In this article we plan on answering 2 important questions
A. Why should an NRI invest in India?
B. How should an NRI invest in India?
Let us begin by asking the Question –‘Why India?’
The simple answer is that India is an attractive destination for Real Estate Business. There are various factors that contribute towards the sector’s growth. Let us understand them better…
I The Scenario as per a KPMG Report
- Demographic statistics suggest that India will be a leading destination for Real Estate Business Globally
- The industry is slated to grow at a CAGR of 15% and grow 5 fold to USD 650 Billion by 2025
- To achieve this possibility Reforms to the Land Acquisition Act & strengthening of the REITS structure have become crucial
- The current demand in India from Genuine end users is 50 million dwelling units at the bottom of the pyramid.
II Drivers of Growth
- Economic growth – India is expected to grow between 7-8% annually over the next 10 years.
- Rising Income Levels.
- Younger & smaller families – means more number of units required.
- Real Estate as an industry ensures the growth of more than 300 allied activities which in turn again fuels Real Estate Growth.
- USD 1 Trillion will be spent on infrastructure by 2017.
- India will emerge as the 3rd largest construction market by 2020.
- 8500 km of new roads being built.
- 200 low cost airports to be built over the next 20 years.
- 1000 Private Universities to come up for producing trained manpower to meet the Industry Requirements.
III Expected scenario in 2028
- 2.5 Billion Sq. Ft. of Real Estate shall be available for the Luxury Segment.
- 3.5 Billion Sq. Ft. of Real Estate shall be available for the Mid- Income Segment.
- 18 Billion Sq. Ft. of Real Estate shall be available for the Affordable Segment.
IV Emerging Real Estate Trends
- Investment in plots
- Around upcoming developing areas where the apartment culture is not yet prevalent.
- Peripheries of the upcoming smart cities.
- Better returns in the mid to long term investment horizon.
- Pockets expected to see a high Realty Growth.
V Chennai and Bangalore are witnessing the arrival of a number of projects with more than 1000 dwelling units each.
- Driver of such projects is the feel of a township with self-contained amenities and social infrastructure. In South India Social Infrastructure is the biggest driver of growth.
- Bangalore is witnessing such projects in the Devanhalli & Hoskote areas.
- Chennai has 45 such projects along the OMR & GST Roads.
- Most of these units are in the luxury segment with 3,4,5 BHK formats in Bangalore, however Chennai has a concentration of smaller units with most of them being 2BHK units.
VI Heritage Cities: The Upcoming Destinations
- The recent initiative by the government to develop various regions as heritage cities will also lead to high realty growth in those cities in the times to come.
- The cities to be considered in the 1st phase of development include: Mathura, Amritsar, Ajmer, Varanasi, Vellankani, Kanchipuram and Gaya.
- The second phase will include cities such as Puri, Tirupati, Allahabad, Ujjain, Hampi, Rishikesh and Lucknow.
- Cities like Varanasi, Rishikesh and Lucknow are already seeing considerable realty growth.
VII Industrial Corridors: Infra growth at India’s Hinterlands
- There are 5 major industrial corridors being developed
- Cities falling along the major industrial corridors are expected to see immense growth in the coming years, making them investment hubs.
- Delhi – Mumbai Industrial Corridor
- Amritsar- Kolkata Industrial Corridor
- Bangalore – Mumbai Industrial Corridor
- Chennai – Bangalore Industrial Corridor
- Vizag – Chennai Industrial Corridor
States & Cities positively impacted by the DMIC
||Cities / Towns positively impacted
||Noida, Ghaziabad, Meerut and Dadri Muzaffarnagar
||Faridabad, Palwal, Rewari and Hissar
||Jaipur, Kushkera-Bhiwadi-Neemrana Dhausa, Ajmer, Kishangarh, Rajasamand, Bhilwara, Pali and Marwar
||Vadodara, Ahmedabad, Baruch-Ankleshwar-Dahej, Dholera and Surat Navsari, Valsad and Umbergaon
||Pitampura-Dhar-Mhow, Nimach-Nayagaon Shahjapur, Dewas, Ratlam, Nagda
||Nashik, Sinnar, Dhule-Nardhana , Alewadi, Igatpuri, Indapur and Mangaon
VIII Affordable Housing – Big Impact on the Real Estate Industry
- Dwelling units in the size range of 350 sq.ft. to 700 sq.ft.
- Tick size of the units ranging from Rs.10 lakhs to Rs.35 lakhs
- Mass Housing with amenities and utilities , better space utilisation
- Demand of more than 50 million units
- Moreover, RBI accorded the infrastructure status for affordable housing projects
- Cashing on this, realty giants such as Mahindra Lifespaces, Tata Housing, Supertech are launching affordable projects in major metro cities
- Project amenities – simple by effective
- Stress on security & automation of security
- Stress on open spaces
- Stress on health related amenities & infrastructure
IX Smart City Boom
||Cities / Areas marked for Smartness!
||Ajmer, Varnasai, Allhabad, Faridabad , Bodh Gaya, Gurgaon, Jaipur
||Tumkur, Electronic City, Vishakhapatnam, Krishnapatnam, Kochi, Vijaywada
||Indore, Bhopal, Gwalior, Ujjain, Jabalpur, Dewas
||Bandra Kurla Complex, Dholera, Aurangabad
X REITS (Real Estate Investment Trust)
- With ‘tax pass through’ status for Real Estate Investment Trusts (REITs), commercial real estate is expected to be the next big thing in 2015.
- As the sector is reeling through an acute funding pressure, this initiative will give a much-needed fillip to the sector.
- REITs will act as the investment vehicle between investors and developers. Recently, Blackstone, American private equity fund, started the process of grouping all the property it holds in India into a Real Estate Investment Trust (REIT).
- DLF is planning to monetise some commercial assets worth about $500 million or Rs 3,000 crore.
- It is a safe investment in real estate considering the fact that REITs will only invest in the properties which are completed and income generating. This is a major advantage for investors because they do not have to worry about completion of the project or success of the project.
Now to answer the question, ‘How should an NRI invest in India?’
A Non-Resident Indian or an NRI can invest in the Real Estate Sector in India. However there are certain guidelines that need to be followed as mentioned below.
I NRI Guide to Buying Real Estate in India
- Know your rights as NRI:
- Covered by FEMA Guidelines administered by the Reserve Bank of India
- NRIs / OCI’s can only purchase residential or commercial property
- Buying of any agricultural or farming land is not permissible , however you can Inherit Agricultural Land or a Farm House
- Even if a residential or commercial building is built on a designated agricultural land, the purchase is deemed illegal for NRIs/ OCI’s.
- There is no distinction between a PIO & OCI as of date as the two have been merged. All erstwhile PIO Holders are now deemed to be OCI’s
- All new applicants can only apply for OCI Card and the procedure will remain the same as earlier.
II Who is an OCI?
- Any person of full age and capacity:
- Who is a citizen of another country, but was a citizen of India at the time of, or at any time after, the commencement of the constitution, or
- Who is a citizen of another country, but was eligible to become a citizen of India at the time of the commencement of the constitution, or
- Who is a citizen of another country, but belongs to a territory that became part of India after the 15th Day of August, 1947.
- Who is a child of such a citizen, or
- A person, who is minor child of a person mentioned in clause (a)
- Provided that no person, who is or had been a citizen of Pakistan, Bangladesh shall be eligible for registration as an Overseas Citizen of India.
III Documents required for buying property
- Pan card (Permanent account number)
- OCI card
- Passport (In case of NRI)
- Passport size photographs
- Address proof
IV Due Diligence For Ready-To-Occupy Properties
- Get all details pertaining to the developer’s credibility.
- Of particular importance is the developer’s delivery track record of past projects.
- Ask the developer for :
- the approved drawings of the project,
- a copy of the IOD (intimation of disapproval) and completion certificate / TP Approval / Collector Approval
- Occupation Certificate
- Clear land title through a title report
- Check if any Bank or Financial Institution is prepared to lend against the property
- If yes it means the property is legal with all clearances & permissions
- The documents required for registration of a residential flat, apart from the sale deed, will include a letter from the society that reflects the number of floors in the building, the year in which the building was constructed, the apartment’s built-up area and the number of lifts in the building.
V Due Diligence For Under-Construction Properties
- Get an accurate idea of the project’s progress. This is especially true if the property is being bought directly from the developer.
- When no property advisor is involved in the transaction, the risk of falling prey to a deceptive projection of the project’s development progress multiplies manifold.
- The buyer needs to establish whether the builder has :
- Free and clear ownership of the land on which the project is being built
- An agreement between builder and the original owner of the land
- The project also needs to have an IOD / Town Planner / Collector Approval
- IOD / TP Approval is a set of instructions that a developer needs to comply with so that he can legally construct the project. The IOD is valid for one year and needs to be reissued if the project has not been completed in a year’s time.
- The project also needs to have a commencement certificate in place
- Check is any Bank or Financial Institution is willing to fund the project
- While considering a pre-launch option, it is even more necessary to establish the trustworthiness of the builder, especially in terms of his track record for transparent dealings and compliance with legal formalities
VI Due Diligence For Redeveloped Properties
- For a redeveloped property, the paperwork is the same as for a new one as the project is complete, no matter what its history is. In the case of redeveloped properties, there are two possible scenarios:
- In the first scenario, discussions regarding redevelopment are ongoing between the society and developer, but no agreement has yet been signed. In such a case, buying into the project is as good as buying into a normal resale property.
- In the second scenario, an agreement is already in place between the society and the developer. If one of the society members wishes to sell his property and has found a buyer, there are three parties involved in the transaction – the seller, the buyer and the developer. The developer in question needs to be kept in the loop so that the rights of the existing society member who is selling his property are properly transferred to the buyer, with the knowledge of the society.
- In case the agreement is signed between society and developer, there are two situations possible. In the first, the building has yet to be demolished, in which case the process is simple – the buyer moves into the property, to vacate along with other society members at the time of actual redevelopment.
- However, if the building has already been demolished, the old flat no longer exists and the new one is yet to be constructed. In this case, the permission of both the society and developer are required since, though money has changed hands, the transaction is incomplete until the property has been reconstructed and registered in the new owner’s name. The agreement needs to mention this appropriately.
- In the case of a redeveloped property, apart from the usual due diligence, the development agreement between society and developer must be checked on. The new buyer must ensure that the seller is surrendering all rights and claims after the property is reconstructed.
VII Tax on income from immovable property selling/renting
- The mere acquisition of property does not attract income tax
- However, any income accruing from the ownership of it, in the form of rent (if it is let out)
- Annual value of the house (if is not let out and it is not the only residential property owned by that person in India)
- Capital gains (short term or long term) arising on the sale of this house or part thereof is taxable in the hands of the owner
VIII Taxation of Real Estate Income in the hands of an NRI / OCI
- The Government of India has granted general permission for NRI/OCI to buy property in India
- They do not have to pay any taxes even while acquiring property in India.
- However, taxes have to be paid if they are selling this property.
- Rental income earned is taxable in India
- NRI / OCI will have to obtain a PAN and file return of income if they have rented this property.
- On sale of the property, the profit on sale shall be subject to capital gains.
- If the property has been held for less than or equal to 3 years after taking actual possession then the gains would be short term capital gains, which are to be included in their total income as tax as per the normal slab rates shall be payable
- If the property has been held for more then 3 years then the resultant gain would be long term capital gains subject to 20% tax plus applicable cess.
IX How does the Double Taxation Avoidance Agreement work in the context of tax on income and Capital Gains tax paid in India by NRI /OCI?
- India has DTAA’s with several countries which give a favourable tax treatment in respect of certain heads of income.
- However, in case of sale of immovable property, the DTAA with most countries provide that the capital gains will be taxed in the country where the immovable property is situated.
- Hence, the non-resident will be subject to tax in India on the capital gains which arise on the sale of immovable property in India.
- Letting of immovable property in India would be taxed in India under most tax treaties in view of the fact that the property is situated in India.
- In case the non-resident pays any tax on capital gains arising in India, he would normally be able to obtain a tax credit in respect of the taxes paid in India in the home country, because the income in India would also be included in the country of tax residence.
X Repatriation of funds
- Property should be acquired only out of foreign exchange sources i.e. remitted through normal banking channels/by debit to NRE/FCNR(B) account.
- The amount to be repatriated should not exceed the amount paid for the property:
- In foreign exchange received through normal banking channel or
- By debit to NRE account (foreign currency equivalent, as on the date of payment) or debit to FCNR(B) account.
Repatriation of sale proceeds of residential property purchased by NRI’s/OCI’s out of foreign exchange is restricted to not more than two such properties. However there is no restriction on the number of commercial properties.
- Capital gains, if any, may be credited to the NRO account from where the NRI’s/OCI’s may repatriate an account up to USD one million, per financial year.
- Repatriation of Capital Gain or Profits will be subject to Tax Compliance
XI Repatriation of Funds Invested in Indian Real Estate
XII Repatriation of Rental Income
- The rental income, being a current account transaction, is repatriable
- Subject to the appropriate deduction of tax and the certification thereof by a Chartered Accountant in practice.
- Repatriation of sale proceeds is subject to certain conditions.
- The amount of repatriation cannot exceed the amount paid for acquisition of the immovable property in foreign exchange.
- If it exceeds the cost of acquisition, it should be credited to the NRO account and repatriation will be restricted to USD.1 million per year
XIII Difference between NRE & NRO Bank Accounts
|NRE (Non Resident External Account)
||NRO (Non Resident Ordinary Account)
|Bank Account to be maintained in INR
||Bank Account to be maintained in INR
|Can be held jointly only with an NRI / OCI
||Can be held jointly with Resident Indian
|Interest on NRE Account is Tax Free
||Interest on NRO Account is Taxable
|Permitted Credits to the account - transfers from other NRE / FCNR accounts, sale proceeds of FDI investments, interest accruing on the funds held in such accounts, interest on Government securities/dividends on units of mutual funds purchased by debit to the NRE/FCNR(B) account of the holder, certain types of refunds, etc.
||Permitted credits to the account - rent, dividend, pension, interest, etc., sale proceeds of assets including immovable property acquired out of rupee/ foreign currency funds or by way of legacy/ inheritance.
|NRE account is freely repatriable (Principal and interest earned)
||NRO account has restricted repatriability i.e permitted remittance allowed from NRO is up to USD 1 million net of applicable taxes in a financial year after
XIV NRI/OCI Home loans
- Housing finance institution in India approved by the National Housing Bank may provide housing loan to An NRI / OCI
- The quantum of loans, margin money and the period of repayment shall be at par with those applicable to housing finance provided to a person residing in India.
- The loan amount shall not be credited to Non-resident External (NRE)/Foreign Currency Non-resident (FCNR) account of the borrower.
- The loan shall be fully secured by equitable mortgage by deposit of title deal of the property proposed to be acquired, and if necessary, also be lien on the borrower’s other assets in India.
XV NRI/OCI Home loans
- The instalment of loan, interest and other charges, if any, shall be paid by the borrower by remittances from outside India through normal banking channels or out of funds in his Non-resident External (NRE)/Foreign Currency Non-resident (FCNR/Non-resident Ordinary (NRO) account in India
- or out of rental income derived from renting out the property acquired by utilization of the loan or by any relative of the borrower in India by crediting the borrower’s loan account through the bank account of such relative