NRIs – Know the Score Before Buying a Property in India

By, Shajai Jacob, CEO – GCC, ANAROCK Property Consultants

Regulations for property acquisitions by NRIs Returns on investment in different real estate asset classes
Documentation, home loans, tax implications compliances Best cities and micro-markets in which to invest

Whether the real estate market remains bullish or bearish, NRIs prefer a place back in India – not just for investment returns but also to remain rooted in their country of origin. Previously, NRIs (like most other buyers and investors) had every reason to be leery of the Indian real estate market.

Today, game-changing policies like RERA and GST have now boosted confidence and transparency and streamlined the property-buying process for NRIs. This has begun fuelling new NRI investments into the Indian property market.

The fact that the rupee value against dollar depreciated in 2018 was also a sound reason for NRIs to view Indian real estate more favourably. And, of course, developers have been offering substantial freebies and even discounts, apart from interesting payment plans, to draw NRIs as well as domestic buyers to their projects.

Mindful of the importance of fostering more positive sentiment for NRI investments into the country, the Government also eased norms to facilitate a more streamlined and less cumbersome property buying process for NRIs.

With Indian real estate once again becoming an attractive proposition, NRIs who are interested in buying a home in India need to equip themselves for making the best-possible property purchase decisions.

This includes understanding the regulations and processes related to Indian real estate purchase by NRIs and also knowing what they can reasonably expect from such investments.

Here’s a quick ‘realty check’:

Understand FEMA Regulations

The Foreign Exchange Management Act (FEMA) stipulates that an Indian citizen residing outside the country can invest in Indian real estate, provided that the property in question is not agricultural land, plantation property or a farmhouse.

There is no restriction on the number of properties that NRIs can own in India. However, NRIs obviously need to make informed decisions on such acquisitions. The most important consideration is that of whether the property purchase is for their own or their family’s actual use, or as an investment for rental income and potential capital appreciation.

Understand Returns on Investment

Before generalized market slowdown in 2015, the ROI on residential property in India was extremely rewarding for NRIs. However, post the slowdown which was exacerbated by DeMo, RERA, and GST, there were no convincing signs of market revival until recently.

As a result, there was a paradigm shift in wealthy NRI investors’ focus – specifically, towards commercial properties, which promised far more satisfactory yields. Then, 2018 saw the beginning of a fairly decent recovery in the residential sector, thanks largely to the improved transparency and efficiency in the market.

Historically, NRIs preferred investing in luxury homes by leading developers as these offered better rental income and capital appreciation. Today, NRI investors are also focused on affordable housing for rental income and better long-term appreciation.

However, NRI end-users with higher purchasing power are still taking luxury housing seriously as long as the price is right. Indian luxury developers are turning out world-class properties which appeal to the expanded world-view of well-travelled NRIs.

In short, both residential and commercial real estate now hold very good investment potential for NRIs, with commercial showing increasing viability on the back of favourable macroeconomic conditions, India’s thriving start-up revolution and the interest for the new kid on the office space block – co-working.

Here’s a broad spectrum of returns on investment that NRIs can expect from different real estate asset classes, provided that they have selected their properties wisely:

Understand NRI Property Purchase Payments

NRI needs no special clearances or permission to invest in Indian real estate. However, it is pertinent to note that:

All monetary transactions must be done in Indian currency and through normal banking channels via an NRI account. NRIs can use either their own funds or avail of home loans from banks or other financial institutions in India. RBI mandates that all buyers, including NRIs, can avail of a maximum 80% of the overall property value via loans from financial institutions.
NRIs must use inward remittances via NRO/NRE accounts in India. They can also issue post-dated cheques or opt for Electronic Clearance Service (ECS) from their NRO, NRE or Foreign Currency Non-Resident (FCNR) account.

NRI Home Loans – Sanctioning and Disbursement

Like other Indians, NRIs are eligible for housing loans in India. As per current regulations, the loan amount cannot be credited directly into an NRIs bank account and must be disbursed to either the sellers’ or the developers’ account.

Repayment of these loans is generally done through the NRO, NRE and FCNR accounts or from other financial accounts permitted by RBI.

In terms of loan disbursements, NRIs need to contribute at least 20% of the property value from their own sources. The remaining amount is sanctioned funded by the financial institution, subject to the NRI’s Gross Monthly Income (GMI). For loan sanctioning, preference is given to qualifications, work experience and duration of stay overseas.

While the loan process and benefits remain same as for resident Indians, the documents that an NRI must submit differ from Indian residents. NRIs must meet certain eligibility criteria and also issue a Power of Attorney (PoA) – a key document required during NRI home loan processing.

Understand the Documentation

The days when NRIs had to visit India or rely on relatives for the initial property search, as well as interviews with property sellers, are, of course, over. Thanks to advancements in technology, NRIs can conduct the initial search online, including via 3D walk-throughs, and make closer inquiries via video conferencing.

The main documents required to make any sound property purchase decision include:

The property’s title deed
Last tax receipts
Approved project plan
Notice of commencement, and
Encumbrance certificate

In addition to this, a valid Visa, Power of Attorney and Pan card are also required for the verification process.

Understand Income Tax Benefits and Compliances

NRIs enjoy all tax benefits that local residents do, except the TDS rate during the property sale. An NRI can claim a deduction of INR 1.5 lakh of the loan’s principal amount under Section 80C of the Income Tax Act, 1961. Under Section 24, the interest on a home loan is deductible to the extent of INR 2 lakh per annum.

To get these tax benefits, a minimum of two years’ investment is recommended. This is because the Indian Income Tax rules state that if a property is sold within two years of purchase, the proceeds will be treated as short-term capital gains, and are therefore added to an NRI’s annual taxable income.

If a property is sold after two years of purchase and ownership, there is an option to reduce long-term capital gains tax by investing the proceeds in another property purchase.

NRIs must file IT returns in India, and all NRIs buying property in India have to pay property tax along with the applicable stamp duty and registration charges for the property. It is therefore advisable that they assess all costs before taking the plunge.

Income earned via rent in India is also subject to income tax. Thus, NRIs should ideally obtain a PAN card before investing so that the associated financial procedures become easier.

Using Property Consultants

Indian real estate can be a lucrative income generator and/or a fulfilling experience for end-users – but only if the property is chosen wisely. NRIs who are out of touch with the ground realities of Indian real estate market dynamics should not rely solely on marketing collaterals and online listings, as these will not reveal potential drawbacks of a short-listed option.

In the rapidly-changing Indian real estate market environment, the services of accredited and credible property consultants have become more important than ever before, especially when it comes to making investments.

As already mentioned, there is an increasing demand for other real estate asset classes such as mall spaces in retail, co-working in commercial, co-living and senior living in residential, and even warehousing. India’s imminent REITs will also garner significant investor interest.

Without adequate professional guidance, it is challenging for NRI investors to gauge these emerging trends and isolate the best investment options. Online platforms provide innumerable options but must never influence a final investment decision.

Real estate consultants can assist NRIs not only in terms of shortlisting the right options but in inspecting properties, negotiating prices and roping in the best offers on their behalf.

The right property consultants will advise NRIs on critical aspects such as the past performance of various developers, individual project specifications, location pros and cons, and also on potential rental income and capital gains. They will also handle all related legal functions and process the necessary documentation.

NRIs should also realize that in the case of residential real estate, a professional property consultant’s services come at no cost to them. Credible consultants charge brokerage from the seller, not the buyer.

The new lodestone of measuring a real estate consultant’s credibility is RERA registration, so NRIs should only deal with agents or agencies which have this all-important qualification.

While there are still innumerable small-time brokers and brokerages operating without it, a consultancy which is duly registered under RERA is fully accountable and will not engage in any untoward activities, including misleading promotions and advice.