Investment in Immovable Property and Tax Planning for NRIs

Investment in Immovable Property and Tax Planning for NRIs
Rajkumar S. Adukia
Chartered Accountant
Investing in immovable properties in India is not a Herculean task for the NRIs anymore. We have come a long way from the days of FERA (Foreign Exchange Regulation Act) regime, when buying or selling of immovable property was governed by the citizenship of a person. According to an estimate, about 25 million NRIs are looking at home country for potential investment opportunities in real estate. The FDI under automatic route in real estate development has also augmented the confidence of overseas Indians to forge strategic alliances with global realty giants for testing select markets across the country. Before we go into the details of the law governing NRI investment in real estate, let us first understand the basic definitions.
Who is a NRI?
Section 2 of the Foreign Exchange Management Act, 1999 (FEMA) deals with various definitions. It defines a person resident in India and a person resident outside India. However, it does not define the term non-resident nor it does define the term Non Resident Indian (NRI).

However, Notification No. 5/2000-RB (dealing with various kinds of Bank Accounts) defines the term Non Resident Indian (NRI) to mean a person resident outside India who is either a citizen of India or is a person of Indian origin. In short, the definition of the term NRI is contextual and can have slightly different connotations for FEMA/Income Tax/Acquisition of Immovable Property etc.
A Non-Resident Indian is termed as a “person resident outside India”. The non-resident Indians are classified into three categories
(1) Non-resident Indian Nationals
(2) Non-resident Indians of Indian Origin/Persons of Indian Origin And
(3) Overseas Corporate Bodies (OCB)
Non-Resident Indian National (NRI)
An Indian Citizen who stays abroad for employment/carrying on business, to pursue a vocation outside India or under circumstances indicating an intention for an uncertain duration of stay abroad is a non-resident. (Persons posted in U.N. organisations and officials deputed abroad by Central/State Governments and Public Sector undertakings on temporary assignments are also treated as non-residents). Non-resident foreign citizens of Indian Origin are treated on par with non-resident Indian citizens (NRIs) for the purpose of certain facilities.
Person of Indian Origin (PIO)
For the purposes of availing of the facilities of opening and maintenance of bank accounts and investments in shares/securities in India, Person of Indian Origin means a citizen of any country other than Pakistan or Bangladesh if,
he at any time, held an Indian passport
he or either of his parents or any of his grand parents was a citizen of India by virtue of the Constitution of India or Citizenship Act, 1955 (57 of 1995)
the person is a spouse of an Indian citizen

For investments in immovable properties, Person of Indian Origin means an individual (not being a citizen of Pakistan or Bangladesh or Afghanistan or Bhutan or Sri Lanka or Nepal or China or Iran)
who at any time, held an Indian passport
who or either of whose father or whose grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955)

A person who is a non-resident can belong to the following categories:

Overseas Corporate Bodies (OCB)
Overseas Corporate Bodies (OCBs) are bodies predominantly owned by individuals of Indian nationality or origin resident outside India and include overseas companies, partnership firms, societies and other corporate bodies which are owned, directly or indirectly, to the extent of at least 60% by individuals of Indian nationality or origin resident outside India, as also overseas trusts in which at least 60% of the beneficial interest is irrevocably held by such persons. Such ownership interest should be actually held by them and not in the capacity as nominees. The various facilities granted to NRIs are also available with certain exceptions to OCBs as long as the ownership/beneficial interest held in them by NRIs continue to be at least 60%.
Key Acts Governing Acquisition of Immovable Property in India by NRIs
The Foreign Exchange Management Act, 1999 is the one that regulates foreign investment in India. Under this umbrella Act, Foreign Exchange Management (Acquisition and Transfer of Immovable Properties) Regulations, 2000 has been enacted vide Notification No. FEMA 21/2000-RB dated 3rd May 2000. These Regulations provide the guidelines for acquisition and transfer of immovable properties by NRIs.

Notifications/Circulars by RBI
(a) A.P (DIR) Series Circular No. 93 dated 09.06.2003
(b) A.P (DIR) Series Circular No. 43 dated 08.12.2003
(c) Master Circular No. / 02 /2006-07dated 01.07.2006
(d) A.P (DIR) Series Circular No. 5 dated 16.08.2006

Income Tax Act, 1961
Income Tax Rules, 1962
Wealth Tax Act, 1957
There is a major transformation in the protocol as far as regulation concerning immovable property situated in India is concerned. Under FERA acquisition of immovable property in India was governed by “citizenship criteria”, whereas under FEMA the same is governed by “residential status” criteria. It means a foreign citizen who is resident in India (not being a citizen of any of the eight countries listed above) can purchase immovable property in India without any approval from RBI. He is also not required to file any declaration at the time of purchase of such immovable property.
Prohibition on citizens of certain countries
Citizens of eight countries, (namely, Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal. or Bhutan (whether resident in India or not) are debarred from acquiring or transferring any immovable property in India without prior approval of the RBI. However, such a prohibition is not applicable to immovable property acquired on lease for a period not exceeding five years.
General Prohibition
Investment in agricultural property, plantation and farmhouse is prohibited for all classes of persons resident outside India, be it NRIs/OCBs/ foreign citizens or other foreign entities.
Acquisition of immovable property

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One thought on “Investment in Immovable Property and Tax Planning for NRIs

  1. Comprehensive and excellent information. Answered a lot of my questions. Are there any CAs in the Delhi, Faridabad, area who have the expertise to assist with sale of property, taxes, repatriation of funds.

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