns abroad, then only one of them will be considered as self-occupied. While the self-occupied property will not call for income tax, the other property whether you rent it out or not will be deemed to be rented out.
Let’s understand this with an example. For instance, you as an NRI resident in New York, USA own and live in a house there. You also own a house property in India. Now, the above rule will come into play. Hence, according to the act, even if you do not give the property in India on rent, you would have to pay income tax on deemed rent in India. Remember that even if you have inherited a property in India and that is not your only property, you would have to pay tax on deemed rental income from that property.
For paying your income tax on such deemed to be rent out property, you will have to calculate deemed rental income on the property based on the valuations recommended under the income tax rules and pay the tax thereof.
Since you are the buyer of a property located in India, any income generated by you from such property will be taxed according to the income tax rules of the country. The income tax rules state that only your income earned in India will be taxed in India and not the foreign income earned abroad (since it will be taxed in the country where you work and generate income from).
As you are aware that the rental income which you earn on the property rented out, is subject to taxation, the tax on rental income can be deducted at source by the payer of the rent. The payer of the rent, in this case, must obtain a TAN number and deduct TDS of 30% from the rent amount. He must also provide you a TDS certificate for the same.
In case you decide to sell your property within 3 years i.e. if you hold your property for a period of less than 3 years then you need to pay 30% tax on the gains that you make from the sale proceeds. On the other hand, if the property has been held by you for more than 3 years, then the tax payable is 20% on the capital gains that you make from the transaction along with indexation benefit (the cost of property will be indexed to the year in which you sell the property).
We hope that we have catered you well through this write-up and have made you confident enough to invest in Real Estate in India.
This NRI article has been authored by PersonalFN, exclusively for Quantum Mutual Fund. PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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