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Financing Options and Tax Implications for NRIs Buying Property in India

Real estate lawsThe procedure for NRIs and Person of Indian Origin (PIO) has been greatly simplified for encouraging them to invest in real estate. The Reserve Bank of India (RBI) and FEMA regulations have categorically specified the kinds of investment that is permitted for NRIs in the real estate segment.

First of all you do not need RBI permission to buy residential or commercial property. You have the permission to carry out the following with regard to real estate in India:

  • Acquire any immovable property other than agricultural land, plantation property and farm house in India.
  • Acquire any immovable property as described above by way of gift from a resident Indian, citizen of India residing outside or Person of Indian Origin.
  • Acquire property by means of inheritance.
  • Transfer by means of sale of immovable property described above by means of a sale to a person residing in India.
  • Transfer agricultural property, plantation land or farm house by way of gift to Indian citizen who is residing in India.
  • Transfer by way of gift residential or commercial property by means of gift to any person who is a citizen of India whether residing within or abroad or a Person of Indian Origin.

For more information on the laws you can click here…

Without dwelling more into the laws and rules for NRIs/ PIO buying a property in India, let’s go to the topic in hand – what are the financing options for PIO/ NRIs wanting to buy a property in India.

Today there are several financing options for NRIs looking to buy a property in India. The RBI has stipulated the following norms for NRIs to buy a house in India:

First, the home loan amount for a NRI is restricted to a maximum of 80% of the cost and the balance has to borne directly by the NRI.

Second, the remittance of the down payment by the NRI can be made directly from the nation of current residence through normal banking channels such as the NRE/ NRO account in India.

Third, the repayment of the principal as well as the interest amount to the financing agency must be done through similar channels only.

Tax Implications for NRIs Buying House in India:

For PIO and NRIs to buy a property in India, payment for the purchase can be made either by way of funds remitted to India from abroad through regular banking channels or through the balance in the NRE, NRO or FCNR Account.

Meanwhile, according to the Indian Income Tax Act, a NRI, just like any other Indian citizen owns more than one property, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property. Based on certain valuations prescribed by the income tax rules, the other property, whether you rent it out or not, will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property and pay the required tax.

Meanwhile the Income Tax Act does not specify if either or both these properties must be situated only in India. At the time of drafting the Income Tax Act, one did not envisage a situation where an Indian would own properties overseas. But now, more and more Indians are settling abroad. So from the reading of the Act, the rule of ‘more than one property’ will apply to global properties too.

This means is that if you own only one property globally and that property is in India, you does not have to pay any income tax on it in India. However, if you own and live in a house in a foreign country and you also own a property in India, even if you don’t give the property in India on rent, you will have to pay income tax on deemed rent in India. The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act.

Invariably you have to pay the stamp duty and the registration fee while purchasing but will have no additional tax due at the time of the purchase.

You will be able to avail the same benefits as resident Indians on the interest paid towards the house loan.

In case the property is leased then the tax procedure becomes slightly more complicated. The income received by this means shall be treated as ‘Income from Property’ and hence the standard slabs of Income tax will be applicable with the standard deductions. If you reside in nations where worldwide income is taxable such as the US, you will have to pay the tax applicable in that country unless there is a Double Tax Avoidance Agreement with India.

As a special benefit all amount paid towards the interest of the home loan repayment is deductible from the taxable income for NRI without any upper limit. Additionally, in case you sell off the property you will be liable for the capitals Gains Tax as applicable under the IT Act.