8 things to know if you are an NRI buying or selling property in India: FEMA rules, power of attorney and more

Buying or selling property in India is complex for NRIs. Beyond price negotiations lies a maze of regulations. Tax rules, FEMA guidelines and documentation all add complexity. A single mistake can delay transactions for months. Here are 8 key issues experts recommend understanding first.

Essential Documents

A missing PAN card remains a common problem among NRIs. Without it, TDS gets deducted at a higher 20% rate.

Other essentials include the original sale deed or certified copy. A legal heir certificate is needed for inherited properties.

For converted properties, include the freehold conversion deed too. Seeking professional advice early can prevent costly compliance mistakes later.

Currency Reality

Dollar income often makes Indian property seem cheap. Over time, rupee depreciation inflates apparent property gains. However, true returns depend on the currency you spend.

Chartered accountant Sidhant Agarwal illustrated this with a real example. A property bought for ₹22.6 crore was sold recently for ₹60 crore. This appeared to nearly triple the original investment amount.

However, adjusted for currency, the picture changes considerably. The rupee-based return was 10.7% annually over 11 years. In dollar terms, this dropped to just 6.5%.

This roughly matches returns from a simple global index fund. Crucially, without property’s illiquidity, construction risk or compliance burden.

Indian Tax Rules

Capital gains tax is calculated purely in rupee terms. It ignores losses caused by currency depreciation entirely. This differs from treatment given to certain financial instruments.

This matters most for those planning to hold dollars. If reinvesting in India, rupee returns remain the priority.

Repatriation Speed

The account used to buy property affects future repatriation ease. NRE or FCNR-funded purchases allow full principal repatriation later. This benefit applies to only two residential properties, though.

Beyond that, the standard $1 million annual limit applies. Commercial properties don’t face this particular restriction, however.

NRO-funded purchases face the $1 million limit regardless. This applies irrespective of how many properties are sold.

Agarwal cautioned that the funding source only protects the principal. Any appreciation still falls under the repatriation limit anyway.

FEMA Rules

Sale proceeds must be credited to the seller’s NRO account. This applies specifically when transferring from the buyer’s bank account.

Two NRIs cannot settle transactions through NRE or foreign accounts. Doing so directly violates FEMA rules, according to experts.

“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,” CA Ajay R Vaswani of ARAS and Company told LiveMint.

TDS Deduction

For resident sellers, buyers typically deduct just 1% TDS. This applies to properties valued above ₹50 lakh.

For NRI sellers, the rate rises considerably to 12.5%. Additional surcharge and cess also apply under the current rules.

Failure to deduct TDS attracts monthly interest penalties. Deducted but undeposited TDS incurs even higher interest charges.

Sellers should ensure buyers deduct TDS correctly and promptly. Otherwise, they risk losing tax credit during filing season.

If the actual tax liability is lower than the TDS, apply early. A lower deduction certificate avoids lengthy refund delays afterwards.

Sale Deeds

Many families mistakenly use sale deeds for property transfers. This applies even among close relatives, such as siblings or children.

Agarwal recalled a case involving a mother-son property transfer. Unnecessary stamp duty was paid as a result of this oversight.

“We routinely meet NRIs who paid full stamp duty and transaction costs on a property transfer to their own sibling or child when the situation didn’t call for a sale at all. Gift deeds, relinquishment deeds and family settlement deeds exist precisely for such situations, but many people discover them only after they have already paid the extra cost,” he said.

Power of Attorney

Many NRIs believe travel is required for every transaction. A properly-drafted power of attorney can avoid this need.

However, embassy attestation alone doesn’t make it legally valid. It must also be registered separately in India.

Many NRIs skip this registration step entirely, Agarwal noted. They later discover the document holds no legal standing.