Top 5 Things NRIs Must Know About Investing In Real Estate
Knowledge on where to invest your money is becoming critical. A good investment not only builds your savings but also helps maximize income. While we are familiar with the stock market and cryptocurrencies, real estate is seen as a more complicated investment, especially among NRIs. However, real estate can offer fantastic returns to consumers while also giving a new route of diversification to their portfolios, if done correctly. If you are an NRI planning to invest in real estate back home, here are a few important things to keep in mind:
1. Foreign Exchange Regulations
While investing in Indian real estate, NRIs need to comply with the Foreign Exchange Management Act of India (FEMA). NRIs with an Indian passport, Overseas citizen of India (OCI) and Person of Indian Origin (PIO) cardholders do not need any explicit approval from the Reserve Bank of India (RBI) for investing in real estate. Loans in India need to be paid in INR and must follow Indian taxation laws pertaining to real estate investments. NRIs can only invest in residential or commercial properties in general, not farm or agricultural land.
However, receipt of such properties in the form of inheritance or gifts is permitted. In some situations, the court can provide permission for NRI investments in agricultural land — this varies on a case-by-case basis.
2. Tax Benefits
Indian income tax laws apply to any proceeds made with real estate transactions. If a property is sold within two years of purchase, the returns are categorized as Short Term Capital Gains and attract 30% tax. Long Term Capital Gains (LTCG) are applicable for the sale of properties held over two years with 20% tax on the gains after adjusting for inflation. The LTCG tax must be paid first for the entire sale value, for which one can claim the rebate later on.
3. Type of Property and Credibility of the Builder
Based on the goal of the individual, one may choose to invest in residential or commercial real estate. Residential properties are attracting a higher demand than commercial real estate post COVID. However, commercial properties in well-located areas can attract good rental yields as well as steady capital appreciation.
Moreover, it is always safer to invest in reputed builders rather than newcomers. Before signing the agreement, ensure that the builder's firm is an ISO-certified company and the project is approved by the Government authorities.
4. Power of Attorney
A Power of Attorney or POA endows a person to act and make decisions on behalf of another person, an NRI in this case. It is obvious that one cannot be available all the time to oversee the development of the invested properties or the maintenance activities. Having a credible and trustworthy POA can take all that stress off since the physical presence of the investor is not required. The appointment of a POA is well documented and needs to follow government compliances to prevent frauds/ disputes.
5. Home Loans
NRIs can avail home loans to facilitate the purchase of a property in India. They are eligible to acquire a loan for up to 80% of the property value. It is generally recommended to use a Non-Resident External (NRE) account when applying for a home loan. It also allows one to get the capital overseas without much hassle post the selling of the property.
The real estate economy is gaining momentum. CRISIL expects established Residential Realtors to see a growth of 30-35% in FY23 compared to 14% last fiscal.1 The interest rates are rising and on a high base for fiscal 2022, making this a good time to enter the market and diversify investments. With thorough research and complying with the regulatory regulations, one can find themselves in a good position to make use of the growing market opportunity.