The real estate sector offers a better rate of return on investment than other assets and hence it is no wonder that it is the preferred investment for most NRIs (non-resident Indians). In fact, pandemic notwithstanding, 2021 saw NRIs investing close to $13.1 billion in Indian real estate, according to a report which further predicts a 12% hike in investment in 2022. Several factors have contributed to this increasing interest in real estate amongst NRIs, some of which include the introduction of RERA and better regulation for developers, government policies, such as easing of FEMA (Foreign Exchange Management Act) requirements, that encourage investment and rising dollar rates. However, there are some things that NRIs need to bear in mind before they commit to any real estate investment:
Type of Property
NRIs can freely purchase residential or commercial property in India. However, investing in agricultural or plantation land requires them to get special approval from the RBI and concerned state authorities. Even when it comes to residential or commercial property it would be wise to opt for projects from a reputed developer with a proven track record where they can be assured of quality construction and timely possession.
Facilitating Paperwork via POA
NRIs by definition do not reside in the country and hence may find it difficult to travel back and forth to complete the paperwork, registration etc required for property acquisition. Hence, NRIs who have zeroed in on which real estate they plan to invest in would need to grant Power of Attorney (POA) to a trusted friend or relative would then be authorised to complete all the formalities on their behalf. The POA could specify if the powers regarding the property would also extend to leasing, sale, mortgage of the property.
Financing the Purchase
There are certain financial factors involved that NRIs should be aware of. Primarily, the fact that the property is being purchased in India, mandates that the payment be made in Indian rupees and therefore it is crucial to hold an NRE/NRO(Non-Residential External and Non- Resident Ordinary) or FCNR (foreign currency non-resident) account with a bank operating in India. Moreover, NRIs can also avail of home loans from Indian banks up to 80% of the property value and need to finance 20% from their own income sources. In some instances, developers can assist in getting loans at lower interest rates via a tripartite agreement.
Repayment of Home Loan
Again, as the loan is taken in Indian currency, it has to be repaid in the same. While, typically, easy monthly instalments (EMIs) are the preferred route to take to repay home loans, in the case of NRIs one has to factor in fluctuations in foreign exchange rate which may not work in your favour. Hence, it would be advised for NRIs to use rental income to repay their home loans.
If the NRI has only one property which is not being rented then they can designate it as self-use and not be required to pay tax on it. However, those owning multiple properties can only claim one as self-use and would be required to pay wealth tax on the others. NRIs like other Indian citizens are also subject to taxes on rental income as well as short-term and long-term capital gains tax. Any property that is sold after being owned for 2 years will attract long term capital gains tax which amounts to 20%.
NRIs need to have the following documents available to be able to purchase property in India:
- NRIs should either hold their Indian passport, or if they hold a foreign passport, they can purchase property provided they have a PIO (Persons of Indian Origin) card or an OCI (Overseas Citizen of India) card.
- PAN Card: This is mandatory for property transactions.
- Power of attorney: This is essential if the NRI is not planning on multiple visits to India to complete registration and other formalities. It needs to be a special POA that is registered and notarized.
- Current address proof documents (like utility bills) and passport size photographs for the sale deed registration.
In addition, for a home loan one would require:
- Work permit or employment contract or appointment letter for the country they are residing in
- Latest salary certificate / Payslips for the last six months
- Latest income tax returns
- Past year’s bank statement of NRE/NRO/FCNR account
- Bureau report of country of residence
When vetting the documents of the developer be sure to look at:
- Title deed which is in the seller’s name
- Approved plan
- Building permit
- Occupation certificate (in case it is a ready building)
- Older title deeds, if any
- Updated encumbrance certificate
- Share certificate (in case it is a cooperative housing society)
- RERA registration
Its best to go with a reputed developer to ensure that the property papers are in order.