Non-resident Indians often feel perplexed as to how to go about investing in property in India. They are unsure about the rules and the methodology of making investments and hence are apprehensive about the outcome from such investments. This article attempts to dispel the doubts in the minds of such prospective NRI investors by addressing key issues pertaining to property dealings in India.
Table of Contents
- NRI, PIO, and OCI
- Type of property that can be/ cannot be bought by NRIs
- Funding the purchase by NRIs
- Power of Attorney by NRIs and its adjudication
- Repatriation of funds and tax implication of NRIs
- Taxability of rental income for NRIs
- Loan availability and tax benefits on home loans for NRIs
NRI, PIO and OCI explained
In addition to NRIs’,If required, one ma there are two categories of individuals who can buy property in India. They are PIOs’ (Person of Indian Origin) and the OCIs’ (Overseas Citizen of India).
The PIO status used to be a 15-year visa for non-Indian citizens. However, this has been discontinued from 9th January 2015. Presently all PIO card holders have been automatically been categorized as OCIs’.
As of now, applicants may apply for OCI cards only since the PIO card scheme is no longer in existence. It is not mandatory to transfer the PIO Card to the OCI card. If required, one may apply for an OCI card in lieu of a valid PIO card free of any charges.
The Central Govt of India grants Overseas Citizenship of India (OCI) to people who have migrated from the country and those whose ancestors belonged to India. (Except Pakistan and Bangladesh).
Type of Property that can be / cannot be bought by NRIs
- All properties which are not agricultural, plantation or farmland property can be acquired by NRIs’ (including PIOs’ and OCIs’).
- An NRI or PIO can buy residential properties in India if he has a valid address proof in India or
an OCI card.
- No special permission is required to be taken by such NRIs’ from RBI for making the purchase.
- An NRI or PIO can receive a residential property as a gift from an Indian or NRI or PIO.
- An NRI or PIO can receive a residential property as an inheritance from an Indian.
- An NRI or PIO can receive a residential property as an inheritance from a resident outside India by following the guidelines set by RBI, provided the acquired property is as per the foreign exchange law at the time of purchase.
- The documents required are an OCI card, Registered Power of Attorney, valid passport, address proof, Permanent Account Number (PAN card), and passport size photographs.
- There is no limit on the number of properties that can be owned by NRI or PIO.
- NRI or PIO can sell their property.
- RBI allows NRIs to rent properties. The income generated is eligible for repatriation.
Funding the Purchase by NRIs
NRIs’ holding non-resident external (NRE) or Non Resident Ordinary (NRO) rupee accounts in India are eligible to buy property by issuing cheques from such accounts. NRIs’ holding deposits in Foreign Currency Non-resident (FCNR) accounts can also make purchases using funds from such accounts. Besides this, overseas currency can also be brought to India through legitimate banking channels.
Power of Attorney (POA) by NRIs and its adjudication
It is often that NRIs’ are not willing to travel to India for registering the property in their name. In such cases and situations, it is within their rights to issue POA in favor of a close relative residing in India. The relative can then sign on the purchase contract on his behalf and also register the same in his or her name. The POA, per se, must be signed by the NRI in the presence of a notary or consulate officer in the country of his residence.
Once the POA is sent to India, the POA holder will have to sign and adjudicate it within three months from the date of assigning the power, at the registrar’s office in India. After this procedure is completed, it can be said that the POA has been legally given.
Repatriation of funds and tax implications for NRIs>
When a sale of property takes place and the amount so received as sale proceeds are-being sent abroad to the country of the NRI’s residence, it is called repatriation of funds. The process involves the conversion of Indian rupee to foreign currency.
As per the Indian tax laws, if an NRI holds property in India, he or she is not liable to pay tax unless there is a rental income accruing from it. However, if the property is sold, then capital gains tax – short term or long term, as the case may be, is applicable.
- Short Term Capital Gain (STCG) is applicable when the property is disposed of for a profit within a period of 2 years from the date of purchase. Profit thus accruing is taxable as per the applicable income tax slab for the seller.
- Long Term Capital Gain (LTCG) occurs when the property is sold after 2 years. Indexation benefit is available in such cases and the profit after applying such indexation benefit is taxable at 20.6 %.
- However, if the profit is reinvested in Section 54EC bonds issued by REC or NHAI (within 6 months of the sale) or if another property is bought with it within a specified number of years, then the tax gets waived off.
Taxability of rental Income for NRIs
If the property held by the NRI is let out on rent then such rental income is taxable . Due taxes have to be paid on such income and proper income tax returns need to be filed under relevant PAN.
If the NRI has two or more properties in India then only one can be treated as self-occupied and ‘deemed rent’ has to be declared for the other properties and tax has to be paid on them. However, as per the rules applicable to resident Indians, NRIs’ too have the choice of showing 30% of such deemed rental income as maintenance cost and get tax benefit against the same.
No tax is payable on deemed income in the country of the NRI’s residence, however, it is advisable to declare the same there as it could otherwise cause problems during the repatriation of funds from India.
Loan availability and tax benefits on home loans for NRIs
NRI, PIO, and OCI all have access to home loans in India. As per RBI, NRIs can avail loans only from certain financial institutions. Multinational banks have different schemes in place for providing home loans subject to country related restrictions. Banks seek POA for extending home loans to NRIs’.
As per the tenets of the Income Tax act of India (section 24), interest on a home loan is deductible from the income gained from house property to the extent of Rs.2 lakh per annum for self-occupied property. Other than self-occupied property, actual interest paid can be claimed as a benefit. Over and above this, up to Rs.1.5 lakhs is deductible on account of principal repayment under the overall limit available as per section 80C. The loan should be repaid within 15 years.
A good decision is based on knowledge. The above details can help you with a better understanding of NRI property dealings and in turn, will help you to make the right property decision.