Repatriation Of Funds from Property Sales: Key Considerations for NRIs

Non-Resident Indians who own a property in India look for various ways to transfer their earnings from the sale of properties to their international bank accounts. Nevertheless, this procedure requires adherence to numerous regulatory compliances in accordance with the Foreign Exchange Management Act (FEMA) and additional related regulations. Comprehending the legal structure and procedural necessities is essential for facilitating an effortless transfer of funds internationally.

Primary requisites for an NRI/PIO to sell a property in India

• An NRI is permitted to sell residential or commercial property in India only to an individual who lives in India or to another NRI or PIO (Person of Indian Origin).
• With general permission, an NRI can sell his agricultural land/plantation property/farm house in India solely to an Indian citizen who is a resident of India.
• An NRI may also transfer his/her residential or commercial property to an authorized dealer or housing finance institution in India via a mortgage.
• An NRI must not transfer their residential and commercial property in India through mortgage to a foreign party. For this scenario, prior approval from the Reserve Bank of India (RBI) is necessary.

Repatriation of sale proceeds of the property by NRIs

• Selling property bought as a Resident Indian (RI):

If property purchased prior to becoming an NRI, then you are allowed to repatriate the sales proceeds within the total cap of USD 1 million per financial year (April–March). If wish to transfer more than USD 1 million in a financial year, it is necessary to obtain approval from the Reserve Bank of India (RBI) by applying through authorized dealer (bank).

• Selling property bought as an NRI:

For properties acquired and sold after becoming an NRI, the repatriation limits are determined by the source of funds used for the property purchase. If you have:

Process of Repatriation of Funds for NRIs

The repatriation procedure consists of several steps, beginning with the deposit of the sale proceeds into the NRO account. The sale proceeds need to be credited to the NRO account, after which NRIs can proceed to apply for repatriation of funds. The specific steps involved:

• Deposit Sale Proceeds in NRO Account: The proceeds from the sale should be deposited in the NRO account. This is the first and most important step before starting the repatriation process.
• Submission of Documents: NRIs need to submit multiple documents to their bank which contains:

• Additional Documents: As per the particulars of the transaction, the candidate needs to submit some additional documents like tax clearance certificate, proof of sales and bank statements.
• Compliance with RBI Guidelines: The requirements set by RBI  ( Reserve Bank of India) must be adhered to, especially if the repatriation sum surpasses USD 1 million in a financial year. Special authorization from the RBI may be required in such situations.

Special Considerations for Inherited Property

The repatriation of funds for NRIs who have received inherited property involves specific regulations and documentation needs. When the property is inherited, NRIs are required to present documentary proof of inheritance, which can include a will or a legal heir certificate, along with tax clearance certificates from the Income Tax Department. The repatriation cap remains unchanged at USD 1 million per financial year. If the payment surpasses the limit or if the property was owned by an individual living outside India, the authorization from RBI might be important.

The process is more complex if the property is inherited from a non- resident in India. In that case, it’s very important to get approval from RBI. This is because the usual repatriation guidelines do not readily apply, and each situation is assessed individually to confirm adherence to Indian laws.

Tax implications for an NRI to Sell a property in India

• NRIs who dispose of their property within three years of its acquisition are liable to pay capital gains tax.
• In the case of a property inherited, when calculating the long-term capital gains, the cost to the previous owner (i. e., the individual from whom the property is inherited) will be regarded as the purchase cost.
• Although NRIs are subject to a Tax Deducted at Source (TDS) on long-term capital gains, there are specific situations where an NRI can receive a waiver. One such scenario would be if the NRI intends to reinvest the capital gains in another property or in tax-exempt bonds.
• If an NRI sells the property before three years of purchase, a short-term capital gains tax is applied. However, the individual can request a tax exemption certificate from the income tax authorities, where his PAN is registered, under Section 195 of the Income Tax Act, along with evidence of reinvestment of capital gains.
• An NRI has a period of two years to invest in another property and up to six months if opting to invest in bonds. If the NRI is considering purchasing another house, a payment receipt or allotment letter must be provided, and an affidavit is required if capital gains bonds are acquired.
• Tax exemptions: If an NRI sells a residential property after three years of purchase and reinvests the proceeds in another residential property within two years from the date of sale, the profit earned is exempted to the extent of the cost of the new property. Nevertheless, NRIs cannot utilize the sale proceeds from property in India on foreign property and still claim the exemption under Section 54 of the IT Act.
• According to Section 54 of the IT Act, if an NRI sells a residential property after three years and invests the capital gains amount in bonds, he will be exempted from capital gains tax. However, those bonds will be locked in for a duration of three years.

Documents Required for Transaction of Sale by NRI:

• Copy of Passport: An NRI who wishes to sell property in India must possess a passport; it does not need to be an Indian passport. This will act as the identity verification for the individual involved in the transaction. For an Overseas Citizen of India (OCI) and a Person of Indian Origin (PIO), a passport fulfills the same role.
• Copy of PAN Card: Many NRIs do not accrue taxes in India since their earnings are subject to taxation in the countries where they reside. Nonetheless, experts advise that NRIs should seek a PAN (Permanent Account Number) card when they aim to sell property in India, as it will be necessary to apply for a tax exemption certificate following the property sale. PAN numbers are issued to NRIs with a foreign communication address to designated countries.
• Power of Attorney (POA): For NRIs unable to be physically present in India to execute the sale of property, they can grant a Power of Attorney (POA) to friends or relatives, legally empowering them to finalize the transaction on their behalf. They will sign agreements and other official documents in your name. The POA can be either general or specific regarding the rights your representative can exercise.
• Tax Returns: If an NRI has held a property for a certain duration and generates income from it (such as through renting it out), the transaction becomes liable for taxes. In this scenario, tax returns for the entire property ownership period should also be prepared.
• Copy of Address Proof: An NRI must provide documentation verifying their address both in India and abroad. This may include a ration card, utility bills such as telephone or electricity bills, life insurance policy statements, etc. The same set of documents is required as proof of international residence
• Copy of Sale Deed: A copy of sale deed which establishes the property ownership of the buyer must be submitted. Sale deed is a legally binding agreement by NRI while selling property in India.
• Copy of Allotment Letter: An allotment letter from the concerned authority (society, builder etc.) will allot the property to the individual who holds it.
• Documents required From the Society: For a flat located in a specific society, a letter from the apartment/society is necessary to proceed with the sales process. This document confirms that the seller has no outstanding payments owed to the society. A copy of the society membership is also critical to verify ownership of the property.
• Copy of Approved Building Plan and Occupation Certificate: While a copy of an approved building plan is essential for selling property, an occupation certificate serves as proof that the apartment has been occupied and is provided by the builder or the building society.
• Copy of Encumbrance Certificate: An encumbrance certificate is required to assure the buyer that there are no dues to any legal authority concerning the land or property. This is significant for a house, an apartment, or even land.

Key Repatriation Rules and Limits

• FEMA Guidelines: Governing the repatriation process, FEMA ensures legitimate and taxed funds are repatriated.
• NRE Account: Full repatriation of funds is allowed.
• NRO Account: Limited to USD 1 million per financial year after tax deductions.
• FCNR Account: No limits on repatriation.
• Special Cases: RBI approval is required for repatriating proceeds from certain property sales or in cases exceeding the repatriable limit.

Investment options with repatriation benefits

Non-Resident Indians (NRIs) seeking repatriable investment opportunities in India have numerous options. Below are various investment options that provide full repatriation flexibility:

• Equity Investments through PIS: NRIs can invest directly in Indian stocks that are listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) via the Portfolio Investment Scheme (PIS). Investments made under this scheme are completely repatriable, covering both the invested capital and any capital gains obtained.
• Mutual Funds: A wide variety of mutual funds focused on India cater to NRIs. Certain funds specifically designated as "NRI Mutual Funds" offer complete repatriation of the invested sum as well as capital gains. These mutual funds invest in different asset classes, such as equities, debt, or a blend of both, depending on the selected scheme.
• Government Securities: NRIs can place their investments in Indian government bonds and treasury bills. These investments present appealing returns with minimal risk and allow for total repatriation of both the principal and the interest accrued at maturity.
• Real Estate (with limitations): NRIs are permitted to invest in residential and commercial real estate in India, except for agricultural lands, plantations, and farmhouses. Although the property itself cannot be repatriated directly, rental income generated from it can be freely repatriated after the relevant taxes are settled. Furthermore, the proceeds from the sale of the property can also be repatriated once any applicable taxes and capital gains taxes are paid.
• Specific Investment Products: NRIs may investigate investment options such as "Masala Bonds" - which are rupee-denominated bonds issued by Indian corporations in foreign markets - and Overseas Direct Investment (ODI) funds. These investment products are tailored to meet the repatriation requirements of NRIs and allow for complete repatriation of the principal amount along with any returns earned.