What is the procedure to purchase a property in India?

Buying properties in India: what you need to know

Investing in a property is about identifying the timing of the purchase, the demand versus supply and the pricing cycles. A recent March 2020 Reuters Poll report shows that housing prices in India are likely to rise by 2% this year and 2.5% in 2021. Despite this, non-resident Indians (NRI’s) undeniably rank as one of the top 5 investor communities to purchase properties in India.

India is Asia’s third-largest economy and NRI’s in Singapore share a natural affinity towards purchasing a property in their Homebase. Apart from looking at the age, size, amenities and style of the property; here is a complete guide for NRIs to buy a property in India.

 

#1. Who is eligible to buy a property in India?

To qualify to buy a property in India, one must abide by the numerous regulations set in place by FEMA (Foreign Exchange Management Act) and the RBI (Reserve Bank of India). Some of these regulations, define the following categories -

  • NRI (Non-Resident Indians), whether Indian citizens or foreign citizens of Indian origin, do not need permission from the Reserve Bank of India to acquire property if the seller is an Indian citizen. 
  • OCI (Overseas Citizen of India). The former PIO status (Person of Indian Origin) has been merged with the OCI card scheme now. A spouse (who is not a citizen of Pakistan or Bangladesh) of an NRI or PIO will also be treated as an OCI for the purpose of back accounts. Almost all banks extend a mortgage to NRIs and OCIs using their property as collateral. 

If an NRI or OCI is buying property under general permissions (i.e. not attempting to buy agricultural land, plantations or farmhouses) then they do not need to seek buying permission from the Reserve Bank prior to property purchase. An NRI can buy property in their own name or jointly with any other NRI.

  • Foreign nationals (with or without residency) cannot buy immovable property in India. It is illegal for foreign nationals to own property in India unless they satisfy the residency requirement of 182 days in a financial year (a tourist visa lasts only 180 days). It is also illegal for Foreign Nationals to buy a property on a tourist visa or jointly purchase a property with NRIs or OCIs. (See RBI FAQ)
  • A foreign company, which has established a Branch Office or business in India, in accordance with FEMA regulations, can acquire immovable property in India, only if it is incidental to carrying on their business.  

Besides, the Free Trade Agreement (FTA)  between Singapore and India extends specifically to goods and services only. Purchase of real estate property in India is however restricted to non-resident Indians and overseas citizens of India.

*Foreign Nationals cannot own a property in India but they are allowed to lease a property for a maximum of 5 years.*

#2. List of documents required to buy a property in India

If you qualify to buy a property in India, there are several things you will need going into your acquisition:

  1. NRE/FCNR (B)/NRO bank account in India. Or an NRI rupee account
  2. Permanent Account Number (PAN) card 
  3. Valuation certificate of the property
  4. Completion certificate. Once you've obtained a completion certificate from the seller, you will need to file an IPI 7 form to the RBI as proof of purchase. This must be done within 90 days from the official date of property purchase.
  5. Stamped transfer deed of Power of Attorney

Ensure that you hire the services of a reputable local property firm to help verify the authenticity of the title deed and Power of Attorney. The Power of Attorney should be given to someone you trust explicitly such as a relative or spouse, in case you want the transaction to be completed on your behalf. It is absolutely vital that you get every agreement and minor acknowledgements in written form. Property transaction costs vary according to state and also if the buyer is a corporate entity. 

Thus, below is a checklist of documents, some of which you can prepare prior to the property purchase and some which you should ensure your advocate is dealing with:

  • OCI/PIO card (In case of OCI/PIO)
  • Passport (In case of NRI)
  • Passport size photographs
  • Proof of residential address
  • Land titles/ construction permits/ Approvals from authorities
  • Sale/Purchase Agreement
  • Title clearance certificate
  • Income Tax clearance
  • Stamp duty and registration
  • Society clearance and membership

If you require a loan, all major banks in India have branches globally, so you can shop around for the best loan rates and eligibility. All loans must be paid through the NRE/NRO/FCNR accounts. They can also be transferred from abroad into those accounts.

 

#3 Tax Deducted at Source (TDS) on Sale & Purchase of Property by NRI

There are no restrictions on the number of properties that can be purchased. But there are restrictions on repatriation of funds for multiple properties. 

  • As a general guide, you need to consider your residential tax status (i.e. how long you spend in India in any one year or over a period of 4 years), and even if you are not considered a resident you will need to file returns if you exceed the basic tax threshold. NRI’s have a basic exemption limit of up to Rs 2 lacs (approx. S$3,750), whereas, if you are above 60 years of age, the exemption limit is Rs 2.5 lacs ( approx. S$4,689).
  • Unlike a resident Indian, who can claim a deduction only up to Rs 1.5 lacs (approx. S$2,813) for home loan interest, there is no upper limit on this for an NRI.
  • NRIs also have to pay a withholding TDS at the rate of 1% if they buy a property worth more than Rs 50 lacs (approx. S$93,768). NRIs will be exempted from wealth tax if the property is vacant and declared as 'self-occupied'. Else they'll have to rent it out for at least 300 days a year to avoid paying wealth tax. This rule is for the first property only. For subsequent vacant properties, a tax at the rate of 1% the value (net of outstanding loans) in excess of Rs 30 lacs (S$56,260) will have to be paid.
  • When an NRI sells a property, the buyer is liable to deduct TDS @ 20%. In case the property has been sold before 2 years(reduced from the date of purchase) a TDS of 30% shall be applicable.
  • A property held for less than 24 months is treated as a short-term capital asset and the resultant short-term gain on transfer is taxable at the normal tax slabs applicable to the NRI. Gains from property held for 24 months or more is taxable as a long-term capital gain at a rate of 20% (plus applicable surcharge and cess).

Thus, an NRI is required to file an income tax return in India to disclose the rent or capital gains arising from the property situated in India and taxes paid thereon within the prescribed due date.

 

#4 What are the real estate returns in India?

When investing in Indian property, it is essential to look at 2 factors:

  • Rental rates in the area
  • Good resale value

Magicbricks data accumulated in April 2019 suggests that while the broader real estate market has remained flat, there are some micro-markets across metros and large cities where property prices are reasonable and investors can expect good returns. On a pan-India level, the average yield per sqft stands at 3%, but in the micro-markets like metros, the rental yield can go up to almost 4.5%.

Thus, markets with cheaper real estate were found to have higher yields and these include Kolkatta, Bengaluru, Hyderabad, Ghaziabad and Ahmedabad.

Delhi NCR, Mumbai, Bengaluru, Hyderabad and Pune have seen higher resale value yields over the years. 

In 2017, RERA and GST were implemented which led to destabilization in supply and demand of real estate. However, the new rules of RERA aim to regulate the real estate industry which is good for real estate investment. Hence, it is a good time to purchase a property now, when the prices are flat across many pockets of cities in India. You can invest in assets that are reasonably priced and have the potential to appreciate in value, but remember - bargain hard, there is enough room for negotiation!

This article was written by Manasi Hukku. Manasi likes to cover the intersection between research and relevance to help readers find a place they'll love. She is a Medium columnist, mother of two and UX Conversation Designer.

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