Reserve Bank of India (RBI) regulates purchase and acquisition of immovable property in India by Non-residents under Foreign Exchange Management Act (FEMA). An Indian citizen, resident outside India under FEMA is an NRI (Non Resident Indian) whereas a non-Indian citizen who, or whose parents or grandparents were born in India etc. are treated as OCI (Overseas Citizen of India). Since for investment in real estate NRIs and OCI are generally treated at par, I will refer both as NRI for our discussion. 

Type of properties & mode of payment

As per RBI directions, NRIs are allowed to purchase any number of residential or commercial properties in India without specific permission. They are not even required to intimate the RBI about such purchases, even post conclusion of the transaction. The NRI can purchase the permitted properties from resident as well as from another NRI. An NRI is permitted to hold only one immovable property jointly with his/her non-NRI spouse. NRIs cannot purchase any agricultural land, farmhouse or plantation property in India without specific permission from RBI.

An NRI can pay for such acquisitions, by remitting money from outside India through proper banking channel. Alternatively, and additionally he can use balance lying in his NRE/NRO or FCNR accounts. However, payment for such permitted acquisition cannot be made through traveler's cheques or foreign currency in India. NRIs are even allowed to avail home loan in Indian rupees from the Indian employer of the NRI or a housing finance company or a bank in India to fund such purchases.

The home loan can be serviced by direct remittance from abroad or from the NRE/NRO/FCNR account of the NRI. An NRI can also use rental of the property to service the home loan. In addition to the above sources, the home loan can also be serviced by money transferred to NRI’s account by his relative in India.

Other routes to buy immovable properties

An NRI is also allowed to inherit, either through a Will or under personal law applicable to the NRI, any property including agricultural land, etc. As far as inheritance from an NRI is concerned, it allowed provided the NRI owner had acquired the same under the permitted rules. He is also allowed to receive gift of residential and commercial properties in India from any of his NRI, OCI relative or any resident Indian.

An NRI is allowed to continue to hold all immovable properties including agricultural land, farm house etc. acquired while he was a resident in India.

Transfer of immovable property, remittance outside India

An NRI can sell or gift any immovable property owned by him in India to any resident but can only sell or gift commercial or residential property to another NRI. Direct payment from a Person resident outside India to another Person resident outside India for acquisition of property in India is not permitted.

An NRI is permitted to remit fully the amount on sale of properties in India to the extent of money remitted from outside India or utilized from NRE or FCNR account for purchase of such property.

An NRI is permitted to remit fully such money in respect of two residential properties only. Additionally, an NRI is allowed to remit upto $10 lakh every year out of India from realisation any of his assets in India.

Taxation on sale of properties in India

Taxation rules on profits on sale of immovable properties are the same as applicable to a resident taxpayer except that in case of an NRI seller, the buyer is required to deduct tax at source at full rate applicable on the profits without any threshold limit whereas for resident seller the tax gets deducted at only 1 per cent and that too when the sale consideration of the property exceeds ₹50 lakh. The NRIs have to pay tax at flat 20 per cent on the indexed capital gains if the property is sold after two-year else tax at applicable rate is required to be paid. An NRI can avail exemption from long term capital gains(LTCG) residential property by investing indexed LTCG in another residential property in India. For LTCG on commercial property he has to invest the sale consideration in a residential property in India. Alternatively, an NRI can claim exemption up to ₹50 lakh of LTCG by investing in capital gains bonds within six months.

The author is a tax and investment expert and can be reached on jainbalwant@gmail.com