Real Estate in India- An Attractive Venture For Non-Residents Indians.

Introduction:      

Though the expression "Real Estate" has not been defined in any statute in India, broadly speaking this expression would mean lands and buildings.

Real estate is stated to be the second largest sector in India with about 250 industries dependent upon the real estate. Despite this it is indeed sad that this industry is not organized. The prospective transferor and transferee have to depend upon half baked information about the legality etc of the transaction. There is no full proof method to determine the title of the transferor and genuineness of records provided to the intending transferee in regard to lands and buildings proposed to be transferred. No doubt it is possible to legally determine the validity of the transaction; however the parties to the transaction choose to rely more on the information and assurances of the property dealers rather than professionally checking the records.

The statute governing the transfer of immovable property in India is known as The Transfer of Property Act, which came in force in the year 1882.

The other ancillary laws to support the transfer of property in India are the Indian Registration Act and Indian Stamp Act.

Besides the resident Indians, non-resident Indians and other foreign nationals are also showing interest in acquiring the immovable property in India. The Indian government is encouraging investment in foreign exchange in India in the real estate sector and has made regulations under the Foreign Exchange Management Act. 1991.

Non-Resident Indians

Non-Resident Indians- A new class of investors in Indian real estate:

A NRI is essentially an Indian citizen, who has elected to stay and work for gain abroad for a specified number of days in a given financial year. It is the residential status of the person, which determines whether the person is a resident of India or is a resident out side India.

An Indian National, who has acquired citizenship of another country, cannot qualify to be a NRI . Such persons cease to be Indians and become a foreign national. The Government of India, has however, carved out another classification, for persons, who either them selves or their parents or grand parents were citizens of India at the time of India becoming Republic. These persons have been termed as Persons of Indian Origin (hereinafter referred to as PIO ). The PIO 's have been placed at par with Non resident Indians in many respects, including the right to acquire property in India.

The Indian Government has made every effort to encourage investments in India in real estate, stocks and other investment opportunities.

A Non-Resident Indian

The expression Non Resident Indian is reserved for Indian citizens. It has been defined in the Income Tax Act, 1961 and Foreign Exchange Management Act, 1991(FEMA) as an expression "Resident out side India". It is stated that a person who has stayed outside India for a period of more than 182 days, for the purposes of employment, carrying on business, or for any other purpose, as would indicate his intention to stay outside India for an uncertain period in the preceding financial year, would be considered to a Resident out side India.

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A Person of Indian Origin

A Person of Indian origin:

The expression PIO, finds mention in regulations formed under Foreign exchange Management Act, 1991. The expression PIO, for the purposes of real estate, means an individual who at any point of time held an Indian passport or who himself or whose father or grand father was the citizen of India by virtue of Constitution of India and/or Citizenship Act, 1955.

The citizens of Pakistan, Bangladesh, China, Sri Lanka, Afghanistan, Iran, Nepal, and Bhutan fall in the prohibited category. They will not qualify to be a PIO, despite the fact; they fulfill the qualifications mentioned above.

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Classification of Properties

Classification of Properties:

The land in India is divided into five categories and the buildings/flats etc are divided in two categories. A land user is attributed to each breadth of land and can be used only for the purpose for which the land user is sanctioned. A person desiring of using the land for the purpose other than specified will have to seek the permission of competent government for get the land user converted.

The land can be broadly classified in following five categories
  1. Residential properties
  2. Commercial properties
  3. Agricultural properties
  4. Plantation properties
  5. Farm House
The buildings/flats can be classified in two categories:
  1. Residential
  2. Commercial
Agricultural Properties:

Certain restrictions have been imposed upon the transfer of agricultural lands in India by Central laws and the respective state laws. The Central government has restricted the transfer and ownership of agricultural lands, plantation properties and farm house on the basis of citizenship and residence of transferor and transferee.

Non-resident Indians (NRI) and Persons of Indian origin (PIO) have been prohibited under the provisions of FEMA from acquiring/purchasing agricultural lands, farm houses and plantation properties. In order to acquire agricultural properties, farm houses and plantation properties one has to satisfy the twin test of being a citizen of India and person resident of India.

The restrictions imposed by the state governments is not limited to NRI's and PIO's, it extends to Indian citizens resident of India. Most of the states insist that agricultural properties can be acquired only by a "farmer" domiciled in that state. The residents of other states and the persons who are not farmers cannot acquire agricultural properties.

Residential properties:

Residential properties and Commercial properties can be acquired by any person irrespective of citizenship and residence. Indian Citizens, foreign national, NRI's and PIO's are free to acquire without restrictions residential and commercial properties.

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Nature of Transactions

Nature of Transactions under the Transfer of Property Act:

The Transfer of Property Act, 1882 describes the modes by which the immovable property may be transferred by a person in favour of another person. This Act provides for following kinds of transfer:
  1. Sale
  2. Mortgage
  3. Lease
  4. Gifte and
  5. Exchange

Sale:

A non-resident Indian and a Person of Indian origin cannot acquire/purchase agricultural property/plantation property and farm house. There is no restriction on their purchasing residential and commercial properties.

Where the seller of agricultural/plantation/farm house is a non-resident Indian/PIO the property may be sold by him only to Indian citizens residing in India. Commercial and residential properties may be sold to PIO's and NRI's irrespective of their residence. A foreign national can buy residential or commercial properties only that too when he is a resident of India.

Where the seller of an agricultural/plantation/farm house is a foreign national (other than a PIO), the same may be sold only to Indian citizens resident in India. Residential and commercial properties may however be sold to to PIO's and NRI's irrespective of their residence. A foreign national can buy residential or commercial properties only that too when he is a resident of India.

Mortgage:

Transactions of loans and advances in Indian currency between a person resident in India and a person resident outside India are governed by FEMA.

A general permission has been granted by the RBI to certain financial institutions providing housing finance in India to grant housing loans to NRI's for acquisition of a house for self occupation subject to following conditions:-
  1. The house/flat would be used for self occupation by the non-resident on return to India and not for any other use;
  2. The quantum of loan, margin money and the purpose of loan will be at par with those applicable loans being granted to residents;
  3. The loans should be fully secured by creating equitable mortgages of the property and if necessary, lien on borrower's other assets in India.
  4. Repayment of loan should be made by the borrower within a period not exceeding fifteen years and in installments comprising principal and interest including all charges by remittances from abroad through normal ban king channels or out of funds in his/herNRI/FCNR/NRO account in India.
  5. if the house/flat is rented out, the entire rental income, if it is more than the prescribed installment, should be adjusted towards repayment of the loan. If the rental income is less than the installment, the borrower should remit the shortfall amount from abroad or pay the difference of his/her NRE/FCNR/NRO account in India.
Lease:

Transfer of an immovable property by way of lease is perhaps the most commonly utilized mode of transfer. Lease in common expression can be understood as transaction of letting an immovable property on rent. The person who lets the property is known as the landlord and the person who occupies the property is known as tenant. The tenant in a transaction of lease, acquires only the right to enjoy/use the premises, the ownership continues to vest in the owner of the premises. A tenant can enjoy the occupation of property till the time the landlord wants him to enjoy; thereafter the landlord has the right to seek the eviction of the tenant by following the due process of law.

The laws of eviction of tenants are divided into the following two categories:
  1. Where the tenants have the protection of rent control legislations;
  2. Where the tenants do not have the protection of rent laws.
The rent control laws, which provide protection to the tenants, are made by the respective state governments. The tenants who are the protected tenants by the rent control legislations cannot be evicted without the satisfaction of the rent controller. The rules of acquisition as stated in the transaction of sale are applicable to transaction of lease with one exception that citizens of Pakistan, Bangladesh, China, Sri Lanka, Afghanistan, Iran, Nepal, and Bhutan cannot have lease of an immovable property, the duration of which is more than five years, without the permission of Reserve Bank of India.

Gift:

Gift has been defined as the transfer of the certain existing moveable or immoveable property, which is made voluntarily and without consideration, by one person to another. The person who transfers the property is called the donor and the person in whose favour the property transferred is called the donee. Acceptance of the gift by the donee during the life time of donor is a pre-requisite of gift.

A transaction of gift should be done:
  1. by registered instrument;
  2. be signed by or on behalf of the donor;
  3. be attested by at least two witnesses.
Where a person of Indian Origin is the donor he is permitted to transfer by way of gift all kind of properties mentioned above. However, there is a restriction with regard to donee in respect of agricultural/plantation/farm house property. The donee has to be an Indian citizen and person resident in India. The residential and commercial properties may however be transferred by a PIO donor to any Indian citizen or PIO irrespective of their residents a foreign national may be the donee in respect of commercial and residential properties, if he is a resident of India. The same is the position with regard to a non-resident Indian donor.

Where a donee of an immoveable property is a NRI or a Foreign National resident of India, he is permitted to remit an amount up to one million US dollar, per calendar year arising out of sale of the gifted property. The remittance is permitted only in regard to sale of residential or commercial property. Since and NRI or a PIO is not permitted to be the donee in regard to agricultural property plantation property/farm house, there is no provision for remittance and sale of such property.

Exchange:

A transaction of exchange is similar to a transaction of sale; the only difference between the two transactions is that in a transaction of sale the consideration for the immovable property is valued and paid in money, whereas in a transaction of exchange, the consideration is paid in kind and not in money.

The laws applicable to FEMA qua the transaction of exchange are similar to those of transaction of sale. Readers may refer to the chapter of sale to understand the import of the involvement of foreign exchange in transactions of exchange.

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Transfer of Real Estate by Way of Inheritance

Transfer of real estate by way of Inheritance:

Besides the above mentioned five kinds of transactions, another very important mode of transfer of immovable property is by way of inheritance. Since India does not have a uniform Civil Code, each religious belief has its own set of personal laws which inter-alia governs the laws of inheritance or succession. The children of inter-faith marriages have another set of laws for governing their succession issues.

The acquisition and transfer of immovable property in transactions of sale, gift, lease, mortgage, and exchange are subject to certain restrictions, which can be broadly divided into the following three major categories:
  1. Restriction with regard to the residential status of the transferor and the transferee, and/or
  2. Restriction with regard to the citizenship of the transferor and the transferee, and/or
  3. Restriction with regard to the nature of the immovable property sought to be transferred or acquired.

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Applicable Laws

Applicable laws:

Documents by which the immovable properties are transferred require registration and attract stamp duty. The Indian Stamp Act, 1899 determines the amount of duty payable on each of the document of transfer. The Stamp Act is a Central Act; however the rates of stamp duties are determinable by the state government of the state where the immovable property is situated. The Registration of the document has to take place in the office of sub-registrar of the district where the property is situated.

Where a foreign national is involved or where foreign exchange is involved in the transaction of the immovable property, FEMA would also be attracted.

Land Ceiling Acts have been promulgated in the country to avoid accumulation of lands in the hands of few. The respective state governments have fixed the land size, both in urban and rural areas, beyond which a person is not allowed to hold. Any person holding more than the specified ceiling land may have to forgo the same in favour of the government.

Any one desirous of purchasing the immovable property in the urban areas of the country must verify the local municipal laws to determine if the constructed property/intending constructed property is as per the sanction laws of the local municipal authorities. It also needs to be determined the permitted land user of the land which is intended to be transacted.

Last but not the least it would be necessary to examine the provisions of Income Tax Act, 1961 and Wealth Tax Act.

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Conclusion

Conclusion:

The NRI and PIO investors desirous of investing in Indian real estate are advised to critically verify the documents to title and other statutory compliances before transacting in real estate.


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