Introduction
The Foreign Exchange Management Act, 19991 ("FEMA") was introduced to regulate Indian foreign exchange transactions, replacing the older Foreign Exchange Regulation Act, 1973 ("FERA"). FEMA tends to play a significant role in governing the financial investments and transactions of Non-Resident Indians2 in the Real Estate Sector, where the current scenario for foreign investment has been a significant driving force of economic growth. FEMA defines a 'Non-resident Indian' ("NRI") as a person resident outside India who is the citizen of India.3
India has also witnessed an exponential flow of Foreign Direct Investment and NRI real estate investments, which is encouraged by economic liberalization. FEMA tends to have a strict imposition on real estate property regulations in relation to ownership, transfer and repatriation, requiring compliance from NRIs investing in the real estate market.
Given the economic, financial and legal impact of FEMA on cross-border real estate transactions, this analysis explores provisions governing the NRI real estate investments, their implications and potential reforms.
Objective
This article aims to briefly:
- Analyze FEMA regulations which govern NRI real estate transactions.
- Examine the types of properties NRI can purchase or sell in India.
- Evaluate the tax implications, which include capital gains and repatriation rules.
- Identify the compliance challenges NRI may face under FEMA regulations.
- Provide suggestions to avoid legal and financial roadblocks while investing in the Indian Real Estate Market.
Acquisition of Immoveable Properties in India by NRIs
FEMA provides clear guidelines on the type of properties NRIs can acquire in India. As per the provisions contained in Section 6(5) of FEMA, Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulation, 20184 and Foreign Exchange Management (Non-Debt Instrument) Rules, 20195, NRIs can acquire / purchase properties in India as follows:
- purchase immovable property in India other than agricultural land/farm house/plantation property;
- acquire any immovable property in India (other than agricultural land / farmhouse/ plantation property) by way of gift from a Relative (as defined in the Companies Act, 2013)6; or
- acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired it (i) under laws in force at the time of acquisition; or (ii) from a resident.
Generally, NRIs and Persons of Indian Origin (PIOs) do not need approval from the Reserve Bank of India (RBI) to acquire / purchase residential or commercial property in India. Additionally, there are also no limits to the number of residential or commercial properties that NRIs or PIOs can buy in India7.
Transfer of Immoveable Property by NRIs:
NRIs can transfer:8
- any immovable property in India to a person resident in India;
- any immovable property other than agricultural land/ farmhouse/ plantation property to NRI or Overseas Citizenship of India (OCI).
NRIs do not require any prior approval from the Reserve Bank of India to transfer such properties.
Payment Mechanism
The transactions in relation to acquisition or transfer of immovable property has to be undertaken through banking channels in India and is subject to payment of all taxes and other duties/ levies in India9.
The payment can also be made out of funds held in NRE (Non-Resident External)/NRO (Non-Resident Ordinary)/FCNR(B) (Foreign Currency Non-Resident Bank) accounts of the NRIs/ OCIs. Payments should not be made through travellers' cheque and foreign currency notes10.
Failure to adhere to FEMA's provisions can lead to penalties, and even confiscation of the property by authorities.
Documentation
As compliance requirement, NRIs are required to provide identification and other documents, which include proof of residence, income tax returns, passport, PAN Card and NRE/NRO account details.
Further, to sell immoveable property in India, NRIs should have the following documents: latest encumbrance certificate, title documents of property, approved building plan, occupancy certificate and permission for transfer from society (if required).
Tax Implications
- Acquisition of Property:
- When purchasing a property from a resident seller and the value of the property exceeds Rs. 50,00,000/-, 1% TDS on consideration is applicable. The TDS rate is higher for purchase of property from non-resident sellers.
- Stamp Duty & Registration Fees: For acquisition of property in India, NRIs should ensure the payment of applicable stamp duty and registration charges on the title document.
- Sale of Property:
- TDS of 12.5% is applicable as per the current regime on sale of property by NRI. Further, additional surcharge, educational cess may also be applicable.
- Capital gains tax is applicable on sale of property by NRIs in India. The tax percentage is variable basis short-term (when property is sold within 2 years of purchase) (taxed as per the applicable tax slab) or long-term (when property is sold after 2 years of purchase) (generally taxed at 12.5%). There may be additional surcharge based on taxable income. NRIs may also claim tax benefits under Income Tax Act, 1961, on selling of property in India.
- Repatriation of Sale Proceeds: NRIs can repatriate property sales, provided that the funds are through NRO/NRE accounts and maximum repatriation limit is USD 1 Million per financial year (without RBI approval).11
Compliance Challenges
- Delays in completion of the transaction due to FEMA approval requirements.
- Taxation complexities regarding capital gains, double tax DTAA benefits, and repatriation limits.
- Failure to comply with TDS requirements, resulting in tax penalties.
Non-Compliance with FEMA provisions may lead to penalties under Section 13 of FEMA, which could include confiscation of property and monetary penalties.12
Common Pitfalls
NRIs should ensure compliance with the below is done beforehand:
- Verification of property titles before the transaction to avoid ambiguous legal disputes.
- Ensuring approvals via FEMA and RBI Regulations are obtained.
- Clear understanding of taxation rules and claim the double taxation avoidance agreement (DTAA) benefits wherever applicable.
- Avoiding agricultural land transactions (without RBI approval), which are penalized and punishable under FEMA regulations and laws.
Conclusion
To conclude under the present regime, NRIs can freely invest in residential and commercial properties but can face restrictions on agricultural land, taxation and repatriation limits which require strict compliance with FEMA regulations. NRIs should bear in mind to undertake legal due diligence and proper documentation, to ensure a hassle-free investment process.
Footnotes
1. Reserve Bank of India (RBI), "Foreign Exchange Management Act, (FEMA), 1999"
2. Section 2(w) in The Foreign Exchange Management Act, 1999
5. (Notification No. S.O. 3732(E) [F.NO.1/14/EM/2015], dated 17-10-2019)
6. Section 2(77) of the Companies Act, 2013
7. Ministry of External Affairs: FAQ on Overseas Indians (OCIs, PIOs and NRIs)
10. Purchase of immovable property in India by Non-Resident Individuals: Purchase of Immovable Property: Reserve Bank of India
11. FAQs: Reserve Bank of India: Remittance of Assets Dated 02/09/2016 Reserve Bank of India
12. Section 13 in The Foreign Exchange Management Act, 1999
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.
