The NRI’s Guide to
Real Estate Investment in India
There’s no place like home, in your homeland. There is no better time than now to buy property in India, particularly Chennai, with the city being among the world’s Top 10 real estate destinations.* Read on, for everything you need to know about making a property investment in India. The first step is to understand the definition of a Non-resident Indian, according to the Foreign Exchange Management Act (FEMA), which governs the purchase of Indian real estate by NRIs. FEMA defines an NRI as a citizen of India who is a resident outside India.
Let us understand the governing terms of real estate investment in India.
Can an NRI purchase property in India?
Yes, an NRI can purchase unlimited residential or commercial properties in India. However, he or she cannot buy plantation land, agricultural land, or farmhouses in India, or even acquire the property as a gift. But an NRI can inherit such property.
Do I need permission from the Reserve Bank of India (RBI)?
No. You don’t require RBI permission to buy residential or commercial property.
How to fund the purchase of property?
Payment can be arranged for the property purchase transaction either by way of funds remitted to India from abroad through regular banking channels or through the balance in the NRE, NRO or FCNR account.
What income taxes are applicable on house properties in India?
The Indian Income Tax Act states that if an individual (resident or NRI) owns more than one house property, only one of them will be deemed as self-occupied. No income tax will be levied on a self-occupied property.
The other property, whether it is rented out or not, will be deemed to be rented.
If you have not rented out the second property, you have to calculate deemed rental income on the property (based on certain valuations prescribed by the income tax rules) and pay the tax thereof.
The Income Tax Act does not specify if either or both these properties must be situated only in India.
If you are an NRI and own only one property, and that property is in India, you will not have to pay any income tax on it in India.
However, let us consider a situation where you are an NRI resident in another country and live in your own house (purchased by you) in that country. If you also own a house in India, you will have to pay income tax on deemed rent in India, even if you have not rented out the property. The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act.
Even if you have inherited a property in India and that is not the only property you own, you will have to pay tax on deemed income.
Is deemed income from house property taxed in a foreign country?
You need to refer to the tax code in your country of residence. If you are living in the USA, the country’s tax code does not tax deemed income. But you have to declare the property, if it’s an investment property, in your tax returns in the USA (even if you are not deriving rental income from the particular property). Make sure to consult with a tax expert beforehand.
Can I take a home loan to buy property in India?
Yes. The Reserve Bank of India (RBI) allows NRIs to avail home loans for buying property in India.
You can take loans even for renovation and repairs in your property.
You can pay EMI in any one of the following ways:
By issuing post-dated cheques or Electronic Clearance Service (ECS) from your NRE, NRO or FCNR Account.
By remitting the money from your foreign bank account through regular banking channels.
Out of the rental income from the property.
Cheques issued from your local relative's bank account.
What tax benefits can I avail on home loan repayment?
According to Section 24 of the Income Tax Act, the interest on a home loan is deductible from the income from house property to the extent of 1.5 lakh per annum. Further, up to 1 lakh of principal repayment can be deducted under Section 80C of the Income Tax Act (subject to an overall limit of 1 lakh of that section).
This interest can be deducted from the rental income. In case of self-occupied property, you will not have rental income, but you can still claim a deduction of interest of up to 1.5 lakh. In that case, you would have a loss from house property. The loss can be offset against income from other sources, such as interest income, capital gains, etc. If the loss is not completely exhausted in a particular year, it can be carried forward for 8 years. That is, you can show the loss in your tax returns for the next 8 years and offset it against other income. But once carried forward, the loss can be offset only against income from house property.
Can an NRI give someone Power of Attorney for property purchase transactions?
*Source: The Candy GPS Report
Yes. It is strongly advisable to give Power of Attorney (PoA) to a person residing in India so that he or she can complete formalities such as registration, possession, execution of agreement of sale and so on. A PoA can be given to facilitate the execution of all contracts, deeds, mortgages, lease, sale and all matters relating to managing the property.
However, it would be better to give specific PoA to any person, restricted only to a single action such as purchasing or leasing. The Power of Attorney should be executed on a stamp paper or as per the requirement of the country where the PoA is executed. The PoA should then be attested by any authorized official of the Indian Embassy / Consulate / Trade Commissioner in that country.
Often, when an NRI purchases property, the developer demands a PoA in their favour. You may choose not to give this PoA, but it may lead to delays, since all documents will have to be mailed to your foreign address. Giving a specific PoA would be a better option.