NRIs looking for end use may get a good deal in the residential segment given the current slowdown
Real estate is an illiquid asset class and faces risks such as delay in construction or default by the developer
When it comes to inward remittance, India tops the global list. According to a World Bank report, Migration and Development Brief, released in April this year, the top remittance recipients include India with $79 billion, followed by China ($67 billion) and Mexico ($36 billion). In fact, it has been on the rise in India, according to data in successive WB reports.
Typically, half of the remittances received by Indian residents are used for maintenance of families, followed by deposits in banks, but a major chunk is also invested in real estate, according to information on Reserve Bank of India (RBI) website. “NRI investments in Indian real estate has doubled from $5 billion in 2014 to $10.2 billion in 2018," according to a report released in 2018 by 360 Realtors, a consultant firm, on the state of NRI investments in Indian real estate. In fact, nearly 63% NRIs prefer real estate over any other investment in India, shows data from ANAROCK’s consumer sentiment survey for H1 2019.
Though real estate remains a favourite with NRIs, Mint does not recommend investments in this asset class because of concerns such as high transaction cost, illiquidity, delayed construction and the chances of default by the developer. “NRIs should not invest in real estate because of low returns and high risk, unless there is a specific need or they have plans to return to India," said Rohit Shah, founder and CEO, GettingYouRich, a financial planning firm.
However, given that a lot of NRIs may still go ahead and invest in Indian real estate, especially with the recent rupee depreciation, we list out the segments they should consider and the concerns they should keep an eye on.
Where to invest?
To decide where they can invest in India, NRIs first need to address this question: whether they are buying the property for end use or for investment.
For end use, there are plenty of options, given the slowdown in the sector. “The residential market, specifically, is better placed this year as speculation-led investment activity has reduced significantly. Residential prices have remained stable in most cities over the past few years. Increased transparency in the market and eased investment norms has made the market more attractive for NRIs. Developers too are offering customized solutions for this segment by developing ‘smart’ homes with international appeal," said Abhinav Joshi, head of research, CBRE India, a real estate consultant.
For investment, the commercial real estate segment may be a better option. “While residential real estate continues to be the ‘first love’ of NRIs, India’s commercial office property asset class presents a profitable alternative for NRI investors. Good capital appreciation and rental yield has increased NRI demand for Grade A offices, IT parks, logistics centres, and now REITs (real estate investment trusts) as well," said Anuj Puri, chairman, ANAROCK Property Consultants. A good commercial property can give an average rental yield of 6-10% against the current residential property rental yield of 1.5-3.5%, he added.
“Rental yields from residential real estate can be around 2%, and professionally managed commercial property can fetch better returns. But in any case, post tax return can’t be more 7-8% from real estate, so we typically do not recommend," said Shah.
Rules to watch out for
An NRI can buy any kind of property, except agricultural land. Also, the investment must not violate the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India regulations.
Payment rules: The payment can be made from funds received in India through normal banking channels or funds held in non-resident ordinary (NRO), non-resident external (NRE) or foreign currency non-resident (FCNR) accounts maintained in India. “NRIs can transfer the money to his or her NRO account in India and pay the seller from there or can also directly transfer the amount to the account of seller in India," said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP, a law firm.
Repatriation rules: According to rules under FEMA, repatriation of proceeds from the sale of a property cannot exceed $1 million in a financial year. However, if the property is inherited or gifted to the NRI, they may repatriate more than $1 million per financial year.
Taxation and other rules: NRIs need to watch out for certain rules when buying, selling or renting out a property. While buying the property, “NRIs need to withhold TDS (tax deducted at source) from the price payable to the seller," said Maheshwari. NRIs need to deduct TDS at the rate of 1% of the property value, if the property’s value is above ₹50 lakh.
“On the sale of the asset, the buyer will deduct TDS from the amount payable to the NRI and the NRI can transfer the amount outside India or to his or her NRE account after paying due taxes," said Maheshwari. TDS rate in this case is 30% (short-term) or 20% (long-term) of the property value.
In case of rental income or capital gains, NRIs are taxed the way resident Indians are. They can even claim deductions available to a resident individual. “An NRI, being an individual gets taxed at the same rate of tax as applicable to an Indian individual. The highest rate of tax shall be 30% and surcharge shall be applicable based on the total income," said Hemal Mehta, partner, Deloitte India, a tax and audit firm.
Similarly, “capital gains arising from the sale of immovable property shall be taxable at the rate of 20% plus applicable surcharge (it is charged over and above the tax amount, in case the total income exceeds a certain limit) if the same is long-term capital gains, else the rate is 30% plus applicable surcharge," added Mehta. Investment in real estate is considered long term if it is held for more than two years.
It is as important, or perhaps more, important for NRIs to do their due diligence before investing in real estate as it is for resident Indians. It makes sense to check the property title and the financial health of the builder, especially if you are opting for an under-construction project. Also, keep in mind that real estate is a highly illiquid asset.
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