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.
NRI, PIO and OCI explained
Let us first look at what the term NRI actually connotes. NRI's or non-resident Indians are individuals who hold an Indian passport and are currently residing or have resided in another country for a consecutive 180 days or above during the said financial year.
In addition to NRI's, there are two categories of individuals who can buy property in India. They are the PIOs’ (Person of Indian Origin) and the OCI's (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 OCI's.
As of now applicants may apply for OCI card only, since PIO card scheme is no longer in existence. It is not mandatory to transfer the PIO Card to OCI card. If required, one may apply for OCI card in lieu of a valid PIO card free of any charges.
Restrictions on property purchase by NRIs
- All properties which are not agricultural, plantation or farmland property can be acquired by NRI's (including PIO's and OCI's).
- No special permission is required to be taken by such NRI's from RBI for making the purchase.
- The documents required are a valid passport, address proof, Permanent Account Number (PAN card) and photograph.
Funding the Purchase by NRI's
NRI's 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. NRI's holding deposits in Foreign Currency Non-resident (FCNR) accounts can also make purchase using funds from such accounts. Besides this, overseas currency can also be brought to India through legitimate banking channels.
Power of Attorney (POA) by NRI's and its adjudication
It is often that NRI's 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 favour 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 NRI's
When a sale of property takes place and the amount so received as sale proceeds is sent abroad to the country of the NRI’s residence, it is called repatriation of funds. The process involves conversion of Indian rupee to foreign currency.
As per the Indian tax laws, if an NRI holds a 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 3 years from 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 3 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 NRI's
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 repatriation of funds from India.
Loan availability and tax benefits on home loans for NRI's
NRI, PIO and OCI all have access to home loans in India. Multinational banks have different schemes in place for providing home loans subject to country related restrictions. Banks seek POA for extending home loans to NRI's.
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.
A good decision is based on the knowledge. The above details can help you on better understanding of NRI property dealings and in turn will help you take the right property decision.