NRIs: Do you face trouble with your flat tenants in India? Knowing this rule helps

Dubai: Buying and renting out properties have long been of interest to Non-Resident Indians (NRIs). However, when managing their rental incomes in India while residing overseas, NRIs often run into a multitude of problems.

Aside from non-payment or delayed rents, another pain point NRIs face when renting or leasing out their Indian properties comes with the tenant even refusing to vacate the property or renew the agreement post the completion of the lease tenure or rental period.

But all of this changed when India implemented a Model Tenancy Act (MTA) in recent years, which not only replaced the Rent Control Act (RCA) of 1999, but also an even older norm from 1948. These norms now not only financially benefit NRIs but relieves them of any stress that comes with such tenant-related issues.

“While the Rent Control Act in India governed rental agreements, tenant rights, and landlord rights, and aimed to prevent exploitation and ensure fair practices, it covered just the essentials like, fair rent, eviction rules, and property repossession,” said Misri Ravi, an overseas property investment consultant based in India.

“However, now there is a clause of penalty on the tenant in the event of failure to vacate the premise post the lease period. To minimise petty rental disputes, the Model Tenancy Act mandates for written agreement for all new tenancies, which means that rent and duration of tenancy will be fixed by mutual consent between owner and tenant through a written agreement.”

How does the Model Tenancy Act (MTA) help NRIs?

Ravi further explained that according to the Act, if the tenant fails to vacate the NRI premises that’s been let out on rent in accordance with the agreed upon tenancy agreement, he or she will be liable to pay the landlord twice the monthly rent for the first two months and then four times till the latter continues to occupy the said premises.

“Under the 1999 Act, tenants could not be evicted if they were 'ready and willing' to pay the rent. However, the Model tenancy Act empowers the landlord to evict the tenant in cases of non-payment of rent, misuse of premises, making structural changes without the consent of the landlord, etc.,” he added.

“The Model Tenancy Act safeguards the rights of the landlord as well as the tenants as the Act does away with the concept of a hefty security deposit, while boosting rental activities. It also specifies the terms of eviction, essential supply to the rented premises, structural repairs, and construction, among others. The MTA also addresses how a renter can legitimately increase the rent without compromising the rights of a tenant.

“Furthermore, the law not only minimises the possibility of disputes by clearly defining landlords' and tenants' responsibilities and obligations but also puts in place a mechanism to provide speedy resolution to disputes. Additionally, the returns from residential real estate have remained very low. The prices of owning a house have soared but the corresponding rental income is still in the range of 1.5 to 3 per cent of the capital values. This is why the MTA helped improve rental revenue prospects among NRI renters.”

How does it differ from the outdated RCA 1948 norms?

Although, tenancy and leasing operations in India are closely regulated by norms in various forms in all states of the country, the broad idea covered in each of the regulations is to protect tenants from unfair eviction and to settle disputes between the landlord and the tenant.

“However, a serious drawback of these old laws was that most of them have been not amended in over two decades, ensuring that the rent ceiling remains capped at the levels prevalent in the late 90s,” Ravi added.

“This has certainly discouraged property owners in India, like the NRIs, from renting out property and has also dampened investor appetite for purchasing second or third homes due to low capital returns.”

Model Tenancy Act to encourage further NRI investments

The Model Tenancy Act essentially aims to formalise the renting and leasing activity of real estate properties in the country, as up until now the NRI investment was largely seen in commercial properties due to the sheer scale, size, and high rental yields vs the residential properties.

“Before the law came into effect, a high number of residential units were purchased by NRIs and kept vacant due to the uncertainties related to the tenant vacating the property post the tenure of the lease,” added Ravi.

“The Act clears the air, instilling confidence in the minds of overseas investors to lease out the properties and unlock gains in the form of regular monthly rentals,” said Ravi, while adding that the clarity on leasing laws is boosting institutional investment in residential real estate properties.

Key takeaways

NRIs have always shown a keen interest in investing in Indian real estate. However, the uncertainties around ensuring that tenants uphold the terms and condition of the rental agreements were significantly high for NRIs.

The entire process of finding a tenant and collecting the dues is usually carried out by family or close associates in India. This is why, historically, investor-friendly laws have helped attract foreign investment into the Indian real estate industry.

“Alongside the success of investing in property stocks on the Indian exchanges, which indicates an ever-growing interest in Indian real estate, the recent Act has been attracting even more overseas investment in the residential real estate segment in India,” added Ravi.

“With the regulatory framework for rental homes more transparent now, NRIs looking to invest in Indian real estate for sustained rental income will be benefitted significantly. The upbeat sentiment will also enable NRIs to easily monetise their existing vacant residential properties by letting them out in an easily manageable way.”