Non-Resident Indians (NRIs) can buy and sell property in India, but such transactions are governed by the Foreign Exchange Management Act (FEMA), Reserve Bank of India (RBI) regulations and income tax laws. The type of property, mode of payment, repatriation limits and tax deductions may vary depending on whether the transaction involves residential or commercial property.
NRIs are only allowed to purchase residential and commercial properties in India. Meanwhile, restrictions apply to agricultural land, plantation property and farmhouses in the country. Such restricted properties can, however, be acquired by NRIs through inheritance or as a gift, subject to applicable legal provisions.
What properties can NRIs buy and sell in India?
A person resident outside India who is a citizen of India or an can purchase any immovable property in the country except agricultural land, plantation property and farmhouses.
They can also transfer any immovable property other than the restricted assets to anyone who fulfills the following criteria:
- A person resident outside India who is a citizen of India
- A person of Indian origin resident outside India
- A person resident in India.
However, NRIs must note that agricultural land, plantation property or farmhouse acquired by way of inheritance can only be transferred to Indian citizens permanently residing in the country.
Regulations to make payments for property acquisition
Payment for property acquisition by NRIs or Persons of Indian Origin (PIOs) can be made through permitted banking channels under FEMA rules. The payment can be made using funds received in India by inward remittance or through money held in NRE, NRO or FCNR (B) accounts.
An inward remittance refers to the transfer of funds from an international source into a local domestic bank account. Payments made through traveller’s cheque, foreign currency notes or any mode not specifically permitted under FEMA are not allowed.
A PIO can acquire immovable property in India either through purchase, gift or inheritance. They can receive property as a gift from a resident Indian, NRI or another PIO, or inherit property from a resident in or outside India, provided the property was originally acquired in compliance with foreign exchange laws. While NRIs are Indian citizens residing abroad, PIOs are foreign citizens with Indian ancestry.
Such people are also allowed to transfer immovable property (other than the exceptions) through sale to a resident Indian or through gift to a resident Indian, NRI or another PIO. However, agricultural land, plantation property and farmhouses can only be transferred by way of sale or gift to a person resident in India who is an Indian citizen.
Repatriation of sale proceeds
NRIs and PIOs are allowed to repatriate the sale proceeds from immovable property in India only if the property was originally acquired in accordance with the foreign exchange laws applicable at the time of purchase or under regulations. Repatriation of sale proceeds refers to the legal transfer of funds from an Indian bank account (such as an NRO account) to an overseas bank account.
The amount that can be repatriated cannot exceed the amount originally paid for purchasing the property. In case the property was purchased using Non-Resident External (NRE) account funds, the repatriation amount is capped at the foreign currency equivalent of the amount paid at the time of purchase.
For residential properties, repatriation benefits are restricted to a maximum of two properties. Where the property was purchased using rupee funds, authorised dealers may permit repatriation of up to $1 million per financial year from Non-resident Ordinary (NRO) account balances. This is subject to submission of the required undertaking by the remitter and a certificate from the Chartered Accountant in the format prescribed by the Central Board of Direct Taxes (CBDT).
How are proceeds from the sale taxed in India?
When an NRI sells a property in India, the profit made is taxed under the head “capital gains.” It is treated as short-term or long-term capital gains based on the period of holding. Here’s how are taxed:
- Purchased property before 23 July 2024: Taxed at 20% with indexation benefit.
- Purchased property on or after 23 July 2024: Taxed at 12.5% without the indexation benefit.
Meanwhile, TDS is deducted at 20% (plus surcharge and cess) on long-term capital gains and 30% on short-term capital gains, according to ClearTax.
Unlike resident sellers (where TDS is only 1% under Section 194-IA), TDS on the sale of property by NRI is comparatively higher because it is deducted on the capital gains tax liability.