Investing in real estate for NRIs is a great avenue for long term returns. However, any kind of investment that is made needs attention to ensure it is up to date with current market trends.
This presents a pretty huge hurdle for NRIs who have property or want property in India but don’t have the bandwidth to give it the attention it needs. While many NRIs delegate a close relative or family friend as the Power of Attorney, this individual may not have the time or knowledge to cover all the bases of managing your property.
A property management firm like PropTech Solutions has a team of experts who are equipped with expert knowledge on real estate policy, market trends, the most ideal advertising platforms, and many more aspects surrounding the management of your property.
The team at PropTech Solutions takes of everything from rental management, tenant management, marketing, advertising, etc. You as a property owner have nothing to worry about as your property will be in great hands.
As an NRI there are different types of property you can invest in, also, due to your NRI status different policies will be applicable to you.
- Types of Property an NRI can invest in
- Residential Real Estate
- Commercial Real Estate
- Industrial Real Estate
- Agricultural land
- How NRIs Are Taxed, For-Profit Earned From Real Estate Investments
- Short term, long term capital gains, and rental income
- Tax on Inheritance
- Reduce Tax Out-go On Long-term Capital Gain
- Tax On Rental Income From Residential Property
- How NRIs Can Make Financial Transactions For Purchase Of Property
- Loan Eligibility For NRIs
- Non-Encumbrance Certificate
Types Of Property An NRI Can Invest In
#1 Residential Real Estate: An NRI can invest in residential properties such as apartments, condominiums, duplexes, quad-lexes, triple-deckers, high-value homes, multi-generational as well as vacation homes.
However, none of the above can be used for any sort of business purposes like setting up an office space.
#2 Commercial Real Estate: As an NRI you can invest in office spaces, sales areas, retail outlets as well as storehouses which all fall under the category of commercial property.
Though these properties can be a great source of income, they demand more attention and its important to take into account that quite a lot of charges and taxes are imposed on such property.
Therefore, its very important to first evaluate various factors like the locality of the property and the potential of development of that locality – as this can vary from one area to another ad impact your returns.
#3 Industrial Real Estate: Industrial real estate includes and is not limited to: manufacturing buildings as well as stockrooms and storehouses. Services like manufacturing, production, engineering, research, industrialization, development and storage as well as distribution services all fall under this umbrella.
#4 Agricultural Land: Agricultural land in India can only be sold to a person who is a resident of India and not to a non-resident. An NRI cannot buy agricultural land, plantation property, or farm houses in India unless it is inherited.
An NRI may inherit such property from another NRI, but this is subject to RBI regulations. An NRI may be gifted agricultural land, plantation property, or farmhouse from a resident Indian.
How NRIs Are Taxed, For Profit Earned From Real Estate Investments
There are two kinds of income streams that arise from holding any residential property, i.e., income from transfer of property and rental income from letting out of the property.
Under the Indian tax law, income from the transfer of residential property is taxed under the head ‘Capital Gains’ and rental income is taxed under the head ‘Income from house property’.
Based on the duration of holding of the property – capital gains of such property are characterized into 2 main types: short-term capital gains or long-term capital gains.
#1 Short-term capital gains: Short term capital gain is applicable to any property that is held for less than 2 years.
The difference between the sale proceeds and the cost of acquisition is used to calculate the capital gains. This is taxed under the NRI slab if you are an NRI.
#2 Long-term capital gains: Gains from property held for 24 months or more is taxable as a long-term capital gain at a rate of 20% (plus applicable surcharge and cess).
#3 Rental income: Rental income earned from a property asset in India, falls under the income accrued in India and is taxable, irrespective of your residential status.
No Tax On Inheritance
It is important to keep in mind that capital gain does not arise on the inheritance of property as the tax law exempts assets received as an inheritance. However, if the inherited property is sold – capital gains tax will be applicable.
Reduced Tax on Long-term Capital Gain
The tax laws provide the following deductions from the levy of long-term capital gains tax on the transfer of residential property if the gains are invested as specified:
• Where the amount of long-term gain is invested for the purchase/construction of new residential house property in India, a deduction to the extent of the gains invested shall be available.
The new property must be purchased either one year before or two years after the date of transfer and must be constructed within three years from the date of transfer.
If an individual cannot invest in a new property before the filing of the income tax returns, the gains can be invested under the ‘capital gains account scheme’.
The gains can be held for three years within which period the amount needs to be withdrawn from the respective bank for purchase or construction of the new residential property. Failure to utilize the amount as prescribed would result in the capital gains becoming taxable.
• Capital gain amount to the extent of `50 lakh may also be invested in specified bonds within six months from the date of transfer of the long term capital asset to obtain a deduction from capital gains tax.
Tax On Rental Income From Residential Property
Income from renting out a residential property is taxable under the head ‘income from house property’.
The owner has to first determine the annual value of the property. A standard deduction at 30% of the annual value is allowed towards repairs and maintenance and a deduction of up to `2 lakh is allowed towards interest payable on any loan taken with respect to the property. Any municipal taxes paid during the year are allowed as a deduction.
If an NRI owns more than one residential property that is self-occupied – then only one of those properties will be treated as self-occupied and the rest will be treated as deemed to let out. There is no tax implication in the case of one self-occupied property.
How NRIs Can Make Financial Transactions For Purchase Of Property
NRIs/ PIO can make payments out of:
- Funds remitted to India through normal banking channel.
- Funds held in NRE/ FCNR (B) / NRO account maintained in India.
- No payment can be made either by traveler’s cheque or by foreign currency notes.
- No payment can be made outside India.
Loan Eligibility For NRIs
An NRI must have a graduate degree to apply for a home loan. Many banks have eligibility criteria of at least a diploma/graduate degree and a few years of employment abroad or any other professional qualification with one at least one year of employment abroad.
In case you are an NRI working in West Asia, you need to have a minimum salary of 36,000 dirhams a year (for loans with a tenor of up to five years) and if you are in the US then you need to earn at least $30,000 a year.
The income taken into account for calculating the home loan eligibility is the repatriable income (income abroad) plus any income in India.
The encumbrance certificate is a necessary certificate used in property transactions as proof of free title or possession. When purchasing a property like a house, plot, or flat, it is essential to confirm that the property does not have any financial or authorized duties.
The certificate is essential for NRIs who inherit property. An encumbrance certificate is used in property transactions as evidence of free title to ensure the property has no legal dues.
As a property management firm, we understand that living abroad and keeping up with all these various legalities and policies in addition to the upkeep and maintenance of your property can be a tedious task. At PropTech Solutions, we have expert property managers who will keep you updated on everything related to your property and also work on ensuring you get the best returns on your investment by managing your property for you.