As an NRI looking to invest in Indian real estate, while real estate investment options may be multiple, the NRI home loan rules are not the same as that for resident Indians. So what does an NRI need to keep in mind when opting for a home loan in India? Here’s everything you need to know and more!
NRI Investment in Indian real estate is considered one of the most lucrative investment options for NRIs given the kind of long-term results and the security backup real estate offers. More often than not, however, NRIs also find themselves hassling for information around not only what property to invest in, but also, around the financing for the property in terms of home loans.
It must be noted that as an NRI investing in Indian real estate, it is highly recommended to not buy the property with hard cash but to take a loan (even if you have the money). This is because banks and other financial institutions conduct private research on the overall viability of a property which, in turn, offers added security to the NRI investor.
On those lines, if you are an NRI opting to take a home loan in India, here's what you need to keep in mind:
1. Understand the definition of an 'NRI'
As per the FEMA and the Income Tax Act, in order for you to qualify to buy a property in India as an NRI until the budget for 2020-21 was announced, NRI’s needed to have resided outside India for at least 183 days or more. After the 2020-21 budget, however, the timeline was revised to 245 days. Hence, for you to be able to buy property in India as an NRI, you should have resided in a country outside India for a mini of 245 days.
It must also be noted that FEMA (Foreign Exchange Management Act) determines one’s eligibility on the basis of one’s residence (NRI or India), whereas, the Income Tax Act determines the tax obligation.
2. Understand the eligibility criteria for NRI home loan applicants
If you are planning to apply for a home loan to buy a property in India, here is the eligibility criteria you will need to meet:
- Minimum 2 years of work experience in the foreign country of residence at the time of loan application
- The loan tenure cannot be of a range beyond 20-30 years
- The applicant should not be more than 60 years of age
Once these criteria are met, the lender will decide the loan-to-value (LTV) ratio on the basis of the applicant’s age and income.
3. Learn about the home loan repayment procedure
For you, as an NRI, to be able to repay your loan to the lender, you need to be sure that you have access to the legally allowed options. you can opt for one of the following methods-
- Transferral of money from your overseas bank account through regular banking channels
- Post-dated cheques
- Electronic Clearance Service (ECS)
- Issue of cheques from a local’s bank account
4. Explore the power of Attorney (PoA) requirement
As an NRI applying for a loan in India, you will also need to appoint a Power of Attorney (PoA) in India. This is a mandatory bank requirement while sanctioning loans because the bank will need to have a local point of contact while you are away. This PoA could be any Indian resident; your friend, family, or acquaintance.
5. Hire a legal counselor or conduct private research on the taxation laws
As an NRI purchasing property in India, you will also further need to learn about the taxation laws in India pertaining to home loans. Here’s what you need to keep in mind:
- You will have to have a plan for taxation in India as well as for your foreign country of residence.
- You will need to be receptive and prepared for foreign currency fluctuations. This is because while your Indian house will be bought in Indian rupees, your income would still be in a foreign currency.
- Additionally, it is also a healthy practice to keep yourself updated with tax, finance, and foreign investment (FEMA) policies.
6. Understand the NRI cost of ownership
NRI cost of ownership for NRI property investment in India is defined as follows:
Price to be paid to the seller/ developer in INR + Forex losses/ gains during the purchase of the asset + Statutory dues to be paid in India and abroad + The cost of capital (bank loan interest)
This means, for example, let’s assume you are living in Dubai and earning in Dirhams. Now, if the INR becomes stronger than the AED, the cost of ownership will increase each year, for projects under construction. If you buy a ready-to-move-in flat. however, it may be more profitable because the cost of ownership is then locked down in Indian rupees and not subjected to FOREX fluctuations.
7. Compare the home loan options in India v/s your resident country
If you are an NRI in a country that has a bank with branches in India too, you may be allowed to obtain a home loan from that bank. It is recommended to explore this option in detail and if possible, opt for a home loan from a bank in your country (ensuring it is a bank with branches in India).
This is primarily because the cost of debt is typically cheaper in countries outside India because the banks, owing to the corresponding relationships and branches in India, provide loans at comparatively lower rates and without being troubled by FOREX fluctuations. In contrast, however, if you take the loan from an Indian branch, you will be vulnerable to currency fluctuation risks.