Real Estate has always been a preferred investment choice for NRI community. However, it is very important for NRI community to know that the foreign exchange law of India FEMA has established certain rules and regulations around conducting a property transaction in India. In case you knowingly or unknowingly fail to comply with the FEMA rules, you can end up in trouble later on and will have to apply for compounding under FEMA provisions to help regularise the transaction.
I have, in an earlier post, already discussed the FEMA implications for buying property outside India check it here: FEMA Rules w.r.t. Immovable Property Outside India: Scenario-wise Analysis
In this post, I am discussing the FEMA rules that apply to NRI for purchase/sale of property in India.
Applicable Regulations
- Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2015
- FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSACTIONS) RULES, 2000
- FOREIGN EXCHANGE MANAGEMENT (PERMISSIBLE CAPITAL ACCOUNT TRANSACTIONS) REGULATIONS, 2000
- FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN RUPEES) REGULATIONS, 2000
- FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN FOREIGN EXCHANGE) REGULATIONS, 2000
- FEM (Realisation, repatriation and surrender of foreign exchange) regulations 2015 Link
- Master Direction – Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999 Link
- Master Direction on BORROWING AND LENDING transaction in Indian rupees by person resident in India and non resident indians/person of indian origin
Scenario Analysis
Let us discuss the provisions of the regulation in a scenario wise manner w.r.t the buyer’s residential status as per FEMA as follows:
Scenario #1: Indian citizen residing out of India
You can acquire property OTHER THAN agricultural/plantation/farm house from any one
Payment for acquisition can only be through inward remittance/money held in any of the non-resident accounts in India – payment through any other means is not allowed
You can transfer (i.e. sell/gift) agricultural property only to a RII (may be Indian or foreign national)
You can transfer (i.e. sell/gift) non-agricultural property to the following:
- RII (may be Indian or foreign national),
- ROI (only if he is a citizen of India or a PIO)
Scenario # 2: Person of Indian Origin (PIO) residing out of India
You can acquire property OTHER THAN agricultural/plantation/farm house from any one
Payment for acquisition can only be through inward remittance/money held in any of the non-resident accounts in India – payment through any other means is not allowed
You can acquire non-agricultural property by way of gift from RII (any nationality) or ROI (citizen of India or PIO)
You can acquire ANY property by way of inheritance from a ROI (any nationality) who had acquired it in compliance with the foreign exchange law at that time.
You can transfer (by gift/sale) agricultural property only to a RII who is also a citizen of India
You can transfer (via sale) non-agricultural property to any RII (irrespective of nationality)
You can transfer (via gift) non-agricultural property to RII (irrespective of nationality) or a ROI (citizen of India or PIO)
Scenario # 3: Foreign national residing out of India
Foreign national (who is not a PIO) cannot buy a property in India, without specific prior approval from RBI.
Scenario # 4: Foreign national residing in India
Rules are different depending upon the country of which one is a citizen.
As per present rules, citizens of the following countries are prohibited from buying property in India without prior RBI approval:
Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau Hongkong
Following points may be noted here:
- What is mandated is that they should be “citizen” of these countries and not “resident” – so, for e.g. a Chinese citizen under a long term deputation by its head office to India becomes a resident of India as per FEMA however since he is a Chinese citizen, he cannot buy property in India without prior RBI approval
- FEMA allows such people to take property on lease, however term of lease cannot exceed 5 years – question arises – can the lease be extended after 5 years period is over: in my view, yes. The interpretation should be that the lease period as per agreement at any point should not be more than 5 years.
- The given list is a dynamic list. Foreign nationals should check this list once before entering into a transaction in India.
As regards citizens of other nationalities who are a RII as per FEMA (e.g. conducting employment in India), they are allowed to freely buy property in India and the rules are equivalent to those applicable to an RII.
Hence, those foreign nationals can even buy agricultural land in India.
Even if foreign national moves out of India, he can retain the property vide Section 6(4) of FEMA for as long as he wants to.
As a foreigner, please also note that purchasing property in India when you are on a tourist visa is not one of the permitted activities and can be a violation of Indian Passport Act. Hence, for buying property in India, you have to be either on an employment or business visa.
However, important thing to note is that foreign national must also check the requirements of respective State Government otherwise it will be difficult to register the property.
There has also been a Press Release dated Feb 1, 2009 by Ministry of Finance Link regarding acquisition of land by persons residing outside India whereby State Registration authorities have been cautioned about foreigners buying properties in India illegally (esp. around Goa).
You can also consider this helpful article on the UK government website Link.
Rules on repatriation of proceeds of sale of immovable property
FEMA has a specific regulation on remittance of assets, I had covered it in my earlier post: Remittance facilities to NRI & Expats under FEMA
However, there are some restrictions/conditions w.r.t. immovable properties which are given in this regulation as follows:
- Seller must have acquired property in accordance with the FEMA regulations.
- In case of residential property, repatriation will be restricted to 2 such properties ONLY
- Amount repatriated will not exceed the funding from inward remittance/NRE/ FCNR account.
Other points:
- In case an ROI had purchased/received as gift/inheritance an agricultural property when he was a RII, he can continue to keep such property after becoming an ROI – this is allowed u/s 6(5) of FEMA
- FEMA requires that any transaction relating to immovable property is subject to tax laws in India.
- There is NO reporting requirement for ROI or even a foreigner who is a RII to RBI. Only one case which requires reporting is where person establishes a branch/project/liaison office in India.
Some Issues
Now let us discuss some thorny issues where the regulation is silent or is not clear and thus subject to interpretation:
Issue # 1: Definition of agricultural property
FEMA nowhere expressly defines agricultural property. Nearest recourse that can be taken is the definition u/s 2 (IA) of the Income Tax Act.
Issue # 2: Purchase in joint name
Many a times, an ROI may want to purchase the property in a joint name with parents/spouse who may be RII or ROI.
FEMA regulations are silent on joint ownership. A view can be taken that as long the purchase transaction by all the multiple owners is permissible under FEMA, you can go ahead with the transaction.
Let us understand with the help of an example. A, an ROI plans to purchase an agricultural property with B, a RII who is a close relative. But he can be a joint owner in a non-agricultural property. Here, A&B should not go ahead with the transaction because while B can purchase agricultural property, A cannot.
Another example: A, a PIO and RII, is married to B, a foreign national. A& B plan to jointly purchase property in India. Here, A can purchase while B cannot as B does not qualify as a PIO as per FEMA Regulations. And hence it is advised that only A purchases it in his own name, and not jointly.
Another view in this, and especially where it is not allowed, is to seek an express confirmation/approval from RBI.
Issue # 3: Purchase in the name of another person
After knowing that one is not allowed to purchase property in India, there may be a temptation to buy in the name of another person. In India, purchasing property in name of another person is a violation of Benami Prohibition Act. This Act has been recently amended (Sept 2016) and made more powerful. Also, it is expected that next black money crackdown of the current government will be on benami properties. So in my view, one should desist from taking this route.
Issue # 4: Purchase by ROI through a company/trust vehicle
Another option for an ROI to purchase a property in India is to purchase it not directly but first form a company in India, and subscribing to its shares. The company in turn will purchase property in India. There are detailed rules and regulations that are prescribed in the FEM (Transfer or Issue of Security) Regulations, 2000: I am not discussing it here as it is outside the scope of this article.
Issue # 5: Purchase with the intention of trading in properties
Trading of properties is not an allowed activity under Schedule I of the FEM (Establishment of a Branch Office or a Liasion Office or a Project Office or any Other Place of Business) Regulations, 2000 and will require a prior RBI permission to carry out this activity.
Issue # 6: Inheritance of agricultural property by NRI/PIO
As per the regulation, NRI/PIO cannot purchase agricultural property in India. But situation becomes complex if you have say your uncle owning agricultural land in India and he, on his death, bequeaths it to you in his will. Now, the transfer of title is valid under Hindu Succession Act, 1956 (assuming the uncle to be a Hindu) but a violation of FEMA.
Now the question is: can FEMA override succession law? In my view, NO. However, before taking a transfer of title in own name, it is better to present all the facts before RBI and seek its prior approval.
Another situation: a ROI purchases agricultural land in India in violation of FEMA. On his death, he names you as the owner of that asset in the will. FEMA disallows it. What should you do? My view, check with RBI first.
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