Importance Of Investment In Real Estate
With the population exceeding the billion mark,real estate
in the Indian sub-continent has obvious potential for growth.
While the idyllic Indian village life has an emotional appeal,
the discerning investor knows the importance of easy accessibility
to schools, shops,offices, entertainment centres and airports.
A real estate investment has far higher value in the major
towns and cities of India. A wise investment here can benefit
from the historic movement of population to urban centres.
A process of economic liberalisation has also encouraged
NRI investments into real estate,as the return on investment
has increased substantially as compared to the pre-liberalisation
era.
The Prudent Investor
A complex web of legislation impinges on all property transactions
in India. Violation of Development Control rules can cause
demolition of construction. Income tax rules threaten expropriation
for economic offences. Hindu joint family succession rules
impact on property transfers. Under this situation of hidden
threats and lurking dangers, the best option for the investor
is to chose a builder with a proven track record.Past performance
in completed projects is the best assurance to the prudent
investor.
The Recession and the Aftermath
There has been a severe recession in the real estate field
since 1995. It is, in reality, a long needed market correction.
The prices of real estate in Mumbai, Delhi and Bangalore
had reached astronomical levels in an orgy of speculation.
Fortunately, such speculative inflows were more limited
in Tamil Nadu. But, everywhere, demand slowed down. Since
apartment projects require co-ordinated investments by many
buyers, promoters were forcedby a lack of demand to slow
down, or even stop construction. This resulted in a shake
up of the market, leaving only the strong promoters in a
position to deliver spaces. The public has become wiser
and customers are now more selective, carefully choosing
safe projects.
Legal
Title deeds by project properties are scrutinised by reputed
legal advisors in addition to the housing finance institutions
approval which also endorses the genuinity of the title
deed,adequate verification of essential records such as
Patta, encumberance Certificates,Planning Permission Approvals.
An investor can employ a legal advisor to examine title
for additional protection. It is safer to buy from an established
builder with a good track record.
Consumer Protection
Consumers in India can obtain relief under the Consumer
Protection Act, 1986, which is a Central Act. Representation
can also be made to the Monopolies and Restrictive Trade
Practices Commission (MRTPC) for issuing instructions against
unfair trade practices.
Financing
The NRI investor has the option to raise finances from financial
institutions. The LIC Housing and Finance Limited (LICHFL)
is the leading institution in India in the field.They have
offices all over the country and respond speedily and efficiently.
Devinarayan Properties are normally eligible for finance
and loan applicants can receive assistance and advice from
our offices.
Unaccounted Money
The use of unaccounted money for payments was very prevalent
in the real estate field in India. It may be superfluous
to warn the NRI investor of the dangers of accepting such
risks.Even if an investor is not involved, he could be drawn
into the problems of his seller. Fortunately, imaginative
tax legislation is driving the real estate field away from
black money. Also, computerisation and consequent extensive
cross checking by the tax department has made it increasingly
difficult to hide financial transactions. In fact, the current
recession in India may partly be the result of thousands
of individuals discovering that there is no safe place to
hide black money. The population may need time to adjust
to the concept that, just like death, taxes are inevitable.
In the meanwhile, play it safe.
Who is a Non-Resident Indian?
Non-Resident Indians are, in general,Indian Citizens who
stay abroad for employment, business, vacation or any purpose
in circumstances indicating an indefinite period of stay
outside India.Indian citizens working abroad on assignments
with Foreign governments, government agencies or International
agencies like the United Nations. Officials of government
and public sector undertakings deputed on assignments with
foreign governments, agencies or organisations or with their
offices (including Indian Diplomatic Missions) abroad.Non-Resident
Indians become residents in India only when they come back
to India for employment or business or vocation or for any
other purpose indicating an indefinite period of stay in
India. They are not regarded as residents in India during
their short visits to India.
Who Is A Foreign Citizen Of Indian Origin?
A Foreign citizen is said to be of Indian origin if :
(a) He at anytime holds an Indian passport.
(b) He, his father or paternal grandfather was a citizen
of India by virtue of the
Constitution of India or the Citizenship Act, 1955 (57 of
1955)
(c) He is the spouse of an Indian citizen or Indian origin.
Purchase / Sale Of Immovable Property By NRI's
The provisions relating to purchase / sale of immovable
property in India by Non-Resident Indians (NRIs) are provided
in the Foreign Exchange Regulation Act, 1973 and the Income-Tax
Act, 1961. Consequent on the liberalisation in Exchange
Control policy and procedures, the government has brought
about major legislative and policy changes to encourage
NRI investments in real estate. The salient features of
liberalised policy and updated position are discussed in
detail below.
Acquisition Of Immovable Property By Nris Holding Indian
Passport
Non-Resident Indians holding Indian passport do not require
prior permission of Reserve Bank of India to buy a residential
or commercial immovable property in India. The purchase
consideration may be paid either by remittance of funds
from abroad through normal banking channels or out of NRE
/ NRO / FCNR account. Non-Residents of Indian nationality
do not require any permission for acquisition, transfer
or disposal by way of gift of immovable property which is
not a farmhouse or agricultural land or plantations property.
Declaration of form IPI-7 for acquisition of commercial
property for carrying on any industrial, commercial or trading
activity by their proprietary partnership firm in India
is required to be filed with RBI within 90 days from the
date of purchase.
Acquisition Of Immovable Property By Foreign Citizens
Of Indian Origin
Under the general permission to Non-Resident Indians holding
foreign passport, the Reserve Bank of India has allowed
them to acquire, hold, transfer or dispose of by was of
sale or inheritance, immovable properties situated in India.
The general permission has been granted, provided :
(a) The property is for the purchaser's bonafide residential
use;
(b) The purchase consideration is met either from funds
abroad through normal banking channels or out of NRE / FCNR
account or out of FCNR Special Deposit account.
(c) Income accruing by way of rent from the properties purchased
or acquired by inheritance will not be allowed to be repatriated
abroad even if the purchase consideration was met out of
NRE / FCNR account.
Form IPI - 7
It is however, necessary for foreign citizens of Indian
origin to declare such property to Reserve Bank of India
within a period of 90 days from the date of purchase in
the prescribed form (IPI-7) to the Chief General Manager,
Exchange Control Department, Foreign Investment Division,
Central office, Reserve Bank of India, Bombay. The following
documents are required to be submitted along with the declaration
:
(a) A certified copy of the purchase deed or a certificate
from the Co-operative Housing Society or an Association
of the apartment owners as an evidence of transfer/registration
of the property in the declarants name.
(b) Certificate from the declarants bankers in India evidencing
receipt of inward remittances in foreign exchange through
normal banking channel or withdrawal of funds from the declarants
NRE / FCNR account / FCNR Special.Deposit Account and payment
of consideration for the property out of those funds.
Acquisition Of Immovable Property By Foreign Nationals
Of Non-Indian Origin
Foreign Nationals of Non-Indian origin (whether resident
in India or not) are permitted on application to Reserve
Bank of India [Form No.IPI 1] to acquire, hold, transfer
or dispose of immovable property provided the following
conditions are satisfied :
(a) The purchase consideration is made out of foreign exchange
remitted from abroad in any convertible foreign currency
through normal banking channels.
(b) The property to be acquired is only for bonafide residential
use.
(c) The Foreign National of Non-Indian origin will provide
an undertaking not to repatriate the sale proceeds at any
future date.
(d) Investment in ready-built house is permitted.
(e) Investment in vacant plots is not allowed.
(f) One unit for residential purposes is allowed.
(g) Consideration will be made on a case by case basis only.
In the absence of a specific circular, it may be necessary
for a foreigner of non-Indian origin to obtain RBI's prior
permission Before letting out the residential premises acquired
by him.
Permission To Let Out Immovable Property
The Reserve Bank of India has also granted general permission
to Non-Resident Indian citizens and foreign citizens of
Indian origin, to let out their residential properties acquired
for their bonafide residential purpose but which on account
of their residence abroad, are not required for their immediate
residential purpose. The rental income or proceeds of any
such income from the properties are not allowed to be repatriated
outside India and such funds should be credited to the owner's
Ordinary Non-Resident rupee account (NRO) maintained with
authorised banks in India.
Any person in India can accept rental income arising from
immovable properties held in India by the NRIs provided
the income will be transferred to the Non-Resident Rupee
accounts of the owners with authorised dealers within a
period of two months.
If the property is let out, be it residential or commercial,
various deductions are allowed for income-tax purposes.
If the rental income from property together with all other
taxable income exceeds Rs. 40,000 then the assessee is liable
to income-tax. If the net rental income is not sufficient
to meet allowable deductions, the resultant loss would be
allowed to be set off against any other income of the assessee,
including salary income.Such loss has to be adjusted only
against the current year's income.
Overseas Real Estate
With the liberalisation of the FERA, NRIs can now buy immovable
properties in any country outside India and retain them
even after their return to India for permanent settlement.In
addition the amount lying in the Resident Foreign Currency
Account (RFC) can also be utilised after their return to
India for the subsequent purchase of immovable property
abroad.
Holding Immovable Property by Inheritence
Where the capital asset becomes the property of the assessee
by succession, inheritance or devolution, the cost of acquisition
of the assets shall be deemed to be the cost for which the
previous owner of the property acquired it, as increased
by the cost of any improvement of the assets or borne by
the previous owner or the assessee as the case may be.
The provisions applicable for purchase of immovable property
by NRIs will apply to receiving and holding of immovable
property by inheritance.
Sale of Immovable Property - RBI Permission
The Reserve Bank of India has granted general permission
to non-residents holding Indian passports and foreign citizens
of Indian origin, whether resident in India or not, to dispose
of by sale or inheritance immovable properties situated
in Indiasubject to certain conditions. However, such property
can be sold to another foreign national of Indian origin
provided funds towards purchase consideration are either
remitted to India or paid out of balances in NRE/FCNR accounts.
It is however, necessary for such persons purchasing the
property to submit to the chief General Manager, Exchange
Control Department, Foreign Investment Division, Central
Office,Reserve Bank of India, Bombay, a declaration in the
prescribed form IPI-7 within a period of 90 days from the
date of purchase.
Sale of Immovable Property - Repatriation of Funds
The Reserve Bank of India has allowed non-residents holding
Indian passports and foreign citizens of Indian origin to
repatriate original investment in equivalent foreign exchange
in residential/commercial properties after obtaining prior
approval subject toa maximum of two houses provided that:
(a) The properties are purchased on or after 26th May 1993
(b) The property had been purchased from the remittances
from abroad or from NRE / FCNR account in India.
(c) The properties are not transferred or disposed of by
way of sale for a period of three years from the date of
the final purchase deed or from the date of payment of final
instalment where the agreement for purchase so provides.(d)
Only the amount of sale proceeds equivalent to the original
investment in foreign exchange,if sold after three years,
will be allowed to be repatriated outside India and the
balance amount of sale proceeds of the property should be
credited to seller's Non-Resident Ordinary (NRO) Account
with an authorised bank in India.(e) The person intending
to repatriate the original investment made in residential
immovable properties shall submit an application in Form
IPI-8.
Form IPI - 8
The person intending to repatriate the original investment
made in residential immovable properties shall submit to
the Chief General Manager, Exchange Control Department,
Foreign Investment Division (III), Reserve Bank of India,
Central Office, Bombay - 400 023, within a period of 90
days of sale of the property an application in Form IPI-8.
The IPI-8 application should be accompanied by:
(a) An authenticated copy of agreement for sale,
(b) A copy of declaration submitted to Reserve Bank of India
at the time of purchase of immovable property; and
(c) A copy of the valid Power of Attorney duly certified
by a competent authority if the application is signed by
a holder of Power of Attorney on behalf of the applicant.
Investment in Real Estate Development by OCB's
Non-Resident Indians are now permitted to enter into the
business of real estate development. This can be done by
either forming a partnership firm or investing in a company
incorporated in India. The Reserve Bank of India has relaxed
certain provisions with regard to investment in Indian companies
engaged in housing and real estate development. Person of
Indian nationality / origin resident outside India (NRIs)
are permitted to invest upto 100 percent in the new issues
of equity shares/convertible debentures of Indian companies
engaged/proposing to engage in the following areas:
(a) Development of serviced plots and construction of built-up
residential premises
(b) Real estate covering construction of residential and
commercial premises including business centres and offices.
(c) Development of township.
(d) City and region level urban infrastructure facilities
including roads and bridges.
(e) Manufacturing of building materials.
(f) Financing of housing development.
(g) Investment in proprietary/partnership firms engaged
in real estate development is permitted on non-repatriation
basis.
The invested firm obtaining investment from the NRI/OCB
will have to file a DIN declaration within 90 days to the
RBI within whose jurisdiction the company is situated. The
RBI has permitted limited repatriation facility to the interest
or income portion on the investment (Circular No. 18 of
1994 series dated 10.9.94) subject to the terms and conditions
that capital invested shall not be repatriable.
(h) Investment in real estate development has since been
extended to Overseas Corporate Bodies (OCBs) predominantly
owned by NRIs. Overseas Corporate Body would mean any overseas
company,partnership company, society and other Corporate
body predominantly owned directly or indirectly to the extent
of at least 60 per cent by NRIs and includes any overseas
trust in which not less than 60 per cent beneficial interest
is held by NRIs directly/indirectly but irrevocably (notification
159/94 of 5.10.94).
(g) Investment in real estate development on repatriation
basis is available only to NRIs/OCBs in companies. Repatriation
of the original investment in foreign exchange made by OCBs
will be permitted with the prior permission of Reserve Bank
only after a lock in period of three years from the date
of issue of shares/debentures. In addition, OCBs will be
permitted to repatriate the net profit (upto 16 per cent)
arising from the sale of such investment after the lock
in period of three years.
(h) Dividend/interest on equity shares/debentures can, however,
be remitted as per the procedure laid down in paragraph
10.C.24 of Exchange Control Manual subject to payment of
applicable taxes without any lock-in period.
(i) Application for necessary permission for the investment
should be made in form ISD (R) by the concerned Indian company
to the Chief General Manager, Exchange Control Department,
Foreign Investment Division (II), Reserve Bank of India,
Central Office, Bombay - 400 023.
(j) The facilities are granted to OCBs so long as the ownership/beneficial
interest held in them by persons of Indian nationality/origin
resident outside India continues to be atleast 60 per cent.
(k) The OCBs are required to furnish at the time of applying
for the facility for the first time and thereafter as and
when required by Reserve Bank/authorised dealers, a certificate
from an overseas auditor/chartered accountant/certified
public accountant in form OAC/OAC-1 as the case may be.
The overseas auditor/chartered account/certified public
accountant has to certify That the ownership interest in
the OCBs is held by NRIs.
(l) The proformae of the certificates in form OAC/OAC-1
have been modified to ensure that the interest held by persons
of Indian nationality/origin in the OCB is actually held
by such persons and is not held by them in the capacity
as nominees.
