A House for Mr NRI

NRIs who purchased property in India a few years ago have not managed to rake in the moolah. Unattractive returns in cities such as Hyderabad and Coimbatore have put off NRIs, particularly from the US, according to builders.

However, NRIs with a long-term horizon for property investments may be able to find value buys in many markets currently. Here are a few ideas from real estate experts on the options available to NRIs.

While outward remittance by Indians to buy property abroad is curtailed, there is no upper limits for remittances into India. So, NRIs can remit through normal banking channels and NRE, NRO or FCNR accounts can be used. NRIs can also take interest-free loans from close relatives residing in India. The lender is subject to the FEMA limit of $75,000 per financial year under the Liberalised Remittance Scheme.

NRIs are also subject to tax deduction at source (TDS) withholding (at the rate of 1 per cent) for property purchases over ₹50 lakh. Housing loan principal repayment, stamp duty and registration charges are allowed as deduction from one’s gross income under the overall limit of ₹1 lakh a year, under Section 80C.

Investing in a flat may be the safest bet for NRIs. Last year, NRIs were more active in the mid-income residential segment, says Kiran Kumar Kavikondala, WealthRays Group. That said, even the residential segment can be risky if you are considering large townships, given the experience with projects such as Lavasa near Pune. Investing in ‘branded’ developers in the growing tier-2/3 cities is an off-beat idea suggested by IAS Balamurugan, Metis Family Offices.

But those who do not find the idea of buying another flat exciting, may look at buying a holiday home in a hill resort such as Manali or a beach property in Goa. Buying property close to a religious place such as Udupi is also becoming popular. In these cases, ensure proper maintenance of the property as keeping it locked up may be risky and also proper upkeep is essential to sustain the property’s value.

There is also some interest among NRIs to purchase retirement homes for their parents. These choices may offer unique benefits to the owner, but may not provide the best returns.

Non-resident Indians are allowed to purchase residential or commercial property in India but not agricultural land/plantation property/farm house, says Amarpal S. Chadha, Tax Partner, EY.

While residential land purchases have benefited many investors, buying land can be risky, especially for an NRI. There could be disputes about title, encroachments and pricing or selling the plot in an emergency could be difficult. Pooling is a popular means of purchasing larger parcels of land. Besides lowering monetary investment risk it also helps in ongoing maintenance and monitoring.

Land in gated developments is a safe choice and purchases for larger parcels on the outskirts of the city may be more risky, though the potential gains can be higher.

“NRIs are sold the most expensive property in a project,” says Om Ahuja, CEO of residential services at Jones Lang LaSalle (JLL), a global property consultant, “and this is not where the most returns are from.”

He suggests investing in multiple mid-priced homes as it is also easy to find a buyer for these properties.

However, when selecting the project, NRIs should go for one with high-end amenities.

A strong builder reputation, quality, prime location, desirable amenities and a good homeowners’ association are important. Engaging with external property management agencies will be particularly helpful in the maintenance and renting of property.

Thanks to the real-estate boom in the last few years, even smaller cities and towns have seen price gains. Factors such as supply-demand mismatch and infrastructure project delays may influence short-term price trends. The long-term appreciation in capital and rental value will, however, depend on the employment scene.

“NRIs from towns such as Madurai or Lucknow are interested in buying in their hometown,” says Ahuja, “but long-term appreciation would depend on the scope for job growth.” For instance, Chennai and Pune, where job growth is driven by multiple sectors and thus hold potential for a wide range of jobs, have seen better property price appreciation compared to Bangalore and Hyderabad, where jobs are primarily from the IT sector.

Buying a property requires time and one should not try to finalise on a property during a flying visit to India.

“Ask a few builders in the locality on what the price was initially, and the price for the last transaction,” advises Mathew Mammen, Executive Director, Sobha Developers, “and visit a completed project by the builder to assess quality before deciding to buy.” Property is a big investment, irrespective of the currency, and due diligence is required in checking the builders’ reputation for timely delivery, legal aspects of the agreement and tax matters – more so due to the distance factor.

Owning a home in India has wealth tax implications. An NRI is exempt from wealth tax on a property that has been rented for more than 300 days.

Also, one vacant house property can be declared as self-occupied property and is exempt from the wealth tax. The value (net of outstanding loans) of second and subsequent vacant properties would be subject to wealth tax, at the rate of 1 per cent on the value in excess of ₹30 lakh, says Parizad Sirwalla, Practising Chartered Accountant, KPMG.

NRIs are subject to capital gains tax in India, similar to what is applied to residents. There are also limits and conditions for repatriation based on the funds used for buying property.

If the property was acquired as per the forex laws, the amount of repatriation is restricted to the extent of the initial purchase cost of the property.