Property is a very important investment for NRIs, especially those who plan to return back to India. In my experience of working with returning NRIs, they get a certain sense of comfort and security by having a property back in India before they plan to return to India.
Many NRIs planning to return to India try to buy property well in advance of their return. As a result, they mostly come to India on a visit from overseas to shortlist property and complete paperwork.
Builder and brokers can easily sense this urgency and if NRI is not vigilant, there are good chances of him getting cheated in the hands of builders or brokers. This is especially given the wrong perception/mindset that still exists that NRIs are cash cows and it is no harm if they are milked a little.
In this post, basis my learning and experience from advising Returning NRI clients on their property investments, I have compiled a checklist of what all points NRI should be careful before entering into a property transaction in India.
Image Credit: www.profit.ndtv.com
Understand the purpose of purchase and market for real estate in India:
Before buying a property, ask yourself a question – am I buying the property for living in it with my family post return to India, or am I buying it for investment purpose?
The answer to this question is vital because the whole approach of property selection and purchase will drastically vary depending on the response.
In case of residential use, factors like convenience, proximity from faculties, composition of neighbours etc. gains prominence as compared to price appreciation possibility. In case of investment purpose, everything is about probable price appreciation, especially given the fact that rental yields in India range between 2-3%.
When selecting a property, be it for residential or investment purpose, and given the fact that in all likelihood, the investment will form a significant part of the total portfolio, in my view, it is a bad idea to “delegate” property purchase decision to other family members/brokers/ media – it should be something you should do yourself.
Also as it is said that the best approach is the “foot on the ground” approach – you have to be there, move in the locality, speak to a cross section of people – and only then you get a fair idea of the property market, reputation of developer, any title issues with property etc. Assuming someone else to do it for you (especially the broker) is not a good idea.
As regards broker, he is concerned with his commission and is concerned more on making the sale rather than understanding your needs and advising you on the right choice. Even in under construction property, the broker gets paid by the builder so there is a good chance he pushes certain projects very aggressively to you – and when he does that, know that it might be because he gets a better commission from that builder.
As far as the big names in real estate advisory go, I checked with a few during my research and in all cases, the adviser did not charge from the consumer. Simple reason is that they get compensated by the builder. So, conflict of interest is something that is very important for the investor to understand. Getting unbiased & objective advice on property selection is a far-fetched dream in the present state of affairs.
And that is the reason that you have portals like Nobroker becoming popular in India as brokers have failed to show the value of the amount of brokerage they charge. Some sanity will come to this space as the new Real Estate Regulation Act (RERA) requires agents/brokers to register with the regulator. However, the regulation does
Short point: Nothing can replace your own due diligence when it comes to buying property in India. Though this will take some time, it has to be seen in the context of the amount of investment which then makes it seem reasonable.
Some tips on due diligence as follows:
- Try to live on rent in the area of your choice for at least a year before deciding to buy the flat in that locality.
- Do not start your negotiations from out of India – try to mask your NRI status in the start and if possible, take help of a relative in India in enquiring about the property.
- In case you wish to do a property transaction during your visit to India, do not mention a timeline to the broker/buyer for closure of everything.
- Stay clear of properties available at a heavily discounted price – in such properties, there is always a risk of title issues or long pending dispute between family members
Deal smartly with the broker:
Broker is generally the link between you and the right property – you need to set clear expectations with brokers and convey at the start itself that you want the entire transaction done in a honest, transparent and organised manner. Few tips on dealing with a broker are as follows:
- Negotiate hard on the brokerage. Prevalent rate is 1% however for high value properties > 1 CR, you can also bring it down to as low as 0.50%
- Agree on a scope of work with the broker when you discuss the fee. Tell him that lawyer’s fees should be within his brokerage and nothing will be paid extra. Also agree before hand on the timing of brokerage payment – say after 7 days of getting possession. Put all this in writing/e-mail for mutual record/reference.
- Tell broker you will pay only through cheque and will need a pukka invoice – let him charge additional 15% service tax – you can only claim brokerage as cost of acquisition for income tax purposes if you have an invoice.
- If possible, front end your property search through a trusted family member who can visit and shortlist the properties
- Prepare a checklist of must have before contacting a broker
Be aware of FEMA norms while purchasing property in India
An NRI need to understand that till he is an NRI and qualifies as a “person resident out of India”, any property purchase in India will also require compliance in India. Please refer to my posts on the subject:
The most important amongst the many requirements is that once a person becomes NRI, he cannot purchase agricultural land/property in India.
Another important requirement that very few NRIs are aware of, is that in a person’s lifetime, he can repatriate the sale proceeds (to the extent of contribution) pertaining to only 2 properties in India. In this case, even if CA is willing to give a certificate in Form 15CB for NRO to NRE transfer, still a person CANNOT repatriate sale proceeds of more than 2 residential properties.
Asides, if you are an NRI and have already made this violation, you can apply to RBI to compound this violation by paying a small fee – read a detailed post on this point: How Resident/NRIs can resolve FEMA contravention
In case you wish to purchase agricultural property, it is a better idea to do so after returning to India and getting employment.
Also, couple of additional points:
- If property is purchased from a foreign citizen (other than an PIO), then RBI approval may be required if foreign citizen was holding the property in contravention of FEMA
- If you are an NRI purchasing property from another NRI, it is not clear if FEMA allows it or not – it is better to seek permission from RBI before proceeding with such a transaction
Be aware of the legal provisions for property transactions in India
Apart from Income Tax Act and FEMA, following other laws will also apply when you purchase property in India:
- Transfer of Property Act, 1882
- Registration Act, 1908
- Stamp Act (of the concerned state) – for example, in Maharashtra, it is the Maharashtra Stamp Act, 1958
- Real Estate Regulation Act, 2016
- Respective Act w.r.t. ownership of flats – for example, in Maharastra, it is the Maharashtra Ownership of Flats Act
- Hindu Succession Act/Indian Succession Act/Muslim Personal Law (in case of inherited property)
- Indian Trusts Act (in case of property held under trust)
It is important to know the implications of above laws so that you are on the right side of law. Very shortly, I will be writing on these laws and will post a link here.
Be aware of the tax implications of buying property
Rule 114B of Income Tax Rules require PAN to be quoted on any purchase/sale of property in India which exceeds INR 10 lacs or where the stamp duty value as per Section 50C exceeds INR 10 lacs. Note that this requirement is applicable irrespective of your residential or citizenship status.
However, Rule 114B allows a person not having PAN to enter into the transaction provided he makes a declaration in Form 60 to the seller/builder.
In my view however, it is advisable to get a PAN in India well before your transaction of purchase/sale of property in India. NRI can even apply online and get it delivered outside India. Refer this post: Returning NRIs: Know how to apply online for PAN in India
As an NRI buying property in India, you need to be aware of the taxation and TDS implications of property transactions in India. Refer the below posts:
From a taxation point of view, following are some tips to ensure proper compliance:
In case of joint sellers, insist that the ratio of ownership is mentioned clearly in sale deed. Make payment in ratio of joint holder’s holding and deduct TDS also in respective ratios
You can claim travel expenses on visiting India for acquiring property as cost of acquisition – in such a case, you should preserve air ticket as well as the boarding pass along with copy of passport entries to show your visit to India
Have a minimum time horizon of 3 years at the time of purchase of property, so that your gain qualifies as a long term capital asset as is taxable at a reduced rate of 20.60% + allows you to claim exemption from capital gain by purchasing a house/investing in bonds etc.
Source of funding of property purchase:
Preserve hard copy bank statements to show a trail for your remittances from overseas or from your NRE account for purchase of property – this is required because when at a later date you sell the property, you will have to prove to the bank that this much was remitted from overseas and hence allowed to be repatriated – even a CA can ask this as part of his certification in Form 15CB.
Do not pay anything in CASH – have a very clear cut expectation setting with the seller/builder as well as the broker that you will not pay a single rupee in cash. Also note that u/s 269SS of Income Tax Act, a person cannot accept cash in excess of INR 20,000.
Do not pay for purchase of property from anyone else’s account – in such a situation, it will be difficult to repatriate the money out of India.
- If the deal does not go through and you are given a cheque by builder/proposed seller which bounces, it is a criminal offence under Negotiable Instruments Act and you should immediately lodge a complaint in a police station for the same.
- While giving any identification documents to builder/broker/home loan provider etc., mention the date and purpose so as to prevent misuse of those documents
- In case property that you’re going to purchase is presently occupied by someone else, it is better to ask seller to vacate them and take a vacant possession of the flat. Also, be wary of purchase-cum-lease agreement where seller continues to stay in the flat and becomes a lessee – there are instances where lessee stops paying rent and start demanding money for vacating the flat.
- Negotiate with the seller to pay as less a token money as possible – in case you do not end up purchasing the flat, the implication will be much lesser.
- As per Supreme Court Directives, property can be transferred only by registration of a duly executed sale deed: thus, the practice of transferring property via General Power of Attorney (GPA) done primarily to avoid registration is now illegal (link to article)
- Prefer to execute a notarised MOU before making ANY payment:
- Buy property directly from owner, not POA holder. Even if purchasing property from a power of attorney holder, to avoid possibility of fraud, make payment directly to the NRI and not to the account of POA holder
- Do not purchase property in some other person’s name – This is referred to as benami property in India and is punishable under the Benami Properties Act – read this post for a detailed analysis: Benami Prohibition Act: An Analysis
- In case of property being purchased from very old persons, it is advisable to get a NOC from the children of such seller – so that they are not able to create any issue or lay claim on property on death of seller. Another way is to make the children a witness to the sale agreement and include an indemnity clause in the sale deed.
Hope the post has been of service to you. Please share your thoughts/feedback in “comments” section below. Thanks!