There are very clear cut regulations on property transactions for NRIs, PIOs and foreigners in India. Mr. T.R.Shastri, Divisional Head of Karur Vysya Bank (Bangalore Division) explains the various implications of current laws:
The real estate prices in Bangalore are increasing and everyone in the market predicts that this time the boom is realistic and not speculative since the actual users are buying and not the investors. There is an influx of people from other States; there is also an influx of people from other countries. Yes, there are a number of foreigners who have chosen to live in Bangalore.
More importantly there are a number of Indians who are working presently abroad and hence are “Non-resident Indians” (NRIs) who would like to return to India preferably to Bangalore. Many of them wish to own a house or flat in Bangalore for either their future use or as an investment. Some of them may even be holding a foreign passport. A few of them may be interested in buying farm houses or agricultural lands nearby or commercial properties.
Having purchased one such property, some would like to sell it and then wish to know whether the sale proceeds can be taken out of India etc. There are a few NRIs who have settled abroad permanently but with inherited property in India. Naturally they would like to sell the property and take the money out of India. Parents of such NRIs who live face many such queries from their wards abroad. On their own also, many parents would like to advise their children abroad of how to invest in real estate and what the related rules are and so on.
In an economy where there are no restrictions on movement of capital (popularly known as capital account convertible economies), the investor in real estate has only to think about the capital gains or loss by such investment and also the tax implications. In our country, where the capital account convertibility has not yet been implemented fully, the investors should also know the exchange control regulations relating to such investments like the number of properties that can be purchased or sold, the repatriability of the sale proceeds, the method in which the funds are remitted, the types of properties that can be acquired etc. This article attempts to explain these aspects in simple terms.
Forex regulations
Transactions between a person resident in India and one outside India or transactions between two persons in India but in a foreign currency are subject to Reserve Bank of India (RBI) rules. Earlier the rules were governed by Foreign Exchange Regulations Act 1947 which were modified subsequently in 1973 and then again in 1993. All these were replaced by an act called Foreign Exchange Management Act 1999 which is effective from June 1, 2000.
Subsequently a number of changes have been made by government and RBI published through notifications, regulations etc. While these are available in the web page of Reserve Bank of India, a summarised version is discussed below. While the words resident or non-resident are apparently simple to understand, the legal definition is provided under the Foreign Exchange Management Act. A person resident in India means a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year (April-March) and who has come to or stays in India either for taking up employment, carrying on business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In other words, to be treated as “a person resident in India”, under FEMA a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of the purpose/intention of stay.
In case of doubt whether a person is to be considered as a resident or otherwise, he has to prove his residential status as per law. e.g. RBI does not give a status certificate. Generally this status is clearly applicable to most of us. But in case of businessmen or dependents of non-residents who travel regularly, students studying abroad, Indians who have acquired foreign citizen but have come to India for work on deputation etc there may be scope for interpretation. It is advisable to consult experts before entering into transactions.
Purchasing
NRIs can purchase residential and/or commercial properties without any restriction. In other words, there is no ceiling on the number of such properties, he can buy, the size or value of such property etc. There is no ceiling on the value of such properties he can buy so long as it is only residential or commercial property i.e. it can be a villa, penthouse, shopping mall or all the shops on M G Road! There is no document or statement or any such details to be sent to RBI, government of India or to any bank before, during or after such purchase.
This freedom is available to all non-residents who are either citizens of India (i.e. holding Indian passports) or who are Persons of Indian Origin (PIO). The permission is for buying residential or commercial property and not purchase of agricultural land or plantation property or farm house in India.
PIOs
There is a legally valid definition for this term PIO. In simple words, however, a PIO is one who held an Indian passport any time earlier or who or whose father or grandfather was a citizen of India. Thus if a person migrates and later acquires local citizenship, he, his children and his grand children also have this permission. However, to avoid complications arising out of citizenship before partition and other related issues, the local citizenship acquired should not be of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan.
Restrictions
On the other hand, a foreign national of non-Indian origin resident outside India (e.g. Mr. George Bush) cannot acquire any immovable property in India by way of purchase. Moreover property cannot be purchased jointly in the name of one eligible person with one non-eligible person even as a second name. That means an NRI or PIO cannot buy a property jointly with a foreigner (i.e. who does not even have the PIO status). However, a foreign national resident in India does not require approval of RBI to purchase any immovable property in India. This is because once he is a resident in India, he gets the rights like any other resident. This freedom of course is not available to citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan. Thus if you propose to sell your property to a “foreigner” because the price is attractive, better verify his residential status!
Such “ineligible persons” (e.g. foreign nationals of non-Indian origin and also citizens of certain countries specified above) can acquire residential (not commercial) accommodation on lease not exceeding five years without any RBI permission.
Property gift
The above explained permissions relating to purchase apply to acquisition by means of gift also. That means NRIs & PIOs can acquire residential/commercial property as gift but not agricultural land/plantation property/farm house in India. Foreign nationals of non-Indian origin cannot acquire any of these as gift also. Normally gift of immovable property is rare. But this sub-rule has been introduced to prevent any deliberate action aimed at misuse and tax evasion.
However, non-resident person (i.e. NRI, PIO or a foreign national of non-Indian origin) can receive such property by way of inheritance from a person resident in India or person outside India (the latter subject to RBI permission). This means that if an Indian, resident in India dies and his legal heir or person named to receive the property is abroad, he can own the property so left by the deceased even if such heir is not eligible to buy such property (e.g. being a foreigner of non-Indian origin like our Mr. George Bush).
In certain communities, certain elderly persons only remain in India and their present generations may have migrated abroad e.g. to Israel. These rules become relevant when such elderly persons in India die either intestate or with specific rules for devolution of property.
Agricultural land
The NRI or PIO cannot purchase or get as gift farm house, agricultural land or plantation property. But it is possible that he may have been owning them before becoming an NRI or PIO. The law does not stipulate that such holdings are illegal or that they have to be sold immediately on becoming NRI or PIO. On the other hand, the law stipulates the rules relating to sale of such property if he so desires any time when he is a non-resident.
The NRI or PIO can let out his property and the rent received is freely repatriable. In other words, even if he has a property owned by him out of local resources or owned before becoming an NIR or PIO, he can take the rent out of the country by converting it into US dollars at his bank. Of course, he cannot ask his tenant to pay the rent in dollars!
Selling
NRIs can sell a residential/commercial property in India to a resident or to an NRI or a PIO but PIO can sell it only to a resident. NRI or a PIO can sell his agricultural land/ plantation property/farm house in India only to a resident Indian, because such property cannot be acquired by other than resident Indians. Foreign nationals of non-Indian origin require prior permission of RBI both for acquiring property in India (as already explained above) and also for its subsequent sale.
Raising loans
The banks and housing finance companies are now over enthusiastic in lending for buying or constructing houses and flats. They are ready to lend to NRIs also and mortgage of property is a must for raising such loan. Fortunately rules clearly permit such mortgage transactions. It can be either the simple “equitable mortgage” or “registered mortgage”. NRIs and PIOs are permitted to raise loans from commercial banks and housing finance companies in India by mortgaging the property.
However, if a private company wants to lend taking such property as collateral, it is not permitted. Similarly for whatever reasons e.g. better interest rate, the NRI cannot mortgage the property to a bank or a company outside India and raise finance. Of course, as always, with RBI permission, this is possible. Foreign national of non-Indian origin requires RBI permission for mortgaging property either in India or abroad.
Initially, the rules relating to the foreign exchange source of funds were very strict in the sense that the non-resident had to bring forex into the country to acquire any property. Now rules have been considerably diluted.
Presently, an NRI or PIO can acquire a property in India by remittance from abroad, from out of his local nonresident bank accounts, out of his local resources, out of loans raised from a local bank or housing finance company or money borrowed from his Indian employer (if such be the case).
Since our economy is not yet capital account convertible, the sale proceeds of a house by a resident India cannot be repatriated, i.e., it cannot be taken out of India.
Repatriating proceeds
In simple words, a resident Indian cannot just sell his house and ask the bank to convert the entire sale proceeds to US dollars saying that he will migrate to USA and hence needs the funds in dollars. However, an NRI or PIO can repatriate sale proceeds of maximum two residential properties acquired out of foreign exchange funds. It is subject to quantitative ceiling in that the amount repatriated should not exceed the foreign exchange brought in.
This is to prevent any attempt being made to repatriate more than what is brought in due to exchange rate fluctuation. There is no lock-in period, i.e., an NRI can buy property on day one and sell it on day two and take back the original amount in dollars and have the capital gains, if any, retained in India.
A question that naturally arises is when can the NRI take out of India, the surplus arising out of sale of the property i.e., the capital gains part of the sale.RBI has permitted taking out of India (i.e. repatriate) such funds provided such a property was held by him for a period not less than 10 years. If such a property is sold after being held for less than 10 years, remittance can be made, provided that the funds were lying in his bank account (NRO account) or in any eligible traceable investment. Applicable tax has to be paid before remittance.
The remitting bank has to ensure this. Hence the bank will agree for remittance of such funds out of NRO accounts only on production of an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes as per their Circular No.10/2002 dated October 9, 2002. of course, this remittance facility is not available to a citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan.
The real estate prices in Bangalore are increasing and everyone in the market predicts that this time the boom is realistic and not speculative since the actual users are buying and not the investors. There is an influx of people from other States; there is also an influx of people from other countries. Yes, there are a number of foreigners who have chosen to live in Bangalore.
More importantly there are a number of Indians who are working presently abroad and hence are “Non-resident Indians” (NRIs) who would like to return to India preferably to Bangalore. Many of them wish to own a house or flat in Bangalore for either their future use or as an investment. Some of them may even be holding a foreign passport. A few of them may be interested in buying farm houses or agricultural lands nearby or commercial properties.
Having purchased one such property, some would like to sell it and then wish to know whether the sale proceeds can be taken out of India etc. There are a few NRIs who have settled abroad permanently but with inherited property in India. Naturally they would like to sell the property and take the money out of India. Parents of such NRIs who live face many such queries from their wards abroad. On their own also, many parents would like to advise their children abroad of how to invest in real estate and what the related rules are and so on.
In an economy where there are no restrictions on movement of capital (popularly known as capital account convertible economies), the investor in real estate has only to think about the capital gains or loss by such investment and also the tax implications. In our country, where the capital account convertibility has not yet been implemented fully, the investors should also know the exchange control regulations relating to such investments like the number of properties that can be purchased or sold, the repatriability of the sale proceeds, the method in which the funds are remitted, the types of properties that can be acquired etc. This article attempts to explain these aspects in simple terms.
Forex regulations
Transactions between a person resident in India and one outside India or transactions between two persons in India but in a foreign currency are subject to Reserve Bank of India (RBI) rules. Earlier the rules were governed by Foreign Exchange Regulations Act 1947 which were modified subsequently in 1973 and then again in 1993. All these were replaced by an act called Foreign Exchange Management Act 1999 which is effective from June 1, 2000.
Subsequently a number of changes have been made by government and RBI published through notifications, regulations etc. While these are available in the web page of Reserve Bank of India, a summarised version is discussed below. While the words resident or non-resident are apparently simple to understand, the legal definition is provided under the Foreign Exchange Management Act. A person resident in India means a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year (April-March) and who has come to or stays in India either for taking up employment, carrying on business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In other words, to be treated as “a person resident in India”, under FEMA a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of the purpose/intention of stay.
In case of doubt whether a person is to be considered as a resident or otherwise, he has to prove his residential status as per law. e.g. RBI does not give a status certificate. Generally this status is clearly applicable to most of us. But in case of businessmen or dependents of non-residents who travel regularly, students studying abroad, Indians who have acquired foreign citizen but have come to India for work on deputation etc there may be scope for interpretation. It is advisable to consult experts before entering into transactions.
Purchasing
NRIs can purchase residential and/or commercial properties without any restriction. In other words, there is no ceiling on the number of such properties, he can buy, the size or value of such property etc. There is no ceiling on the value of such properties he can buy so long as it is only residential or commercial property i.e. it can be a villa, penthouse, shopping mall or all the shops on M G Road! There is no document or statement or any such details to be sent to RBI, government of India or to any bank before, during or after such purchase.
This freedom is available to all non-residents who are either citizens of India (i.e. holding Indian passports) or who are Persons of Indian Origin (PIO). The permission is for buying residential or commercial property and not purchase of agricultural land or plantation property or farm house in India.
PIOs
There is a legally valid definition for this term PIO. In simple words, however, a PIO is one who held an Indian passport any time earlier or who or whose father or grandfather was a citizen of India. Thus if a person migrates and later acquires local citizenship, he, his children and his grand children also have this permission. However, to avoid complications arising out of citizenship before partition and other related issues, the local citizenship acquired should not be of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan.
Restrictions
On the other hand, a foreign national of non-Indian origin resident outside India (e.g. Mr. George Bush) cannot acquire any immovable property in India by way of purchase. Moreover property cannot be purchased jointly in the name of one eligible person with one non-eligible person even as a second name. That means an NRI or PIO cannot buy a property jointly with a foreigner (i.e. who does not even have the PIO status). However, a foreign national resident in India does not require approval of RBI to purchase any immovable property in India. This is because once he is a resident in India, he gets the rights like any other resident. This freedom of course is not available to citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan. Thus if you propose to sell your property to a “foreigner” because the price is attractive, better verify his residential status!
Such “ineligible persons” (e.g. foreign nationals of non-Indian origin and also citizens of certain countries specified above) can acquire residential (not commercial) accommodation on lease not exceeding five years without any RBI permission.
Property gift
The above explained permissions relating to purchase apply to acquisition by means of gift also. That means NRIs & PIOs can acquire residential/commercial property as gift but not agricultural land/plantation property/farm house in India. Foreign nationals of non-Indian origin cannot acquire any of these as gift also. Normally gift of immovable property is rare. But this sub-rule has been introduced to prevent any deliberate action aimed at misuse and tax evasion.
However, non-resident person (i.e. NRI, PIO or a foreign national of non-Indian origin) can receive such property by way of inheritance from a person resident in India or person outside India (the latter subject to RBI permission). This means that if an Indian, resident in India dies and his legal heir or person named to receive the property is abroad, he can own the property so left by the deceased even if such heir is not eligible to buy such property (e.g. being a foreigner of non-Indian origin like our Mr. George Bush).
In certain communities, certain elderly persons only remain in India and their present generations may have migrated abroad e.g. to Israel. These rules become relevant when such elderly persons in India die either intestate or with specific rules for devolution of property.
Agricultural land
The NRI or PIO cannot purchase or get as gift farm house, agricultural land or plantation property. But it is possible that he may have been owning them before becoming an NRI or PIO. The law does not stipulate that such holdings are illegal or that they have to be sold immediately on becoming NRI or PIO. On the other hand, the law stipulates the rules relating to sale of such property if he so desires any time when he is a non-resident.
The NRI or PIO can let out his property and the rent received is freely repatriable. In other words, even if he has a property owned by him out of local resources or owned before becoming an NIR or PIO, he can take the rent out of the country by converting it into US dollars at his bank. Of course, he cannot ask his tenant to pay the rent in dollars!
Selling
NRIs can sell a residential/commercial property in India to a resident or to an NRI or a PIO but PIO can sell it only to a resident. NRI or a PIO can sell his agricultural land/ plantation property/farm house in India only to a resident Indian, because such property cannot be acquired by other than resident Indians. Foreign nationals of non-Indian origin require prior permission of RBI both for acquiring property in India (as already explained above) and also for its subsequent sale.
Raising loans
The banks and housing finance companies are now over enthusiastic in lending for buying or constructing houses and flats. They are ready to lend to NRIs also and mortgage of property is a must for raising such loan. Fortunately rules clearly permit such mortgage transactions. It can be either the simple “equitable mortgage” or “registered mortgage”. NRIs and PIOs are permitted to raise loans from commercial banks and housing finance companies in India by mortgaging the property.
However, if a private company wants to lend taking such property as collateral, it is not permitted. Similarly for whatever reasons e.g. better interest rate, the NRI cannot mortgage the property to a bank or a company outside India and raise finance. Of course, as always, with RBI permission, this is possible. Foreign national of non-Indian origin requires RBI permission for mortgaging property either in India or abroad.
Initially, the rules relating to the foreign exchange source of funds were very strict in the sense that the non-resident had to bring forex into the country to acquire any property. Now rules have been considerably diluted.
Presently, an NRI or PIO can acquire a property in India by remittance from abroad, from out of his local nonresident bank accounts, out of his local resources, out of loans raised from a local bank or housing finance company or money borrowed from his Indian employer (if such be the case).
Since our economy is not yet capital account convertible, the sale proceeds of a house by a resident India cannot be repatriated, i.e., it cannot be taken out of India.
Repatriating proceeds
In simple words, a resident Indian cannot just sell his house and ask the bank to convert the entire sale proceeds to US dollars saying that he will migrate to USA and hence needs the funds in dollars. However, an NRI or PIO can repatriate sale proceeds of maximum two residential properties acquired out of foreign exchange funds. It is subject to quantitative ceiling in that the amount repatriated should not exceed the foreign exchange brought in.
This is to prevent any attempt being made to repatriate more than what is brought in due to exchange rate fluctuation. There is no lock-in period, i.e., an NRI can buy property on day one and sell it on day two and take back the original amount in dollars and have the capital gains, if any, retained in India.
A question that naturally arises is when can the NRI take out of India, the surplus arising out of sale of the property i.e., the capital gains part of the sale.RBI has permitted taking out of India (i.e. repatriate) such funds provided such a property was held by him for a period not less than 10 years. If such a property is sold after being held for less than 10 years, remittance can be made, provided that the funds were lying in his bank account (NRO account) or in any eligible traceable investment. Applicable tax has to be paid before remittance.
The remitting bank has to ensure this. Hence the bank will agree for remittance of such funds out of NRO accounts only on production of an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes as per their Circular No.10/2002 dated October 9, 2002. of course, this remittance facility is not available to a citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan.
A person owning residential, commercial property, agricultural land, plantation property, farm house may become a NRI or PIO. There is no legal bar in he continuing to hold them for any length of time.
It may be noted that such property is held out of local resources and hence does not have the colour of foreign exchange. In spite of it, considering the liberal foreign exchange position of the country, the present rules permit repatriation of sale proceeds of such property also provided that the property was held for at least 10 years or for any short fall in that period, the funds were lying in his bank account (NRO account) or in any eligible traceable investment. Immovable property inherited by NRI or PIO can be sold and it can be repatriated at the rate of $1 million (nearly Rs. 4.4 crore) per year.
However this involves certain documentation including tax clearance certificate. Thus if a wealthy Indian citizen dies leaving behind large mansion in the heart of city and if his children are abroad, they can sell the property and take away the proceeds at the rate of around Rs. 4.3 crore per year, which frankly is a large figure.
Thus, there is considerable liberalisation of rules for the non-resident individuals. However, rules are not that liberal if the investment is proposed to be made by overseas companies, investment entities etc. Thus “FDI” investments are still subject to conditions. The basic idea is that there should be no hassles for individual transactions and it should be as though full convertibility is available to non-resident Indians for his assets (like house property) and receivables (like rent received) in India.
Perhaps on the roadmap for convertibility and making Indian economy truly global, the first salvo has already been fired and it is for our beloved nonresident Indians to test it and taste it. Come, invest and if you wish take back - that is what the mother land is telling them. If it is taken well, perhaps government will tell this to any one outside India.
