Purchasing Property from An NRI? Key Considerations and Practical Advice

 Property from An NRI

Buying property is a significant investment, and when the seller is a Non-Resident Indian (NRI), the transaction entails additional legal and financial nuances. The process can be intricate due to the distinct laws governing NRI property sales in India. Understanding these subtleties is crucial to ensure a smooth transaction and to avoid potential legal hurdles. Here's a detailed guide, bolstered with examples, to assist you in buying property from an NRI.

Table of Contents

Understanding NRI Property Rights

NRIs are Indian citizens who reside outside India. Under the Foreign Exchange Management Act (FEMA), 1999, NRIs are allowed to sell property in India, but there are specific regulations they must follow, especially regarding the repatriation of sale proceeds. For instance, if an NRI sells a property purchased in foreign currency, they can repatriate funds up to the amount initially paid in foreign currency. Understanding these regulations will help you gauge the implications of the transaction from the seller's perspective, which can influence their willingness and the transaction's terms.

Suggested read: NRI Home Loans

Legal Checklist for Buying Property from an NRI

  1. TDS Implications: Tax Deducted at Source (TDS) plays a pivotal role when purchasing property from an NRI. The buyer is legally required to deduct TDS at the rate of 20% (plus applicable surcharge and cess) on the capital gains of the sale, not on the transaction value, which is higher than the 1% normally deducted when the seller is a resident. For example, if you are buying a property valued at ₹1 crore from an NRI. You must deduct ₹20 lakh as TDS and deposit it with the Indian tax authorities, regardless of the actual capital gain calculated.
  2. Certificate for Lower or NIL TDS: An NRI seller can apply for a lower or nil TDS deduction certificate from the Income Tax department if they believe the capital gains tax liability is lower than the TDS to be deducted at 20%. This certificate must be provided to the buyer to adjust the TDS accordingly.
  3. Legal Due Diligence: Conduct thorough due diligence to ensure the property title is clear and the property has no legal encumbrances or outstanding dues. This includes verifying the title deeds, checking for any litigations, and ensuring compliance with local laws.
  4. Repatriation of Funds: If the NRI seller wants to repatriate the sale proceeds, they need to provide proof that all taxes have been paid. The buyer should ensure that these aspects are sorted to avoid any legal complications after the transaction.

Suggested read: Home Loan Subsidy

Financial and Banking Considerations

  1. Mode of Payment: Payments should ideally be made through banking channels directly to the seller's NRO (Non-Resident Ordinary) or Non-Resident External (NRE) or Foreign Currency Non-Repatriable (FCNR) account. Never commit to depositing the money in the seller’s savings account in India. This is important to avoid future hassles.
  2. Loan Approval: If you are considering a home loan to purchase an NRI's property, ensure the bank is informed about the seller's NRI status as it might influence the loan approval process.
  3. Buyer needs a TAN: While having a Permanent Account Number (PAN) is a must for the seller to carry out the transaction, the buyer needs to have a Tax Deduction and Collection Account Number (TAN). Without a TAN, you will not be able to deduct the tax – tax deducted at source or TDS – you as a buyer are liable to pay. Both the parties could apply for the same if they do not have the above-mentioned numbers already. Also note here that if you are buying this property along with your wife, both the buyers must have TANs. 
  4. Special Power of Attorney: In case the seller shows his inability to be present in India to complete the process and proposes to grant a power of attorney to his representative in the country, ask him to prove this representative with a special power of attorney. A general power of attorney is given to someone to carry out any sort of financial transaction on an NRI’s behalf. A special power of attorney would in a way restrict this representative’s powers, something that favours a buyer.

Buying property from an NRI requires careful consideration of legal, financial, and regulatory aspects. Ensure you are well-informed and possibly seek assistance from real estate experts or legal advisors. Proper preparation will facilitate a transparent and efficient transaction, safeguarding your investment against potential pitfalls.

This detailed approach ensures that buyers are well-equipped to navigate the complexities.

FAQ about Purchasing Property from An NRI

The procedure involves verifying the NRI’s legal title to the property, ensuring all documents are in order, deducting the appropriate Tax Deducted at Source (TDS), and making payments preferably through banking channels to the NRI's NRO account. Due diligence and compliance with FEMA regulations are crucial.

The tax rate for the buyer is not directly affected by the seller's NRI status. However, the buyer is responsible for deducting TDS on the capital gains of the NRI seller at the rate of 20% plus applicable surcharge and cess.

TDS should be deducted at 20% of the capital gains earned by the NRI on the sale of the property, plus any applicable surcharge and acess.

Buying property in India can be a worthwhile investment for an NRI, especially if they plan to return to India or want to retain financial ties to the country. The real estate market can offer good returns, but like any investment, it comes with risks and requires careful planning and understanding of local laws.

Yes, an NRI can claim a TDS refund if the tax deducted at source is higher than their actual tax liability. They would need to file a tax return in India to claim this refund.

When an NRI sells property in India, they must pay capital gains tax on any profit earned from the sale. The buyer is required to deduct TDS on the capital gains at the rate of 20%. The NRI can repatriate the sales proceeds abroad, subject to certain conditions and after paying all applicable taxes in India.

Published on 22nd May 2024