Everything That NRIs Must Know About Investing In Real Estate

The year 2020 was good for investors. Gold shot up due to the global uncertainty, stock markets crashed but later bounced back to touch new highs while bonds gave decent double-digit returns. The only exception was real estate. According to a survey by real estate portal Magicbricks, real estate prices in top cities declined by 2-9% and property searches dipped 27% in the first quarter of 2020-21 due to the Covid-induced lockdowns.

Though sales improved in the third quarter and even surpassed the previous year’s tally due to pent up demand getting released during the festive season, real estate developers have not been able to raise prices because of the humongous unsold inventory. In fact, residential property prices have remained in the doldrums for the past five years. The RBI House Price Index, which is based on residential property prices in the 10 biggest cities of India, has risen 5% annually since January 2016. Property prices in the National Capital Region (NCR) have remained almost flat, registering a 1% annual growth since 2016.

The tardy rise in property prices is a terrific opportunity for investors, especially NRIs who wish to invest in a house back home. With stock markets showing signs of fatigue, and deposit rates falling below 6-7%, NRI investors should focus on real estate. The rupee has also strengthened against the dollar in recent months and its continued rise will make Indian property a worthwhile investment in the coming years.

There is a lot of optimism among long-distance buyers following the passing of the Real Estate Regulation Act (RERA), which safeguards the interests of buyers by creating a robust grievance redressal system. Builders can no longer siphon away funds from an announced project and will be answerable for delays, misleading advertisements and poor construction quality, among other things.

For NRIs, who are not able to follow up on their investments in India, RERA is a godsend. Delay in real estate projects has been a major problem and happens mostly because funds collected from one project are diverted to other projects and sometimes for unrelated activities. Under RERA, a builder must keep 70% of the money collected for a project in an escrow account. The escrow account releases funds as construction of the project progresses, thus preventing misuse of funds.

Home loans for NRIs

If you intend to buy a house with a loan, this may be a good time to do so. Interest rates on home loans are at decadal lows right now, with some banks offering credit at 6.5%. You can avail a bank loan of up to 80% of the property value, though the paperwork can be quite tedious.

It is best to use a non-resident external (NRE) account when applying for a loan, as this will allow you to repatriate the capital invested in the property, when you sell it off.

Tax treatment of the gains from real estate investments

Your investments in real estate can earn you rental income and short-term or long-term capital gains. The rental received from property in India is treated as income accrued in India and is taxable, irrespective of the residential status of the individual. There is a standard deduction of 30%, and the remaining is added to the total income and taxed at normal rates.

For NRIs, Indian laws are somewhat unfriendly when it comes to withholding tax and other levies. If an NRI earns rent from property in India, the tenant has to deduct 30% TDS from rent payments. NRIs also need to submit Form 15 CA for remittance of rental income.

If the property is sold within two years, the profits earned on the sale will be short-term capital gains. They will be taxed as per the slab rate applicable for the NRI. If the property is held for more than two years, the profit will be long-term capital gains and will get taxed at 20% after indexation.

The bottom line

The evolving post-pandemic scenario pertaining to Real Estate pricing and also to interest rates for Home Loans is an open invitation for NRIs to evaluate suitable options in India. A word of caution : focus on established builders, specially for under-construction projects.

(Source: Moneycontrol)