Flush with cash, an increasing number of Non-Resident Indians (NRIs) look at Indian property as a part of their investment portfolio. In fact, a large number of NRIs prefer real estate over other asset classes thanks to India’s rebooted regulatory environment and the evergreen desire to own properties in their home country. This augurs well for the Indian real estate sector since NRIs roughly account for one-third of total sales in housing projects by the most reputed Indian developers. However, the complicated nature of real estate deals and lack of understanding of rules often hit the property investing experience of NRIs. Game-changing policies like RERA and GST have now boosted confidence and transparency and streamlined the property-buying process for NRIs, says Shajai Jacob, CEO – GCC, ANAROCK Property Consultants. This has begun fuelling new NRI investments into the Indian property market, he tells Kumar Shankar Roy in an interview. Read on to gain insights about NRI real estate investing.
It’s been said NRIs have a renewed interest in Indian real estate. Why is that happening?
Whether the real estate market remains bullish or bearish, NRIs prefer a place back in India — not just for investment returns but also to remain rooted in their country of origin. Previously, NRIs (like most other buyers and investors) had every reason to be leery of the Indian real estate market. Today, game-changing policies like RERA and GST have now boosted confidence and transparency and streamlined the property-buying process for NRIs. This has begun fuelling new NRI investments into the Indian property market. The fact that the rupee value against dollar depreciated in 2018 was also a sound reason for NRIs to view Indian real estate more favourably. And, of course, developers have been offering substantial freebies and even discounts, apart from interesting payment plans, to draw NRIs as well as domestic buyers to their projects. Mindful of the importance of fostering more positive sentiment for NRI investments into the country, the government also eased norms to facilitate a more streamlined and less cumbersome property buying process for NRIs.
From returns on investment perspective, is Indian real estate attractive enough for NRI investors?
Before generalized market slowdown in 2015, the Return On Investment (ROI) on residential property in India was extremely rewarding for NRIs. However, post the slowdown which was exacerbated by DeMo, RERA, and GST, there were no convincing signs of market revival until recently. As a result, there was a paradigm shift in wealthy NRI investors’ focus – specifically, towards commercial properties, which promised far more satisfactory yields. Then, 2018 saw the beginning of a fairly decent recovery in the residential sector, thanks largely to the improved transparency and efficiency in the market. Historically, NRIs preferred investing in luxury homes by leading developers as these offered better rental income and capital appreciation. Today, NRI investors are also focused on affordable housing for rental income and better long-term appreciation. However, NRI end-users with higher purchasing power are still taking luxury housing seriously as long as the price is right.
What kind of RoI can NRIs expect?
In the residential space, the affordable segment has an expected ROI of 8-10%. The returns in mid-segment are 6-8%, in luxury are 3-5% and in ultra-luxury are 2-3%. In the commercial space, grade A office has projected capital appreciation of 10-12%, while grade B office has 6-8%. In the retail space, high-grade mall space has projected capital appreciation of 10-12% and high-street shops have 10-13%.
Are there any special rules for NRI investment in Indian property?
NRI needs no special clearances or permission to invest in Indian real estate. However, it is pertinent to note that all monetary transactions must be done in Indian currency and through normal banking channels via an NRI account. NRIs can use either their own funds or avail of home loans from banks or other financial institutions in India. RBI mandates that all buyers, including NRIs, can avail of a maximum 80% of the overall property value via loans from financial institutions. NRIs must use inward remittances via NRO/NRE accounts in India. They can also issue post-dated cheques or opt for Electronic Clearance Service (ECS) from their NRO, NRE or Foreign Currency Non-Resident (FCNR) account.
What norms do NRIs have to follow for taking home loans?
Like other Indians, NRIs are eligible for housing loans in India. As per current regulations, the loan amount cannot be credited directly into an NRIs bank account and must be disbursed to either the sellers’ or the developers’ account. Repayment of these loans is generally done through the NRO, NRE and FCNR accounts or from other financial accounts permitted by RBI. In terms of loan disbursements, NRIs need to contribute at least 20% of the property value from their own sources. The remaining amount is sanctioned funded by the financial institution, subject to the NRI’s Gross Monthly Income (GMI). For loan sanctioning, preference is given to qualifications, work experience, and duration of stay overseas. While the loan process and benefits remain the same as for resident Indians, the documents that an NRI must submit differ from Indian residents. NRIs must meet certain eligibility criteria and also issue a Power of Attorney (PoA) – a key document required during NRI home loan processing.
Many NRIs fear property taxation. Is it something very complicated?
NRIs enjoy all tax benefits that local residents do, except the TDS rate during the property sale. An NRI can claim a deduction of Rs 1.5 lakh of the loan’s principal amount under Section 80C of the Income Tax Act, 1961. Under Section 24, the interest on a home loan is deductible to the extent of Rs 2 lakh per annum. To get these tax benefits, a minimum of two years’ investment is recommended. This is because the Indian Income Tax rules state that if a property is sold within two years of purchase, the proceeds will be treated as short-term capital gains, and are therefore added to an NRI’s annual taxable income. If a property is sold after two years of purchase and ownership, there is an option to reduce long-term capital gains tax by investing the proceeds in another property purchase. NRIs must file IT returns in India, and all NRIs buying property in India have to pay property tax along with the applicable stamp duty and registration charges for the property. It is therefore advisable that they assess all costs before taking the plunge. Income earned via rent in India is also subject to income tax.
Given the elaborate rules governing real estate investment, taxation, and norms for NRIs, can they do all this alone? Or they should take the help of property consultants?
Online platforms provide innumerable options but must never influence a final investment decision. Real estate consultants can assist NRIs not only in terms of shortlisting the right options but in inspecting properties, negotiating prices and roping in the best offers on their behalf. The right property consultants will advise NRIs on critical aspects such as the past performance of various developers, individual project specifications, location pros and cons, and also on potential rental income and capital gains. They will also handle all related legal functions and process the necessary documentation. NRIs should also realize that in the case of residential real estate, a professional property consultant’s services come at no cost to them. Credible consultants charge brokerage from the seller, not the buyer. The new lodestone of measuring a real estate consultant’s credibility is RERA registration, so NRIs should only deal with agents or agencies which have this all-important qualification.