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Round-trip property transaction costs may vary depending on your local area, but as a general rule they are moderately high (9 to 18%). To find reliable housing market statistics, refer to your local area.
Don’t underestimate the geological side of it, and check the possible risks in your local area.
Acquisition of Indian real estate by foreigners or non-residents
The Foreign Exchange Management Act (FEMA) 1999 may restrict the ability of foreign nationals to purchase property in India.
There is a general permission to acquire real estate in India. All property purchases outside the scope of the general permission require prior approval from the central bank (RBI).
The following nationalities are automatically excluded from the general permission: Afghanistan, Bangladesh, Bhutan, China, Iran, Nepal, Pakistan, Sri Lanka. Agricultural land is also outside the scope of the general permission.
All other foreign nationals fall within the scope of the general permission only if they are deemed resident in India. Some visas (e.g. tourist visas) are specifically designed to bar foreigners from acquiring resident status as defined by FEMA. The general permission may also cover individuals who are Persons of Indian Origin (PIO) or Non-Resident Indians (NRI). For more information on immigration, see IMMIGRATION – Visas and Passports for Expats in India.
An FAQ is available here.
Additional restrictions or compliance requirements (i.e. other than RBI monitoring) may apply in your local area.
If you are in any doubt, seek professional advice. Be wary of illegal or fraudulent schemes to circumvent foreign investment restrictions (e.g. bribes, holding property through a company, joint purchase with an Indian citizen, etc.).
Sale of land by foreigners or non-residents
There are additional restrictions regarding real estate transactions at sale-level. Unless you have NRI/PIO status, you generally need prior approval from the RBI to complete a sale of immovable property in India.
All individuals with PIO status also require RBI approval if they are transferring property to another PIO.
Indian housing market generally
The Indian housing market is not really uniform, as market conditions may vary dramatically from one city to another. Mumbai is by far the most expensive city in India (more than ₹2,00,000 per square metres). It is followed by Pune and Delhi (₹1,00,000 per square metres). Real estate can be much less expensive in many other cities (e.g. ₹75,000 in central Kolkata, etc.).
In some cities, gross rental yields may be lower than in Western countries, despite India’s comparatively high inflation. For example, gross rental yields in Mumbai are often below 3%, i.e. about 1/3 to 1/2 of India’s inflation rate (See Investment for Expats in India). This contrasts with 5% in London.
India may offer opportunities for higher rental yields (e.g. above 4%) outside of areas in high demand. Alternatively, commercial property is even said to attract inflation-busting yields.
An assessment of the Indian housing market must include many additional macroeconomic factors, including:
Don’t forget that you are in a 1.25-billion-strong emerging market whose cultural perceptions are constantly evolving.
Cultural or social factors (e.g. higher mobility) can be a large contributor to new demand for homes, which may force homeownership rates or rents higher.
Property rights in India
From a historical perspective, land ownership has been a very complex issue in India.
Property rights are protected only moderately, though India is gradually moving towards greater regulation of land distribution. Once your property rights are well documented, you are probably already on the right side. Additionally, property transactions are much safer when they are made through a reliable estate agent.
India now has a mandatory land registration system, which is managed at state-level. Land registration may be subject to tax, but registered properties are much more protected than their unregistered counterparts. However, land registration does not guarantee the validity of your property title. Hence, it is genuinely necessary to carry out proper due diligence prior to acquiring property.
In all cases, be wary of:
Freeholds vs. Leaseholds
An expat should understand the concept of “leasehold” before going ahead with a property purchase. In some countries, the residential real estate market consists almost exclusively of freeholds. In India, the system has many similarities with the UK, as there are many freeholds but many leasehold properties as well.
When you own leasehold property, you are only a lessee, and you must pay ground rent to the freeholder. Ground rent may be designed to include the property taxes the freeholder has to pay.
Leaseholds are like tenancies, but they spread over a very long period (typically 30, 60, 99 or 999 years), and ground rent is designed to be very low. In fact, leaseholders may have the illusion that they are the ultimate owner of their property, even though it will eventually return to the freeholder unless they have a right to renew their lease, or to buy the freehold.
You should always check your property tenure. Don’t forget that the value of leasehold property erodes over time. Typically, you enter red territory when your lease matures within less than 70 years.
It is commonly said that houses are freeholds whereas flats are leaseholds. However, this is not automatic, and a growing number of flats are reportedly sold as freeholds.
Leasehold properties whose lease matures within five years are not subject to foreign investment restrictions. Expatriates may avail themselves of this five-year period if they think they will qualify as resident foreigners in the future.
Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.
From a financial point of view, remember that:
For more information on mortgages in India, see ACCOMMODATION – Mortgages for Expats in India.
Property taxes and municipal rates are levied by local authorities. Higher land taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.
Letting your property
As general rule, Indian landlords can expect gross rental yields below inflation. Rents may rise in the future, but this is not guaranteed either.
There might be state-level rent controls (e.g. the Maharashtra Rent Act 1999), and tenants are generally strongly protected by the law. Thus, it may be very hard to evict a tenant who doesn’t pay or who overstays. If you do things well, it can take a bit more than 200 days to evict a tenant. Otherwise, it can take years.
Landlords may mitigate these risks by relying on short-term leases (leave and licence agreements), whose duration may not be 12 months or more. Landlords typically require a three-month deposit and overstaying penalties, and they may even ask for full upfront payment of the annual rent.
From a financial point of view, the return on property investment comprises of:
In an Indian context, ultra-low gross rental yields may be largely justified by rising rents. This is called a “negative gearing” strategy, which involves initially accepting low cash flows because they will rise in the future. In practice, future rent rises may be passed on to the property’s future market value, thereby attracting a capital gain.
Aaron buys property for ₹20,00,000 in year 1. Net rental yield in year 1 is 1.5%, i.e ₹30,000 per year. However, rents rise at a pace of 5% per year.
One year later (i.e. in year 2), net rental yield has increased accordingly. It is therefore 30,000*1.05 = ₹31,500. As compared with his initial investment, rental yield has increased to 31,500/20,00,000 = 1.575% per year.
Assuming the market is still happy with gross rental yields of 1.5% in year 2, Aaron’s property should have appreciated to 31,500/0.015 = ₹21,00,000. Thus, his overall financial return in year 1 is 31,500 + 1,00,000 = ₹1,31,500.
In other words, Aaron’s real financial return has been 1,31,500/20,00,000 = 6.575%.
The example above is just for illustrative purposes. In practice, there are many other variables, such as taxes and transaction costs.
Rental income received by an individual is taxed at the progressive rates of income tax, plus applicable surcharges.
A 1% net worth tax applies if your net wealth exceeds one crore (₹1,00,00,000; or $153,000).
Mortgage interest is tax-deductible up to ₹1,50,000. An extra ₹1,00,000 deduction is available in respect of loans agreed in 2013/2014 only. Any unused part of that additional deduction may be carried forward in future years.
For more information on tax in India, see TAXATION – Investment Taxation for Expats in India.
Sections in FINANCIAL CONSIDERATIONS IN INDIA:
» Money Transfers for Expats in India
» Foreign Exchange for Expats in India
» Banking for Expats in India
» Pensions for Expats in India
» Investment for Expats in India
» Wealth Management for Expats in India
» Property Investment for Expats in India
» Insurance for Expats in India
We value input from our readers. If you spot an error on this page or have any suggestions, please let us know.
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