Jigar M. Patel
International Tax Attorney
India continues to be an emotional and financial home for millions of Indians living abroad and persons of Indian origin who have taken permanent residency rights or foreign citizenships. For many, investing in Indian real estate is not just about returns, it is about roots, security and future plans. The rules governing what NRIs (who include Indian passport holders living abroad, OCI card holders and foreign nationals of Indian origin) can buy, sell and repatriate are governed by a complex interplay of FEMA (Foreign Exchange Management Act) and Indian income-tax laws. Understanding these rules is essential to avoid costly mistakes.
FEMA Regulations for NRIs for Immovable Properties
Under FEMA regulations, NRIs are permitted to purchase residential and commercial property in India without any special approval from the Reserve Bank of India, since this is covered under the general permission. This makes investing in residential apartments, villas, offices or shops relatively straight-forward. There is no restriction on the number of residential or commercial properties that can be purchased by an NRI in India. NRIs can invest in the same through foreign currency remittances or even out of the balances lying in their NRE, FCNR or NRO bank accounts.
Restrictions for Agricultural Properties
As per FEMA and RBI guidelines, NRIs are not permitted to acquire any Agricultural Land, Plantation Property or Farm Houses in India. However, an NRI can continue to hold any such land or property acquired by him, while he was still a resident of India. Even the receipt by way of a gift of such property is not permitted in the case of an NRI.
Inheritance or Succession – an Important Exception?
While NRIs cannot buy agricultural properties or receive them by way of gift, they are permitted to receive them through inheritance or succession, either from a person resident in India or even another NRI. Moreover, an NRI can sell any agricultural property held by him in India, but only to a person resident in India, who is a Citizen of India.
Repatriation of Funds on Sale of Property
Keeping in view the freedom granted to NRIs to annually repatriate up to USD 1 million per financial year out of the balances held in their NRO accounts, repatriation of sale proceeds is feasible, subject to the aforesaid monetary limit. The transfer of funds from NRO to NRE Account or repatriation from NRO to a bank account in any country outside India is subject to the completion of documentary process of Form 15CA to be uploaded for the NRI and issue of Form 15CB by a Chartered Accountant.
Taxation in India & NRI’s Home Country
Any long-term capital gains (LTCG) on sale of immovable property in India arising in the hands of an NRI is taxable at 12.5%, the same tax rate as in the case of a resident taxpayer. It is important to note that any capital gains tax paid in India by an NRI is not likely to be a double tax burden in majority of the cases. Under India’s Double Tax Avoidance Agreements (DTAAs), an NRI is entitled to Foreign Tax Credit (FTC) in his home country on the amount of taxes paid by him in India, ensuring that the capital gains tax income is only taxed once, in line with international tax guidelines. Moreover, if the property has been received under inheritance or succession by an NRI resident in the United States (US) and is subsequently sold, he would be eligible to claim the benefit of ‘Step-Up in Basis’, which can in appropriate cases, quite significantly reduce his capital gains tax liability in the US.
