5 Things NRIs Should Note Before Making Real Estate Investment in India

Non-Resident Indians (NRI) have been known to look for ways to invest their earnings in India. Some wish to diversify their assets, while others look for a house property to live in their motherland after retirement.To promote the flow of foreign capital to India, the Reserve Bank has eased some regulations on investments made by non-residents. The Foreign Exchange Management Act (FEMA) governs the real estate transactions of non-residents.Here are 5 such rules that an NRI should know before investing in Indian real estate: An NRI can only invest in commercial or residential property. He/she cannot register an agricultural property (including plantations and farmhouse) unless inherited or gifted to them.Additionally, a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, cannot acquire any immovable property in India without prior permission from the Reserve Bank of India. They can, however, lease a property for a period, not more than five years. Payments towards acquiring the property can only be made through funds remitted to India through regular banking channels and not outside India. It can be carried out using NRE or NRO or FCNR(B) accounts maintained by the NRI. These payments cannot be made using travellers cheque or foreign currency notes. NRIs are taxed on any income that they may earn from their property in India. This income may be in the form of rent earned on these properties or on their sale. The income is broadly classified as:Short-term capital gains: Any profit made on the sale of a property within two years of purchasing it, is considered as short-term capital gains. Proceeds from the sale minus the cost of acquisition will be considered as the profit for tax calculation as per the law. The tax rate applicable will be based on their total taxable income in India.Long-term capital gains: Returns from the sale of a property held for over 2 years is considered LTCG. It is taxed at 20 percent. In case of inherited property, the date of acquisition of the original will be considered for the time period and the cost of the property will the cost of the previous owner. An NRI is also eligible to claim exemptions under sections 54, 54 F and 54 EC of the income tax act.Rental income: Computation of rental income and taxes imposed on an NRI is the same as an Indian resident in this category. NRIs too can apply for home loans just like Indian residents in Indian rupees for 80 percent of the value of the property. The loan taken can be repaid through inward remittance of the foreign fund to India, NRO/NRO/FCNR(B) accounts, rental income from the property. It can also be repaid through a close relatives (Indian resident) account in India (as per section 6 of the companies act of 1956). You can invest in an under-construction property by giving the power of attorney to a trusted associate. Also take help of your lawyer to prepare the document correctly to make sure your investment is safe while property is being constructed and you do not fall prey to forgery.