Tips for NRIs buying or selling property in India — How to dodge compliance pitfalls before closing a deal

NRIs buying or selling property in India must take note of some of the compliance pitfalls before signing a deal. From TDS to repatriation limits and FEMA rules, we have listed some tips that NRIs should be mindful of while closing a contract as uninformed decisions can lock up money for months or even attract penalties.

Currency check on capital gains

Chartered accountant and co-founder of India for NRI Sidhant Agarwal explained how real estate investments that seem to yield significant capital gain over the years are altogether much lower when adjusted for currency movements. “The currency-adjusted internal rate of return (IRR) works out to about 10.7% in rupee terms but only around 6.5% in US dollar terms over 11 years. That’s broadly in line with what a simple global index fund could have delivered, without the construction risk, illiquidity and compliance burden that comes with owning property,” Sidhant Agarwal said.

Moreover, Indian capital gains tax is calculated entirely in rupees using the property’s purchase and sale value. According to Agarwal, capital gains tax does not compensate investors for the loss in value caused by currency depreciation, unlike the facility offered by certain financial instruments.

This observation is relevant only for those NRIs who intend to use their wealth in US dollars. In case, they plan to spend or reinvest the proceeds in India, rupee returns come into the picture. If an NRI plans to repatriate funds in the future, then it is noteworthy that a CA certification is mandatory for repatriation which requires documentary proof of the source of funds.

Significance of choice of bank account

Let’s learn about how the choice between an NRE/FCNR account and an NRO account play a key role in influencing repatriation of sale proceeds. The original property investment can essentially be repatriated in full upon sale only if the asset is bought using funds from a Non-Resident External (NRE) account or a Foreign Currency Non-Resident (FCNR) account.

In case of residential properties, repatriation benefit is applicable for up to two properties. Notably, annual repatriation limit of $1 million applies beyond this limit while commercial properties are immune from this restriction.

Repatriation is capped at $1 million per financial year if a property is purchased using funds from a Non-Resident Ordinary (NRO) account irrespective of the number of properties sold. Beyond this threshold, RBI approval through the authorised dealer bank is needed.

Suggesting that NRIs misunderstand what the funding source actually achieves, Agarwal said, “The funding source only protects the principal’s speed of exit. Any appreciation, which is usually the point of the investment, still falls within the $1 million annual repatriation limit either way.”

Under the Foreign Exchange Management Act (FEMA), the proceeds from selling property in India must be credited to the seller’s NRO account from the buyer’s bank account. CA Ajay R Vaswani of ARAS and Company warned against violation of FEMA rules and said, “If both the buyer and the seller are NRIs, they cannot settle the property transaction directly through their NRE or any foreign bank accounts. Doing so would violate FEMA rules and could attract significant penalties.”

Why one should not overlook TDS obligations

While tax deducted at source (TDS) is the buyer’s legal responsibility, sellers must ensure that the deduction is carried out correctly to avoid tax compliance issues. For resident Indian sellers, buyers are required to deduct 1% TDS on property purchases exceeding ₹50 lakh. However, if the seller is an NRI, the buyer must deduct 12.5% TDS, along with the applicable surcharge and cess, under the new long-term capital gains tax regime.

“The seller should ensure that the buyer deducts the applicable TDS. If the TDS is not deducted, the seller may not receive credit for it while filing the income tax return. The seller may also have to pay self-assessment tax, along with interest, as the tax department could treat the shortfall as a failure to pay advance tax,” Vaswani explained.

Unnecessary costs on execution of sale deeds

NRI families often incur unnecessary costs on stamp duty by executing sale deeds when transferring property among close relatives. Sidhant Agarwal said, “We frequently meet NRIs who have paid full stamp duty and other transaction costs while transferring property to a sibling or child, even though a sale deed wasn’t required. Gift deeds, relinquishment deeds and family settlement deeds are specifically meant for such situations, but many people learn about them only after incurring the additional expense,” he said.