NRI’s Buying Property in India: Which FEMA laws apply to you?
In 1999, FEMA (Foreign Exchange Management Act) was enacted to regulate NRI, PIO and foreign investments on property in India.
Controversial at first, this new law gave the Reserve Bank of India (RBI) power to determine how to proceed with such investments and banned citizens from 10 countries of investing in Indian real estate. FEMA also establishes clear parameters within one’s national status can be determined, dividing foreigners into three categories, being these:
Non-Resident Indians (NRI): An Indian passport holder that has immigrated to another country for more than 6 months to work or just reside there.
Person Of Indian Origin (PIO): An individual but has, but not currently possess an Indian passport, or that is within two generations a direct descendant of a person that was a citizen of India according to the Constitution of India or the Citizenship Act of 1955)
Foreign Nationals: A person that neither is an Indian national nor lives in India.
Depending on the person’s situation, FEMA established different parameters for investing in Indian property. For NRI’s in particular, no special permission is solicited to buy. An NRI can purchase any non-agricultural property while staying within the margins of other regulations without permission from the RBI, and are also able to transfer ownership to an Indian resident, non-resident Indian, or PIO that lives outside of India.
Funds transactions can be managed through a local account, that has to fall into the following categories (with no consideration to be paid outside India).
- Non-Resident (External) Rupee Account Scheme [NRE Account]: Can be held by NRI’s and PIO’s, and can be owned jointly. They must be in rupees and can only be Savings, Current, Recurring or Fixed Deposit accounts that may just present expenses in India. They’re also allowed to remit money, are repatriable and are not taxable. These accounts may as well receive loans both from and outside of India.
- Non-Resident (External) Rupee Account Scheme [NRE Account]: Can be held by NRI’s and PIO’s, and can be held jointly. They can be in any convertible currency or rupees, and can only be Term Deposit accounts that may just present expenses in India. They’re also allowed to remit money, are repatriable, and are not taxable. These accounts may as well receive loans both from and outside of India.
- Non-Resident Ordinary Rupee Account Scheme [NRO Account]: Can be held by NRI’s and PIO’s, and can be held jointly. They must be in rupees and can only be Savings, Current, Recurring or Fixed Deposit accounts that may only present expenses in India. They’re also allowed to remit money, are repatriable up to 1 Million Dollars a year for income. These accounts are taxable and authorized to receive loans in India, but not from outside.
The RBI also presents the following considerations for NRI’s and PIO’s interested in acquiring property, detailing licit ways for which they can do so:
- Farmhouses, plantations, agricultural lands and similar are not allowed for NRI’s to purchase. Therefore, residential and commercial properties are permitted.
- NRI’s are allowed to inherit properties from any rightful owner.
- PIO’s are only allowed to sell the property to resident Indians.
- In the case of agricultural property, NRI’s have a right to sell it to any resident, while PIO’s can only do so to Indian residents.
- An NRI can’t buy property in India via a joint, nor does a PIO.
- Non-Residents are also allowed to repatriate the profits from their sales, a process that we describe in this article.
Taxes
When it comes to taxes, FEMA does achieve its goal of fostering NRI investments through fairer policies. For NRI’s, for example, buying property doesn’t derive in any taxes, while they do have to pay taxation over the income earned by either renting or selling them. However, with the inclusion of the Double Taxation Avoidance Agreement (DTAA), NRI’s in most countries, even if they are to repatriate their profits, are to pay taxes only in India (which will also work backward).
These policies have proven attractive for NRI’s as its now possible for them to not only avoid paying double taxes but also to grow as investors as the RBI has also fostered another measure: Capital gain reinvestments.
While Capital Gain Tax (the most critical tax NRI’s need to pay), at short-term being 30.9% is still reasonably elevated, NRI’s have the option of paying tax only over the profits that are not invested on other properties within a time limit. Because of this, an NRI may be entirely exempted from paying taxes over a property sale if the gross profits are re-invested in a property that’s equal or higher priced than them.
Capital Gain Tax should be noted, applies to any profit made over a property sale, and that does not exclude funds that are to be repatriated. With the DTAA in place, and to avoid repatriation of black money, FEMA only allows repatriating funds that don’t exceed the amount noted as the total of the property sale after Capital Gain taxation.
With NRI investment being one of the most critical trends for India’s real estate future, there’s no space to doubt that India is looking to secure these investments (whether they come from the UK, the UAE, or the US and Canada) through the enforcement of new policies.
As for NRI’s themselves, more and more opportunities continue to open up. In Reobee.com, for example, we provide a free platform to meet potential buyers or sellers, and sellers from the around the world post their Indian properties for sale. If you’re interested or already investing in Indian real estate, be sure to give it a try!
