Foreign Investment in Real Estate – Part I

Subject to the Foreign Exchange Management Act 1999 (“FEMA”) and regulations issued there under, Foreign investment in real estate can be broadly achieved in the following ways:

1. Purchase of immovable property[1]: Can be acquired by a Non Resident Indian/Person of Indian Origin by way of purchase/inheritance/gift. Non Residents can acquire immovable properties for carrying on certain activities.
2. Investment in construction development projects[2]: This kind of investment does not involve the purchase of property directly but in the investment of Companies’ that are involved in real estate projects by purchase of equity shares.

Section 6 (5) of FEMA accords general permission to any person outside India to hold, own and transfer immovable property in India provided that such immovable property was acquired while he/she was a resident of India or by way of inheritance from a person who was resident in India.

The Reserve Bank of India (“RBI”), accorded general permission[3] to a Non Resident Indian (“NRI”) as well as a Person of Indian Origin (“PIO”) to acquire immovable property in India by way of a gift, inheritance or purchase.

For the purpose of these regulations, an NRI/Person Resident Outside India is defined to be an Indian citizen or a Person of Indian Origin (“PIO”) resident outside India; PIO is defined as a person who: i. At any time held an Indian passport or ii. Who or whose father, mother, grandfather or grandmother was a citizen of India, provided that such PIO is not a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan.

It may be noted from the aforementioned definitions that all NRIs are PIOs as well. This article will explore the regulations concerning the acquisition and transfer of immovable property by NRI/PIOs by way of gift/inheritance. Other aspects of foreign investment and real estate would be dealt with in the forthcoming articles.

Acquisition and transfer of Immovable Property by a NRI/PIO:

The RBI has granted general permission to a NRI for acquiring immovable property in India by way of gift or by way of inheritance subject to certain regulations.

1. Acquisition by way of Gift: RBI has accorded general permission to an NRI for the acquisition of immovable property in India by way of a gift. It is pertinent to note that under the Indian laws, for a transfer to be considered as a gift, it must be with respect to existing property and not any future property, given without any consideration and made during the lifetime of the donor. In order to make this transfer, the donor needs to execute a gift deed with respect to the property proposed to be gifted, have it attested by at least two witnesses and compulsorily register it.

The said immovable property may be liquidated by way of sale to an Indian resident, a NRI or a PIO. The sale proceeds must be compulsorily credited to the recipient’s Non Resident Ordinary (“NRO”) Rupee Account and may be repatriated subject to the limit of USD 1 million a year. Further, a tax clearance certificate from a Chartered Accountant must be produced stating that the requisite taxes for the remittance have been paid for.

As an inheritance/settlement: The procedures applicable herein are similar to those applicable in case of immovable property acquired by way of gift. In case of an inheritance, documentary evidence in support of the inheritance must be submitted. The inheritance can also be received as a settlement by executing a settlement deed prior to the death of the settler. This will save time from procedural glitches.

Our inference:

As stated above, there is a lot of similarity between receiving immovable property as a gift or as an inheritance. The only difference is that, Sale proceeds of property received by way of inheritance can be repatriated directly without having to be routed through a NRO account. Remittances under both would require adequate supporting documentation i.e. either a gift deed or a will/settlement deed and compulsorily require a tax clearance certificate. The advantage of executing a settlement deed is that, on the death of the owner/parent, the property will pass on to the beneficiary without any procedural hassles or delay. In case the settlement deed is done without retaining a life interest in the property, the same would tantamount to be a gift.

Remitting rental income of a NRI/PIO arising out of immovable property owned in India:

Another issue that arises out of owning immovable property in India is the current incomes such as rent/interest that it gives rise to. Section 5 of FEMA accords general permission to any person wishing to sell, draw or otherwise deal in foreign exchange as long as the same is for a current account transaction and is subject to certain regulations[4] issued by the RBI. FEMA defines a current account transaction as one that would not substantially alter a person’s or a company’s assets and liabilities. Receipt and remittance of rental income of a NRI would fall under the definition of a current account transaction.

RBI has placed certain restrictions on the type of current account transactions that are permissible. Receipt and remittance of rental income by a NRI, for a property legally owned and held in India, is permissible without any restriction.

Current Account Income: RBI has issued a Master Circular on Remittance Facilities for NRIs[5], which clarifies that incomes like rent, dividend interest etc. can be freely remitted abroad in the following ways:

1. As a debit out of the NRI’s Non Resident Ordinary (“NRO”) Rupee Account or Non Resident External (“NRE”) Account. Both these accounts can be opened and maintained by a NRI without permission from the RBI. Rental income can be repatriated outside India out of both these accounts.
2. As a direct remittance to the NRI’s bank in his/her resident country through the Authorized Dealer/Bank in India.

However, before remittance, certification from a Chartered Accountant must be obtained stating that the amount is eligible for remittance and that applicable taxes have been paid/provided for.

Income arising out of sale: Properties received by way of gift/inheritance may be sold by the recipient, to an Indian resident, an NRI or a PIO. The sale proceeds of property received by a gift must be compulsorily credited to the NRO account of the NRI, however, sale proceeds in case of an inheritance can be remitted directly. All such remittances are subject to a cap of USD1 million in a year. Permission of RBI requires to be obtained for remittance of any amount over and above the said ceiling of USD 1 million in a year. In addition to the same, a tax clearance certificate from a Chartered Accountant must be produced stating that the requisite taxes for the remittance has been paid / provided for.

Our inference:

RBI does not stipulate any restriction on rental incomes of an NRI and the same is an “eligible income” for the purposes of remittance outside India.

In light of the above, NRIs/PIOs have the right to freely repatriate rental income /income arising out of sale proceeds, and may either choose a NRE/NRO account or repatriate the same directly depending on the advice given by their authorized dealers / Financial Advisors.

 [1] Governed by Foreign Exchange Management (Acquisition and Transfer of Immovable Property) Regulations, 2000 issued by the Reserve Bank of India and modified from time to time

[2] Governed by the Foreign Exchange Management (Transfer or Issue of Security to any person resident outside India) Regulations, 2000 and the extant Consolidated FDI Policy issued from time to time.

[3] Foreign Exchange Management (Acquisition and Transfer of Immovable Property) Regulations, 2000

[4] Foreign Exchange Management (Current Account Transactions) Rules, 2000

[5] Master Circular No. 8/2014-2015 on Remittance Facilities for Non-Resident Indians / Persons of Indian Origin / Foreign Nationals dated July 14, 2014

(The Author was an Associate in the Corporate team, Jayanth Pattanshetti Associates, Bangalore)