An NRI, who wishes to buy a property using a home loan, in India, should be aware of the taxation and foreign exchange regulations. We look at the dos and don’ts for NRIs who are availing of home loans in India
The Indian real estate market offers a lucrative investment opportunity for non-resident Indians (NRIs). Like resident Indians, NRIs are also allowed to buy properties in India, with the help of home loans. However, the home loan rules are not exactly the same for NRIs and resident Indians. Hence, it is important to know the crucial differences.
1. NRI, as per the FEMA and the Income Tax Act
“An Indian, who has not resided in India for 183 days or more and is residing in a foreign country, is commonly referred to as an NRI,” explains Shajai Jacob, CEO – GCC (Middle East), ANAROCK Property Consultants. Experts point out that the FEMA (Foreign Exchange Management Act) will determine whether you are eligible to invest as an ordinary citizen or as an NRI, whereas, the Income Tax Act determines the tax obligation related to such investment.
2. Eligibility criteria for NRI home loan applicants
An NRI home loan applicant should fulfil the following criteria:
- Minimum 2 years of work experience in the country where s/he is residing, at the time of applying for the loan.
- The maximum loan tenure allowed, is around 20 to 30 years.
- The maximum age allowed for servicing the home loan is usually up to 60 years.
- The loan-to-value (LTV) ratio will depend on the applicant’s age and income.
3. Home loan repayment procedure/norms for the NRIs
An NRI can transfer money from an overseas bank account through regular banking channels, issue post-dated cheques or an Electronic Clearance Service (ECS), or issue cheques from a local relative’s bank account, to repay the home loan.
4. Power of Attorney (PoA) requirement
Lenders require a Power of Attorney (PoA) while extending home loans to NRIs, because they live in a foreign country and the lender needs someone in India to deal with.
5. Taxation laws pertaining to the home loan
The primary difference between an Indian resident buyer and an NRI is:
- NRIs have to plan for taxation in India and their country of dwelling.
- NRIs have to manage foreign currency fluctuations, as their house investment will be in Indian rupees and their income will be in a foreign currency.
- NRIs need to stay updated on tax, finance and foreign investment (FEMA) policies related to property purchase.
- They need to have adequate means to purchase their home, based on the home loan terms extended to them.
6. Cost of ownership for NRIs
The cost of ownership is the price to be paid to the seller/ developer in Indian rupees, plus forex losses or gains during the purchase of the asset, plus statutory dues to be paid in India and abroad, plus the cost of capital (bank loan interest). “If the Indian currency strengths over the US dollar, the cost of ownership will increase each year, for projects under construction. Depending upon one’s need, availability of capital and loan terms, it may be best to buy a ready house, so that the cost of ownership is locked down in Indian rupees,” suggests Amit Goenka, MD and CEO, Nisus Finance Services Co Private Ltd (NiFCO).
7. Home loan from a bank in the NRI’s country of residence
It may also be possible for an NRI to obtain a home loan from a bank that is located in his country of residence, which also has a branch in India. This option should be extensively explored. As the cost of debt is usually cheaper in most countries outside India, foreign banks, through corresponding relationships and branches in India, are able to provide loans at attractive rates, without worrying about forex. NRIs buying a home in India with a loan, will be exposed to currency fluctuation risks. They should, hence, explore the options to hedge the currency fluctuation risk, to avoid escalation in the cost of the loan.