Explaining NRI Investments In India's Real Estate
India has a policy for non-residents which invites them to invest in the construction and development sector. For investment in independent premises, the policy is open only for NRIs.
A look at the relevant laws
Currency and exchange control
Framed under Section 47 of the Foreign Exchange Management Act, 1999, the Foreign Exchange Management (Acquisition and Transfer of Immoveable Property in India) Regulations, 2000, apply on immoveable property transactions by non-residents or other transactions involving foreign exchange. The Reserve Bank of India classifies FEMA transactions into two types: capital account transactions and current account transactions. Real estate investment is a capital account transaction.
In India, anyone is taxed on the basis of residence and not citizenship. Indians are subjected to tax in India on their global income while non-residents are taxed on their Indian source of income.
Do note that if you are a Non Resident Indian (NRI) travelling to India to manage your property? Such travel expenses incurred will not be deductible from total income under the provisions of Income Tax Act, 1961. This is established by the Lal Nathirmal Moolchandani versus the International Taxation case.
In this case, the assessee had claimed deduction under section 57. He has income from property, short term capital gains as also income from other sources. The deduction was claimed for travelling to manage the property in India and the expense was claimed to be Rs 2 lakh but the Assessing Officer did not allow the claim with respect to travelling. The assessee had also claimed that the amount was spent only on travelling to manage his property and that the expenses on boarding and lodging were separate and not added to the claim.
The claim was disallowed by the Commissioner of Income Tax (Appeals) who said, “I have gone through the facts of the case and the merits of the arguments of the appellant. On going through the provisions of Sec.57 it is seen that the only Clause under which the appellant could have claimed the said expenditure would be if it can be demonstrated that the said expenditure was laid out or expended wholly and exclusively for the purpose of making or earning such income. There is nothing to suggest that this is the fact of the circumstances of the appellant. Therefore, in the light of this I am in agreement with the AO that Rs. 2 lakhs of expenses claimed on account of travelling and other expenses would not be liable. The ground of appeal is thereby rejected.”
Investment in independent premises for NRIs and PIOs
- Non-resident Indians (NRIs), persons of Indian origin (POIs) and foreign nationals have to ensure that the land on which the purchased property is built is not agricultural land or plantation property, as these types of land can only be purchased by an agriculturist who is an Indian citizen.
- An Indian citizen resident outside India or a PIO does not require any special permission to buy immovable property in India. However, the payment has to be made in Indian currency through normal banking channels, or funds maintained in any non-resident account under the FEMA and the RBI regulations. Foreign nationals and foreign companies are barred from purchasing a property in India.
- Any residential or commercial property can be bought by an NRI but no business can be carried out on the premises.
- As far as disposal of property is concerned, an NRI can sell his property to a fellow NRI or any Indian citizen.
NRIs and foreign nationals investing in real estate business
With a ban on direct business, non-residents are permitted to invest in real estate development activity through Indian companies. According to the new policy, any project under construction, regardless of size, can have access to FDI.
There is a lock-in period of three years before which the minimum investment can be repatriated. Investments may be routed through Mauritius or Singapore so as to make use of tax treaty provisions.
How can NRIs /PIOs acquire real estate in India?
As an individual is the direct owner of the property, he has to be aware of the exchange control consequences of such an investment.
Direct purchase: They can directly purchase any real estate in India (barring farm land, farm house and plantation property) with no restriction on the number of properties. The payment can be made through funds received in India through normal banking channels or funds held in any non-resident account maintained under FEMA.
Gift: Gifts are permitted under the exchange control regime, with relevant Indian stamp laws applicable.
Inheritance: They may inherit Indian real estate from a resident or non-resident (provide the deceased had acquired the property under exchange control regulations).
Investment options to foreign nationals
Any direct acquisition is not permitted to a foreign national, nor can they be joint owners in a property. However, foreign nationals in India who are citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would require prior approval to buy a property in India. Foreign nationals are permitted to sell or gift residential or commercial property to any Indian citizen, NRI, PIO with RBIs approval.
Along with exchange control regime and tax laws, it is important to note that succession laws in India are region and community-specific. For instance, Hindus and Muslims are governed by different succession rules, which will have to be read with FEMA regulations. Anticipation and planning in advance can protect from such situations.
With inputs from Sneha Sharon Mammen