FEMA Regulations for NRIs Investing in Indian Real Estate

Indian real estate has become an attractive option for Non-Resident Indians. The market, over the years, has seen significant economic growth due to urbanisation, favourable foreign exchange rates and government incentives. 

More non-resident Indians are expressing their interest in Indian real estate, as the market is secure and assures high returns on investment. To make this purchase smoother and navigate the rapidly growing market, there are FEMA regulations for NRIs that ensure every transaction is legal and profitable. 

The Foreign Exchange Management Act (FEMA) oversees foreign investment, and property purchases and defines how the NRIs can invest in the Indian market. By following FEMA, you are ensuring easy transactions, avoiding legal complications, and simplifying fund repatriation. 

In this blog, we will explore an important topic: FEMA compliance for NRIs.
First, let’s learn more about this act.

What is FEMA and Why It Matters for NRI Purchases 

History and Purpose:

The Foreign Exchange Management Act was introduced in 1999, replacing the more strict Foreign Exchange Regulation Act (FERA) of 1973. Upon implementation, FEMA relaxed the rules set around foreign transactions, encouraged more investment from foreign countries, and promoted trade, leading to transparency and better financial security. 

Key Objectives:

• Making foreign exchange transactions easier, 
• Improving clarity by introducing rules and reducing the risk of fraud. 
• Stopping money laundering by making the regulatory framework stronger. 

FEMA and Real Estate Transactions:

FEMA governs NRI investments in Indian real estate: 

• By defining what NRIs can invest in, and what the ownership conditions are. 
• Regulating funding sources for property transactions 
• Imposing restrictions on cash transactions and foreign currency payments. 
• Establishing rules for the repatriation of the money earned from sales. 

So, who qualifies as an NRI? 
According to FEMA, an NRI is an individual who lives outside India but holds an Indian passport. Another category is OCI or the Overseas Citizens of India who are foreign nationals of Indian origin. 
The Income Tax Act defines the NRI differently; according to it, an NRI is someone who has spent a significant number of days outside India during the financial year.

Types of Properties NRIs Can Invest in

FEMA guidelines for NRI real estate investment direct what kind of properties you can invest in as a Non-Resident Indian:

• Residential Properties such as apartments, villas, independent homes, and gated communities. So for example, you can buy a home at Raymond Realty’s Address By GS – Thane even if you live in the USA. 
• Commercial Properties: Office spaces, retail outlets, warehouses, and industrial buildings. 

What properties are off-limits? 

FEMA’s rules for property purchase in India dictate that NRIs cannot buy: 

• Agricultural land, unless inherited. 
• Plantation properties
• Farmhouses. 

Investment Strategies: 

• Residential properties: Personal use, rental income, and long-term appreciation. 
• Commercial Properties: Higher rental yield and steady cash flows. 

Risk analysis: Doing due diligence, location research, and complying with the FEMA regulations is necessary. 

Key FEMA rules for NRIs

How NRIs can fund property purchases: 

• NRE (Non-Resident External): For repatriable funds. 
• NRO (Non-Resident Ordinary): For non-repatriable funds, ideal for rental income. 
• FCNR (Foreign Currency Non-Resident Account): Maintained in foreign currency. 

Restrictions:

• No cash transactions. 
• Foreign currency payments from abroad are not directly allowed. 

FEMA rules on Home Loans for NRIs:

NRI property investment rules under FEMA also dictate their loan eligibility. According to the regulations, NRIs can take home loans from Indian banks and housing finance companies. 

Repayment can be done via:

• The NRE, NRO and FCNR accounts. 
• However, they can’t be repaid using the Foreign bank account directly. 

Power of Attorney for Property Transactions:  

Since NRIs live abroad, having a Power of Attorney is important. A PoA is a trusted representative in India, selected to complete all property-related transactions on the NRI’s behalf. 

To be legally recognised as a PoA, the document has to be notarised and attested by the Indian embassy in the NRI’s residential country. 

Selling Property under FEMA:

According to FEMA real estate regulations for NRIs, property sales can happen under the following conditions: 

• Residential and Commercial Properties can be sold to other OCIs and NRIs. 
• Agricultural land can be sold to Indian residents only. 

Repatriation After Sale: 

FEMA rules for NRI real estate investment allow only $1 million per financial year from an NRO account. The following documents are required: 

• Proof of property purchase
• Sale Deed
• Tax Clearance Forms (15CA and 15CB) 

Tax Deducted at Source: 

• 20% TDS is applied to long-term capital gains. 
• 30% TDS is applied to short-term capital gains. 
  

Tax Implications under FEMA for NRIs

Tax on Rental Income from Indian property: 

NRI investments in Indian real estate also include rental income. If you have put a property on rent, then you have to follow the tax laws in India. Here are some key aspects: 

TDS on Rental Income: 

• Under Section 195 of the Income Tax Act, rental income is subject to 30% TDS, with additional applicable surcharge and cess. 
• The tenant has to deduct the TDS before paying the rent. 

Tax Exemptions and Deductions: 

However, NRIs can claim deductions to reduce their tax liability. 

• Standard Deduction under Section 24: 30% of the rental income is exempt as a maintenance deduction. 
• Interest Deduction on Home Loan: The interest paid on a home loan is also deductible from rental income. 
• Municipal Taxes Paid: Property Tax paid to local authorities can be cut from the rental income. 
• DTAA Benefits: If the NRI owner lives in a country that has a Double Taxation Avoidance Agreement (DTAA) with India, then they can claim tax relief. 

Capital Gains Tax for NRIs: 

When NRIs sell a property in India, the applicable tax depends on how long they owned it: 

Short-Term v/s Long-Term Capital Gains Tax: 

• STCG: Applicable if the property was owned for less than 2 years. It is taxed at the applicable income tax slab rate. 
• LTCG: If the property was possessed by the NRI for 2 years or more, then LTCG is taxed at 20% with indexation benefits. 

Capital Gains Tax Exemptions for NRIs: 

However, you can avail exemptions on this tax category: 

• Section 54: This part of the Income Tax law allows for exceptions as long as the money earned from the sale is reinvested in another residential property within 2 years.  

• Section 54EC: Under this rule, the LTCG tax is not applied if the money is invested in bonds within 6 months. 

Double Taxation Avoidance Agreement (DTAA): 

This agreement helps NRIs avoid being taxed twice. But how does this work? 

• NRIs who reside in countries that have a DTAA agreement with India can claim relief on Income Tax paid in India. This will stop them from being taxed twice on the same income by their resident country. 

Types of DTAA benefits: 

• Exemption Method: Income that is taxed in one country is exempt in the other. 
• Tax Credit Method: Tax paid in India is credited against the tax payable in the foreign country. 

Steps to Claim DTAA benefits:

Step 1: Submit the Tax Residency Certificate (TRC). This is usually issued by the resident country’s tax authority. 

Step 2: Next, file Form 10F with the Income Tax Department in India. 

Step 3: Provide the self-declaration to claim tax relief. 

Wealth Tax and Inheritance Tax Rules for NRIs: 

• The Wealth tax was scrapped in 2015. However, NRIs with multiple properties may be subject to deemed rental income tax, especially if the property is not self-occupied. 

FEMA Rules on Inheritance and Gifting of Property: 

• NRIs can inherit any property type, residential, commercial, agricultural land or farmhouse from an Indian resident, or another NRI. 
• All kinds of properties apart from agricultural land are allowed to be gifted under FEMA, but they are subject to the gift tax under Indian Tax laws. 
  

Common FEMA Compliance Challenges for NRIs

Documentation and Procedural Obstacles:

While FEMA approval for NRI property investment is essential, it brings certain challenges, such as: 

• Inadequate Paperwork: Missing property purchase agreements, tax filings or proof of funds. 
• Incorrect remittance channels: Using non-compliant funding sources for transactions. 
• Delay in PoA Notarisation: A PoA must be notarised and attested by the Indian Embassy. 

Best Practices to ensure compliance: 

• Keep a digital and physical record of all transactions. 
• Verify property documents through legal experts. 
• Ensure that the KYC is completed and follows all FEMA rules for property purchase in India

Regulatory Updates and Adaptations: 

FEMA’s real estate regulations for NRIs are often altered periodically, and these may bring a couple of challenges, such as: 

• Staying updated on the new changes: NRIs often struggle to track these changes by FEMA. 
• Banking and remittance policy changes: RBI also often revises its rules, which can affect the remittances and repatriation limits. 

So how can NRIs stay informed in such cases?  

You need to regularly follow updates on RBI and FEMA’s websites. Additionally, remember to consult financial experts in NRI investments. You can also join NRI property investment forums, as they regularly post about FEMA’s new rules and regulations. 

Legal Repercussions of Non-Compliance: 

FEMA compliance for NRIs is essential, and not following these rules can lead to: 

• Penalties and Fines: RBI-imposed financial penalties. 
• Invalid Property Transactions: Properties acquired through these channels can be declared invalid. 
• Difficulty in Repatriation: You may not be able to transfer the money you earn from rent or sale should you not follow the FEMA compliance checklist for NRIs buying property. 

Avoiding Legal Issues: 

• Engage a legal expert who specialises in FEMA compliance. 
• Use only authorised banking channels, like NRE, NRO and FCNR accounts, for all transactions. 
• Ensure you file all taxes on time so that you can avoid any inspections from the Income Tax Department. 
  

FAQs on FEMA for NRI Real Estate Investments

1. Can NRIs buy property in India under FEMA?
   Yes. FEMA allows the purchase as long as the property is a residential or commercial project. Properties like agricultural land, plantations and farmhouses are not allowed unless they have been inherited. 
   
   
2. How does FEMA regulate NRI real estate transactions?
   NRIs can purchase property in India using NRE, NRO or FCNR accounts only. 
   Transactions should be routed through Indian banks. 
   NRIs have to follow the TDS laws on rental income and capital gains. 
   Fund repatriation is capped at $1 million every year. 
   
   
3. Can NRIs invest in multiple properties in India under FEMA?
   Yes. There are no restrictions on the number of residential or commercial properties NRIs can buy in India.

4. How can NRIs avoid double taxation while investing in Indian real estate?
   This can be done by
   – Claiming DTAA benefits using forms 10F and TRC
   – Utilising Sections 54 and 54EC to claim exemptions for capital gains tax. 

5. Can NRIs inherit property in India under FEMA?
   Yes. FEMA allows NRIs to inherit any kind of property: residential, agricultural, commercial and farmhouses from Indian residents or other NRIs. 
   

Conclusion

To recap, the Foreign Exchange Management Act of 1999 brought in a lot of changes in the way NRIs can invest in Indian properties: 

• NRIs can invest in residential and commercial properties, but not agricultural land. 
• They can apply for home loans, although repayments have to be done via NRE or NRO accounts. 
• Sale proceeds can be transferred, but are capped at $1 million per financial year. 
• TDS only applies to rental income. Capital gains tax is applied to property sales only. 
• DTAA helps NRIs avoid double taxation. 

Following  FEMA real estate regulations for NRIs is important as it helps secure property ownership, smooth transactions and easy fund transfers. In case you have any doubts, then seek guidance from the financial and legal experts to maximise your investment potential, while still following Indian regulations.