NRI Investments in Commercial Real Estate

Introduction:

Non-resident Indians (NRIs) invest in India in commercial real estate following the regulations of the Reserve Bank of India (RBI). However, such properties can only be purchased according to FEMA or Foreign Exchange Management Act guidelines. For a better understanding of such investments in India, let’s get into the details about how NRI invest in India:

Summary:

• NRI investments in commercial properties have picked up quite drastically over the last few years after the residential property market started showing lower returns.
• Apart from earning high rental income, NRIs investing in commercial real estate benefit from capital appreciation, which has been better for commercial properties than residential properties.
• RERA’s accountability has also pushed more NRIs towards investing in commercial real estate properties.
• Repatriation is slightly more complicated for NRIs. For example, NRIs can only repatriate proceeds from the sale of property as long as it does not exceed the price paid.
• Buying, selling, or renting commercial property is completely legal in India as an individual must sign the agreement for any dealing & has to follow all the legal procedures.

What are the properties that NRIs can buy?

NRIs with valid Indian passports may invest in commercial and residential properties. For these transactions, they do not need special permission from RBI. In addition, NRIs are not required to tell the central bank about their purchases and may invest in more than one property. For executing transactions in India, they can also provide legal power of attorney on their behalf to others. In contrast, NRIs are prohibited from investing in agricultural land or deploying investments in farmhouses without the RBI’s permission. In such cases, RBI consent is not guaranteed.

What is the process of NRI property investments?

• NRIs can invest in India and buy property separately or with another NRI and purchase real estate in India. The best way to purchase such property is through the legal power of attorney (POA) if they cannot visit India.
• NRIs can appoint the POAs as personal legal advisors. This person will advise on all transactional matters and assist with verification and other formalities. It will be a smoother process since legal specialists are already familiar with all the systems in this case.
• Since legal personnel are familiar with all rules and regulations, they can help NRI investors get the best deals and ensure their safety. One should appoint the general power of attorney (GPA) or the special power of attorney (SPA) only after determining whether an individual is reliable.

Real Estate Investments for NRI Investors: Residential real estate vs Commercial real estate

In the real estate market, many steps taken by the current regime — including demonetization, discouraging cash transactions, establishing RERA, and increasing vigilance — have created a conducive environment for above-board transactions. As a result, the residential property market, primarily driven by cash and black money, has now been decimated and is only a shadow of what it used to be.

This has resulted in a marked shift of interest of NRI investors to invest in Commercial Real Estate projects. Since most of the tenants are corporate entities -audited, all transactions occur through the proper channels and comply with the law.

Regulation

For NRIs to invest in India in agricultural land, tea plantations, or farmhouses, they must obtain permission from the RBI. Other than that, NRIs can invest in India in any property directly through the automatic route- residential or commercial. In such properties, there are no investment limits.

Taxation On NRI Investments in Commercial Property

In terms of commercial real estate, NRI investments are treated the same as those made by residents of the country. When a property is sold after holding it for more than two years, long-term capital gains (LTCG) taxes are applied at 20% after indexation benefits. If the property is sold before this period, STCG tax is applicable by an income tax slab. Surcharges and cess on income tax, if applicable, are also levied.

If there was a loss on the sale of a commercial property, it could be carried forward. The loss can be set off against profits from selling other properties in the coming financial years.

Repatriation of Proceeds

From a commercial property, NRIs can earn two types of proceeds:

1. Sale proceeds (at profit/loss)
2. Lease or rental income

Repatriation of Sale Proceeds

In India, When NRIs wish to repatriate commercial property sale proceeds, certain restrictions apply to them. For example, in a financial year, sale proceeds of only up to two residential properties can be repatriated even if they were paid from the NRE or FCNR accounts. However, as this restriction does not apply to commercial properties, it is another attraction in their favour.

1. If the property was acquired by them when they were residents of India, inherited, or purchased from the funds in the NRO (Non-Resident Ordinary) bank account, then they can repatriate only up to USD 1 million per year.
2. When the property was purchased out of the funds in the FCNR (Foreign Currency Non-Resident) account or the NRE accounts, then the proceeds are repatriable. However, the amount is limited to the price paid for acquiring the property, including any significant capital expenditure in its renovation, remodelling, or extension.

Repatriation of Lease/Rental Income

Lease or rental payments are only received in the NRO account, and their repatriation will be within the overall limit of USD 1 million per financial year set by the RBI.

Commercial Real Estate: Things to Consider for NRIs

One must consider many factors before investing in Commercial Real Estate, whether you are an NRI or not. However, the considerations are far more grave as the ticket size for investment is larger, the assets cannot be liquidated quickly and easily, and the market information or analysis is, at best sketchy.

Legal Title: NRIs can avoid many legal risks with a proper legal title of the property, no-dues certificate (bank release), and occupancy certificate from local authorities. In this matter, one must not rely only on the information provided by the property owner, brokers, or property platforms. It is always better to check the legal status independently through a legal attorney.

Location: The location of the Commercial Real Estate would make all the difference in its rental profits, occupancy, footfalls, accessibility, and price. Many banks may not offer loans on commercial properties at locations with few prospects.

Amenities and Safety: One must look for some of the minimum amenities such as parking places, common areas, cafeteria, lobby, networking, and lighting. Water and fire safety is becoming a must for every commercial property, and so are drainage and physical security.

NRIs’ advantages in investing in Indian commercial property

1. Rupee’s depreciation against the dollar and other major currencies gives an undue advantage to NRIs.
2. Reduced down payment requirements and easy access to loans.
3. Reduction of FEMA regulations, FDI requirements, and automatic route investment.
4. The growing contribution of the services sector to the Indian economy and exports creates an insatiable need for managed commercial real estate.
5. There should be a strong regulator in the form of the RERA (Real Estate Regulatory Authority) to ensure investor interests are protected in the otherwise lopsided real estate market.
6. Tax benefits.

Conclusion

Investment in commercial property patterns has significantly strengthened the real estate sector. This is because NRIs can purchase immovable property in India while adhering to FEMA regulations. As a result, it is easy for them to acquire commercial properties in India. Hence, an increasing number of NRIs are purchasing properties in India. However, buying a commercial property is always different from residential investment. Therefore, NRIs must buy a property in India only if it fits their overall investment philosophy.