Revealed: Tax Benefits and Subsidies For NRI's Looking to Invest

The global economic sentiment is one of apprehension and fear. According to news reports and market watchers, all the countries in the Eurozone, including economic leaders like Germany, have gone into recession. While the US economy is not there yet, uncertainty over Fed's interest rates has kept industry, the major exchanges, and investors on tenterhooks. China too is starting to look gloomy.

The Indian economy is a glorious exception in this dull climate and shines through as a bright spot for global and domestic investors. The equity markets are, however, at an all-time high, as are the associated risks of investment. It is but natural that global investors, non-resident Indians (NRIs) in particular, are looking to invest in the Indian real estate market to make a profitable investment and to build a residential property in India.

NRIs and the luxury housing market

The realty sector of India was possibly the worst hit during the COVID-19 pandemic. Over the past year, the bounce back has been phenomenal, but the prices of residential and commercial properties have not yet peaked. This, along with a favourable currency exchange rate, has made real estate investment an excellent investment for NRIs. The luxury housing market is particularly attractive for Indians living abroad. While there are some tax benefits and subsidies for NRI to take advantage of, there are some regulations that they must keep in mind as well.

Understanding FEMA

According to the Foreign Exchange Management Act (FEMA), any Indian citizen living abroad, an NRI, or a Person of Indian origin can invest in Indian real estate. They cannot, however, buy or invest in agricultural land, plantation properties, or farmhouses. So NRIs are free to invest in all residential or commercial projects and can buy more than one real estate property. They can hold these as long as they wish and sell them freely to any individual residing in India and an Indian citizen. However, the payment made for buying such property cannot be made in foreign currency and should be made in INR through an NRO or NRE account.

Benefits and Subsidies for NRI Investors

To understand the applicable taxes on real estate investments for NRI, we need to look at the purpose of investment. Most NRIs wish to buy properties for self-use (or occupation by immediate family), to let out for rent or lease, or capital appreciation. So, an NRI can own up to one property for self-occupation even if they cannot reside in this property due to being abroad for work or business. If they own more than one property, the others will be deemed let out, and a notional rent will become a taxable income in India. This tax can, however, be offset by the following benefits and subsidies for NRI real estate investors –

• NRI investors can avail of home loans up to 80 per cent of the property value from RBI-registered banks or NBFCs. In case the NRI investor avails such a loan, they can claim a 30 per cent standard deduction from any real or deemed rental income on this property towards maintenance and repairs of the property. They can also claim an exemption on property taxes paid to the local municipal authorities.
• Under section 80C, the NRI investor can claim an IT deduction towards repayment of the home loan principal amount and additionally claim a deduction on stamp duty and registration charges made while buying the property. Furthermore, they can claim an IT deduction of up to INR 2 lakhs on the interest paid towards the repayment of home loans.
• Under Sections 54, 54F and 54EC of the IT Act, any NRI investor whose only income in India is from real estate or other investments where TDS has already been deducted are not required to file IT returns in the country. This is particularly helpful when an NRI sells their property in India and receives the sale proceeds after TDS.
• The short- and long-term capital gains on the sale of the property by an NRI investor are taxable according to the applicable slabs. Any property held for 24 months or less is subject to short-term capital gain tax, and anything over 24 months attracts a long-term capital gain of 20 per cent plus surcharge and cess. The investor can, however, avail of an exemption if the long term capital gains are reinvested in specific bonds or another real estate property. This exemption is only available on the sale of the first property.

A clear understanding of all these tax deductions and exemptions can help NRI investors optimise the ROI on their real estate investments in India. The economic and administrative environment is highly conducive for Indians residing abroad to invest back home.