Investing in Indian land, though challenging in many ways, is worth exploring given its high appreciation potential. For non-resident Indians (NRIs) in particular, it serves the dual purpose of being not only an exponential wealth multiplier but also a tie-back to their roots.
“Investing in land in India is challenging unless one is from a sound financial background as loans are not available on purchase of land,” says Rajesh Dasija of RGD Chartered Accountants. “Appreciation is generally quicker in land.” He adds that resale value of plots with independent houses is usually considerably higher than flats, as the person buying the house also becomes the owner of the plot of land.
The option of purchase of commercial or residential immovable property is freely available to NRIs. Though they are restricted from purchasing agricultural land, they may be owners by inheritance. They are also allowed to continue with ownership for land purchased before gaining NRI status.
Moreover, not all Indian states allow those not resident or from a family of that state to buy any property in that state at all, whether agricultural or non-agricultural. More prominently, these are Himachal Pradesh, Jammu and Kashmir and Arunachal Pradesh. In some other states specific prime areas such as hill stations and beaches may be protected, while others may allow non-state domiciliary holders to purchase only for specific purposes.
Agricultural land is even more tightly controlled than commercial or residential. Some states require even resident Indians to have bona fide proof of current ownership of agricultural land or farming as the family occupation to qualify for fresh purchases. In some cases, the existing farm landholding has to necessarily be in the same state as the new purchase proposed. Some other states are more lax, in that agricultural land ownership in any part of India would be considered valid.
In short, when planning to purchase land in India one has to account for the variance in rules governing land acquisition from state to state. Being an NRI only adds a further layer of complexity to the rules.
To fund the purchase, NRIs can issue cheques from non-resident external/non-resident ordinary rupee accounts in India or use deposits held in foreign currency non-resident accounts. Overseas currency brought into India through legitimate channels can also be used.
However, while land acquisition for NRIs is only prohibited for agricultural property, sale of any real estate, especially when repatriating funds, comes with some Foreign Exchange Management Act restrictions. Repatriation of funds is the transaction by which when a sale of property takes place and the amount received as proceeds is sent abroad to the country of the NRI’s residence. Property sales attract capital gains tax — either short term (if sold within three years of purchase) or long term (if sold later than that). Rental income from properties held by NRIs is also taxable.
In the case of residential property, while one can own any number of properties, the repatriation of sale proceeds is restricted to no more than two. General permission is available to NRIs to also repatriate proceeds of the immovable property inherited from a person resident in India subject to the conditions that the amount should not exceed $1 million (Dh3.7 million) per financial year.
“As per the rules applicable to resident Indians, NRIs too have the choice of showing 30 per cent of such deemed rental income as maintenance cost and get tax benefit against the same,” Ramalingam K., Director and Chief Financial Planner, Holisticinvestment.in, states in a post on Moneycontrol.com. “No tax is payable on deemed income in the country of the NRI’s residence. However, do declare this as it could otherwise cause problems during repatriation of funds from India.”
It is essential to get oneself the right property search, legal and financial advisors to avoid rude shocks midway through the process or worse still when trying to monetise the investment. “Information asymmetry is the biggest concern that any buyer, more so an NRI, faces while buying a property in India,” says Gulam Zia, Executive Director — Advisory, Retail and Hospitality at Knight Frank, India. “Since NRIs don’t have the benefit of physical presence for most of the purchase process, they may face a distinct disadvantage compared to a resident buyer.”
The buyer should evaluate the title deeds and whether property taxes are paid. Some builders sell land with constructed houses, but on agricultural land or land otherwise restricted from sales such as adivasi or lands owned on terms that do not allow sales without additional taxes, fees or penalties paid before they can be bought.
Given the complexity of laws and financial structures governing land acquisition in India, you would certainly be best advised to tread softly on those dreams.
A summary of reasons NRIs are keen to invest in land in India and the challenges they face:
Why invest?
1. Retirement home back-up plan.
2. High appreciation, especially for agricultural land.
3. Build a house for the family back home.
4. Build industrial, plantation or other commercial infrastructure for additional income.
Key obstacles
1. Agricultural land may only be acquired with ownership held by someone they can be sure of inheriting from, though there would be financial and legal challenges faced on taking this route.
2. Identifying the right partners to verify and close land acquisition transactions to ensure clear titles and that no retrospective penalties exist for any past owner not being in compliance.
3. Availing of land development infrastructure and permissions for areas that don’t yet have water or electricity supply.
