Introduction: Non-Resident Indians (NRIs) often seek avenues to invest their foreign exchange earnings in the Indian real estate market, especially with the depreciating value of the rupee. Over the past decade, the ease in Indian regulations and taxation has witnessed a surge in NRI investments. This article aims to demystify the regulations governing real estate investments by NRIs and shed light on the associated taxation implications.

Regulations on Real Estate Investment by NRIs:

Under the Foreign Exchange Management Act (FEMA), the Central Government, in consultation with the Reserve Bank of India (RBI), frames rules for capital account transactions. The RBI, in turn, regulates the acquisition or transfer of immovable property in India by individuals residing outside the country.

Acquisition of Immovable Property:

The Foreign Exchange Management (Non-Debt Instruments) Rules 2019 allows NRIs or Overseas Citizens of India (OCI) to acquire immovable property in India, excluding agricultural land, farmhouse, or plantation property. The consideration for property acquisition should be from funds received in India through banking channels or through NRO/NRE or FCNR(B) accounts.

• Acquisition by Gift: NRIs or OCIs can acquire immovable property in India through a gift from a person resident in India, NRI, or OCI, provided they are relatives as defined under the Companies Act.

Transfer of Immovable Property:

NRIs or OCIs can transfer any immovable property in India by sale to any person resident in India, NRI, or OCI. However, the transfer of agricultural land, plantation property, or a farmhouse is restricted to a person resident in India.

Repatriation of Sale Proceeds:

According to FEMA, in the case of selling immovable property (excluding agricultural land/farmhouse/plantation property) in India, NRIs or Persons of Indian Origin (PIO) can repatriate sale proceeds outside India, subject to certain conditions.

• The property must have been acquired in compliance with prevailing laws.
• The funds for property acquisition should be from foreign exchange received through banking channels or from funds held in foreign currency accounts.
• Repatriation of sale proceeds for residential property is limited to not more than two properties.

Specific Country Considerations:

Citizens of certain countries, including Pakistan, Bangladesh, Sri Lanka, etc., require prior permission from the Reserve Bank for acquiring or transferring immovable property in India. Lease transactions not exceeding five years, however, do not require prior permission.

Tax Implications on Sale of Immovable Property:

Since immovable property is considered a capital asset, profits or gains from its transfer are taxed under the head “Income under the head Capital Gains.” The taxation is determined based on the holding period of the property.

Exemptions:

• NRIs or OCIs can avail exemption from long-term capital gains by reinvesting the sale proceeds in the purchase or construction of a residential house in India.
• Union Budget 2023 proposed a maximum exemption cap of Rs. 10 Crores.

Tax Deducted at Source (TDS) Provisions:

When an NRI sells property in India, the buyer is required to deduct TDS under Section 195 of the Income Tax Act. The rates are 20% for long-term capital gains and 30% for short-term capital gains, along with additional surcharge and cess. NRIs can apply for Nil/Lower deduction of TDS if their tax liability is lower.

Repatriation Formalities:

To repatriate money received from the sale of property in India, NRIs need to submit Form 15CA & Form 15CB as per the Income Tax Act to the Bank.

Double Taxation Avoidance Agreements (DTAA):

To mitigate double taxation issues, India has entered into DTAA with several countries. NRIs can get a tax credit for taxes paid in India, reducing their tax liability in their resident country.

Conclusion: Investing in Indian real estate offers lucrative opportunities for NRIs, backed by eased regulations and favorable taxation. Understanding the intricacies of property acquisition, transfer, and taxation is crucial for NRIs to make informed investment decisions and navigate the legal landscape effectively. This guide aims to provide clarity on these aspects and empower NRIs to make sound real estate investments in India.