What NRIs need to know about investing in real estate back home

2020 was a good year for investors. Gold soared on global uncertainty, equity markets collapsed, but later recovered and hit new highs, while bonds posted decent double-digit returns. The only exception was real estate. According to a survey by real estate portal Magicbricks, property prices in top cities fell 2-9%, and property searches fell 27% in the first quarter of 2020-21 due to lockouts caused by Covid.

Although sales improved in the third quarter and even surpassed last year’s numbers due to the pent-up demand released during the holiday season, property developers were unable to raise prices due to the huge unsold inventory. In fact, residential property prices have remained in the doldrums for the past five years. The RBI real estate price index, which is based on the prices of residential real estate in India’s 10 largest cities, has increased by 5% annually since January 2016. Property prices in the National Capital Region (NCR) have remained nearly unchanged at an annual rate of 1% growth since 2016.

The belated rise in property prices is a great opportunity for investors, especially NRIs looking to invest in a home from home. With stock markets showing signs of fatigue and deposit rates dropping below 6-7%, NRI investors should focus on real estate. The rupee has also appreciated against the dollar in recent months, and its continued surge will make Indian real estate a worthwhile investment in the years to come.

With the passage of the Real Estate Regulation Act (RERA), which protects buyers’ interests by creating a robust complaint system, there is great optimism among remote buyers. Builders can no longer withdraw funds from an announced project and are responsible for delays, misleading advertising and poor construction quality, among other things.

For NRIs who are unable to pursue their investments in India, RERA is a godsend. Real estate project delays have been a major problem and mainly occur because funds raised from one project are diverted to other projects and sometimes to unrelated activities. Under RERA, a contractor must keep 70% of the money raised for a project in an escrow account. The trust account releases funds during the course of the project and thus prevents the misuse of funds.

Home loan for NRIs

If you are planning to buy a home with a loan, this may be a good time to do so. Home loan interest rates are currently at a decadal low, with some banks offering loans as high as 6.5%. You can get a bank loan of up to 80% of the property’s value, although the paperwork can be quite tedious.

It is best to use a non-resident external account (NRE) when applying for a loan as this will allow you to repay the capital invested in the property upon sale.

Tax treatment of gains from real estate investments

By investing in real estate, you can generate rental income and short-term or long-term capital gains. Rent received from property in India is treated as accrued income in India and is taxable regardless of the individual’s residential status. There is a standard 30% deduction and the rest is added to total income and taxed at normal rates.

Indian laws are a bit unfriendly for NRIs when it comes to withholding taxes and other levies. When an NRI earns rental property in India, the tenant must deduct 30% TDS from the rental payments. NRIs must also submit Form 15 CA for rental income transfer.

If the property is sold within two years, the profits made on the sale are short-term capital gains. They are taxed according to the ceiling rate applicable to the NRI. If the property is held for more than two years, the gain is a long-term capital gain and is taxed at 20% after indexation.

The final result

The evolving post-pandemic scenario in terms of house prices, as well as home loan interest rates, is an open invitation for NRIs to evaluate suitable options in India. A word of caution: focus on established home builders, especially for projects under construction.