NRI Real Estate Investment: The Complete FEMA Compliance Guide

NRI (Non-Resident Indian) investment in Indian real estate is governed by the Foreign Exchange Management Act (FEMA), and the compliance framework is specific but straightforward once understood. Here's the complete guide.

Who is an NRI for FEMA purposes?

An NRI is an Indian citizen who resides outside India for more than 182 days in a financial year (for employment, business, or other purposes indicating an intention to stay outside India for an uncertain period). OCI (Overseas Citizen of India) cardholders are treated on par with NRIs for property investment purposes.

What can NRIs buy?

NRIs and OCI cardholders can buy: - Residential property (apartments, houses, villas) — no upper limit on the number of properties. - Commercial property (office space, shops) — no upper limit. - Agricultural land, plantation property, and farmhouses — NRIs CANNOT buy these. This is a key restriction.

The transaction:

1. Funding: The purchase must be funded through the NRI's NRE (Non-Resident External), NRO (Non-Resident Ordinary), or FCNR (Foreign Currency Non-Resident) account. The funds must be remitted from abroad or from the NRI's existing NRE/NRO account balance.

2. Payment: All payments must be made through banking channels (no cash transactions above ₹50,000). The payment can be made via inward remittance, debit to NRE/NRO/FCNR account, or by cheque drawn on the NRI's account in India.

3. Documentation: The NRI must provide PAN (Permanent Account Number), OCI card (if applicable), passport, and overseas address proof. The sale agreement, registration, and stamp duty are the same as for resident buyers.

4. Power of Attorney: If the NRI cannot be present for the transaction, a Power of Attorney (POA) can be executed in favor of a resident Indian to complete the registration and possession formalities. The POA must be notarized and attested by the Indian embassy in the NRI's country of residence.

Repatriation:

NRIs can repatriate (send back abroad) the sale proceeds of residential and commercial property, subject to the following limits: - The repatriation is limited to the amount originally paid through inward remittance or NRE/FCNR account. - The repatriation is limited to two residential properties per financial year (no limit on commercial properties). - The repatriation must be done through the NRO account, with a certificate from a chartered accountant confirming the capital gains tax has been paid. - The overall limit for repatriation from the NRO account is USD 1 million per financial year (including all sources, not just property).

Tax implications:

1. Capital gains: NRIs are subject to the same capital gains tax as residents — 12.5% for long-term (held > 12 months for equity, > 24 months for property) and 20–30% for short-term. The surcharge and cess apply.

2. TDS: On the sale of property by an NRI, the buyer must deduct TDS at 20% (long-term) or 30% (short-term) plus surcharge and cess. This is higher than the resident TDS rate, and NRIs often need to apply for a lower TDS certificate (Section 197) to avoid excess deduction.

3. Rental income: Rental income is taxable in India at the NRI's applicable slab rate. The TDS on rental income is 30% plus surcharge and cess.

4. Exemptions: NRIs can claim the same capital gains exemptions as residents — Section 54 (reinvestment in residential property) and Section 54EC (reinvestment in bonds).

Our view: NRI real estate investment compliance is straightforward but requires attention to the FEMA rules, the account structure, and the repatriation limits. We recommend working with a chartered accountant familiar with NRI taxation to ensure compliance and optimize the tax outcome. The key restrictions to remember: no agricultural land, funding through NRE/NRO/FCNR accounts, and the USD 1 million annual repatriation limit.

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