"Men count you in this World by how much you own and not by what you really are"
Even though 50 years have passed since independence has been obtained, the housing shortage is growing in proportions as time passes by. The property industry in India is maturing in terms of market dynamics in the post 1994 scenario when the country witnessed the major turbulence. Like other sectors in the economy, this industry is also plagued by political interferences and absence of proper regulatory mechanisms so as to protect the common interest of the investor. However considering the importance of this sector and the growing affluence of the middle and higher income groups, this sector has demanded the attention of the finance ministers in the last four years. Even the latest budget for the fiscal 2001-2002 has given lot of sops to the investors in this sector. In line with our earlier commitment we propose to cover the benefits to the common man arising out of the latest budget on their investments and also try to clarify few misgivings about the investment in this sector.
Investments From Foreign Funds:
Any foreign citizen irrespective of his residence can buy housing property in India subject of course to the permission of the Reserve Bank of India (RBI). Normally such permissions are given generally if the foreign exchange used for buying the property is remitted through normal banking channels or the investments are made out of their NRE / FCNR accounts. It would be sufficient compliance if the necessary declaration were filed with RBI within 90 days of the purchase. The RBI permits repatriation of original investment equivalent to the forex originally invested after obtaining necessary approvals. The above repatriation is subject to following conditions:
- In case of residential properties repatriation is restricted to two houses.
- The investment should have been made on or after 26th May, 1993.
- The ownership should have been atleast for three years.
- The repatriation would be restricted to the original forex brought into this country and the balance amount if any would be credited to the seller’s NRO account or the Resident Rupee Account in the case of resident foreign citizens.
- Prior RBI permission is required for repatriation and the relevant application should be lodged within 90 days of the property sale.
Investment From Local Funds:
- For foreign citizens of Indian origin, RBI will grant the permission to invest the local funds in immovable properties against necessary application only in cases where such investments are required for bonafide residential use.
- Properties not immediately required can be leased out and repatriation of leased income is permissible.
- Foreign citizens resident in India are generally permitted to buy one house property only for their family’s bonafide residential use out of their Rupee funds.
Investment By Foreign Citizens Of Non-Indian Origin:
- RBI permits foreign nationals to acquire immovable properties in India for bonafide residential use out of fresh forex remittances through normal banking channels.
- Any income out of such investments is not repatriable.
- Prior RBI permission is required for such investments.
Investment By Indian Citizens:
- Practically there are no restrictions for Indian citizens to invest in immovable properties.
- Any investment on or after 26th May, 1993 is entitled to repatriation subject to relevant information shared with the apex bank.
- No restriction exists for sale of properties for Indian citizens and for foreign citizens, the sale is subject to RBI permission.
- No loans can be taken from resident Indians for such investments without necessary RBI approval.
- For purchase and sale of flat the non-resident is under no obligation whatsoever and only the resident should seek prior permission to make payment including the purchase consideration to a non-resident.
- RBI generally grants permission for inheritance of immovable properties to non-residents of Indian origin irrespective of citizenship and to hold and enjoy such properties. However no repatriation of sale proceeds is allowed as the rupee is not fully convertible on capital account.
- RBI also gives permissions in case of gifts of immovable properties to any Indian citizens or non-residents of Indian origin.
Income Out Of Immovable Properties:
RBI gives general permission in case of lease income subject to the following conditions:
- The lease income and the proceeds of any investment out of such income shall be repatriable due to current account convertibility.
- As an alternative, the above income shall be credited to NRO account or Resident Rupee Account in India.
Rules Governing Partnership Firms, Trusts And Associations:
- A firm should take prior RBI permission for purchase or sale of property even if one of the partners is a Foreign citizen.
- Trust or association should take RBI permission if any member or trustee is a foreign citizen.
Loans For Housing:
With the globalisation of the economy, there is a growing number of players in the financial services to the property industry and loans are given on competitive terms to NRIs for acquisition of a house / flat for self occupation. NRIs can also avail of loans from any authorized dealers on their return to India. Normally such loans are for a period of 15 years and the loans are to be settled out of fresh inward remittances. The employees of Indian companies residing abroad can also avail loans from their employers against RBI permission.
Investment By Foreign Companies / Banks:
- Companies other than banking companies are granted permission to acquire or hold any immovable property if they are incidental to their business subject to usual declarations.
- Foreign companies having only liaison office or representative office can invest subject to fresh inward remittances.
- Foreign banking companies can invest subject to the provisions of the Banking Regulation Act and the RBI policies in force.
Pre-Emptive Purchase Of Immovable Properties:
Chapter XX – C governs the acquisition of immovable properties in certain cases of transfer to counter tax evasion.
Impact Of Recent Budget:
- Maximum deduction for interest payment on housing loans for self occupied houses hiked to Rs. 1.5 lakhs per year. As a consequence, the effective rate of interest on a Rs. 11.5 lakhs loan at the prevailing 13% interest works out to a mere 8.69%.
- Exemption for income from house property raised from 20% to 30%.
- Administrative procedures simplified due to scrapping the need for clearance from the Income Tax Department for sale of immovable property valued at Rs. 5 lakhs or more.
- Rationalisation of provisions to provide for only two deductions – 30% of the annual value and the interest borrowed on the capital borrowed.
- Long term capital gains invested in IPOs will be tax exempt.
- Surcharges go; so effective rate is now lower.
In general, the budget has catalysed the investment into this sector and it is expected to prop-up the investment climate in the property industry and in the capital markets. Loan seekers also have it good. The exemption limit for interest on housing loans has been raised from Rs. 1 lakh to Rs. 1.5 lakhs. With the reduction in the interest rates on long-term funds, the interest on the loans for the housing sector will also have a rippling effect. It is hoped that the NRIs will reap the benefits. In our next article we propose to cover your investments in specific industries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.