Tax Implications and Guidelines for NRIs Buying Property in India

The Government has granted some leniency towards the NRIs and PIOs in matters of real estate investment. This came as a welcome move for the said buyer groups as many of them were quite enthusiastic about holding real estate back in their country of origin. However, a majority of these buyers remain poorly informed about the procedure, the implications, etc. when it comes to purchasing Indian property. The NRI guide to buying property in India consists of a lot of reformed stipulations.

It is crucial for NRIs and PIOs to understand the real estate purchase process stipulations for them. The procedure for NRI to buy property in India grants them the opportunity to invest in both residential as well as commercial real estate. The fortuitous happenstance for them is that they can hold as many real estate and commercial real estate units as they please.

However, they are still prevented from holding even a single unity of agricultural land, farmhouse or plantation land unit. Ownership of any of these types of property is only allowed when the land parcel is gifted or inherited.

All monetary transactions for NRIs and PIOs are required to be carried out via applicable banking channels with an NRI account. Another saving grace for the NRIs by the RBI is that they can apply for financial loans up to 80% of the price of the real estate unit in question.

Indian institutions only lend in INR. An NRI buyer can temporarily transfer the Power of Attorney to anyone in the country to handle the agreement for the sale, sale deed, and lease and even conduct transactions.

Loan policies for NRIs

NRIs can avail NRI loans from most of the major banks in India. They can have these loans transacted by any relative or friend or trusted person in India who has acquired the POA from the NRI. There are some documents required for NRI to buy property in India. Some of these documents must be submitted to the bank in order to complete the transaction.

Full set of documents required for NRI to buy property in India

NRIs require passport copies and visa copies are required for all the POA documents submitted by the NRI applicant. A copy of their current appointment later which comprises of their joining date, their salary certificate, role details, previous appointment details, last three months’ salary slip, etc. need to be submitted. Some banks require the POA holder to be a residing Indian.

NRI buying property in India tax implications

For an NRI buying property in India TDS is at 1% if the value of the property is more than Rs.50 Lacs. The rate of deduction is significantly higher if the purchase is being made from another non-resident. The balance amount after the tax deduction must be then paid to the seller. The income tax department receives the taxes along with a Challan 26QB fill.

Taxes are applicable on the financial gains when a property is being sold. The tax deduction in such a situation can be controlled by making certain investments.

What makes Noida Expressway a hot property market?

Noida-Greater Noida Expressway, a 24 km stretch, has already brought the transformation in the property market in Noida. Since its inauguration, the expressway has been developing by leaps and bounds, not just in terms of connectivity with its neighbouring areas and Central Delhi, however the development at this stretch is more organized and balanced.

Let us see how the Expressway has only added to the development of the Noida and Greater Noida, in commercial property in Noida Expressway as well as residential property in Noida Expressway which is about to see even more upgrade in the years to come.

Corporate Presence


Both sides of the Expressway are filled with corporate sector. Companies like KPMG, Adobe, TCS and Birla Soft have their offices here. This has brought opportunity to residential builders and the area now comprises of numerous residential projects for every class.

The market serves both kinds i.e. affordable residential solutions as well as the most high-end residential zones. This has brought the entire stretch in notice of foreign companies and industrial houses as well. Owing to this, luxury hotels and restaurants have also been seen flourishing here along with various shopping arcades.

Well-planned infra-structure and robust connectivity


Various sectors from 129 to 150, are offering premium townships that are theme based like sports city that will cater to various kinds of need of the society. Societies are built adjoining each other in order to remain connected.  The area has everything that is required by an investor in terms of social infra-structure.

Metro line is already developed which will be operational soon. There are knowledge parks, hospitals, and entertainment hub like Connaught place, shopping arcades, schools, University and everything else connected with each other within a short radius.

In terms of connectivity, the Expressway itself joins Noida and Greater Noida and was basically built to ease the traffic congestions on National Highway 2. It also connects the two suburbs with Yamuna Expressway and Agra city.

It is a win-win situation for the residences and MNC’s and foreign establishments here as the human resource needs are fulfilled and employment is not a problem here

Availability of Land


Though lots of development has already taken place, schools, colleges, restaurants, corporate buildings and residential complexes have already taken an attractive part of the land on both sides of the Expressway, still there is a lot available for the developers to take over.

Lot of scope still lies for the development, which might take place in phases in upcoming years like commercial/residential property market in Noida.

Connectivity with Delhi


As mentioned above, the Expressway of 24 km connects Noida and Greater Noida. It not just connects the two suburbs but the most of the part of the stretch is connected with Delhi.

Only 3kilometres falls under Greater Noida while the approximately 20 Kms stretch belongs to Noida.

The upcoming metro-line is all set to connect the Expressway with other parts of the NCR say, Gurugram and Faridabad.

This will further enhance the connectivity and will prove to be the boom for the commercial real estate property in Noida Expressway and residential real estate property market in Noida Expressway here.

So the area is no more just the living space available for the working population of Delhi. In fact, it has turned out to the destination for the upward mobile population and home-seekers due to its self-sustaining feature and continued social infra-structural growth.

Applying for loan on commercial property in India?

You need to keep in mind certain pointers when applying for a loan on commercial property in India.

Taking a loan for a residential property may be a common thing but there are many people who take a loan for commercial property in India. It is possible to take a loan on commercial property as some banks provide this facility. There are certainly differences between the two that need to be kept in mind.

Loan for commercial property is either for an outlet or an office space which can be further divided into under construction and ready to occupy. Lot many lenders hesitate to lend for commercial properties because majority of them are investors. Rather they would lend to individuals. Same applies to under construction property as well.

Difference between residential and commercial property loans:

  • Low LTV: Loan to Value ratio is the proportion that the bank will finance and the remaining amount is the down payment. While for commercial properties, it is 55 per cent, in case of residential properties, it ranges from 75-90 per cent. So, a major portion needs to be paid from the pocket when it comes to commercial properties.
  • Processing fee: This fee is higher for commercial properties in comparison to residential ones. While for residential properties, it is a maximum of Rs 10,000, in the case of commercial properties, it is mostly one per cent of the amount of loan.
  • Rate of interest: The loan for commercial property interest rates is higher compared to residential ones.
  • Tenure: While for a commercial property loan is for a period of 10 years, the tenure for residential properties is 30 years.
  • Builder category: For the lenders of a commercial property loan, it is essential that an under-construction property is completed on time. Generally, they take less time for construction than residential properties. The lenders verify the previous record of the builder regarding delivery schedule and then decide whether to give the loan or not. There are no such checks against residential properties.
  • Evaluation on ground: Technical specifications like lifts, shafts, emergency kits, fire-extinguishing etc are evaluated so that it complies with the norms.
  • Approved clearances: The statutory approvals like clearances from fire department, building plan etc need to be presented. There must not be any risk of demolition due to rejections or pending approvals when it comes to loan for commercial property calculator.
  • Property valuation: In order to avail the loan for commercial property, the property value may be quoted higher. Lenders check the valuations independently considering that lower valuations have lower risk.
  • Residual age: Older properties may not be technically compliant as per the commercial property loan eligibility calculator. The residual age or the usable years of the property may also be less. So, the chances of loan application being approved may be less.
  • Minimum area in square foot: Is only funded for commercial properties including commercial shop loan interest rates.

 

Though borrowing is difficult, it generates higher ROI.

What’s better? Rental income from residential or commercial property?

Many people find investment in property lucrative. Not just the value of the property increases with time but there are possibilities of earning rental income as well, if the owner wishes to rent out his property. However, many find it difficult to understand the kind of property to invest in, whether it should be commercial property or residential?

Both kinds of investment have their own pros and cons. It depends on the preferences of the person investing whether he would like to go with the ups and downs of the economy and buy the commercial property or would like to be safe from any kind of external factors affecting his rental income and buy residential property.

Yes, the most important point that you need to consider while buying commercial property is that dealing with commercial properties is bit complicated as it is directly related with the ups and downs of the market.

Let us delve in some more details about what kind of property investment will suit you.

Commercial property v/s residential property

Commercial property is comparatively expensive than the residential property. This is because the property is located in a market area and it will be used for the commercial purpose. Residential property on the other hand, is not as costly as commercial property. The buyer is able to get more number of square feet as compared to that of commercial property.

As mentioned above, commercial property is linked with market dynamics. The investor is able to earn high rental income if there is demand of commercial property and demand is especially considerable in the area where his property is located. However, at the same time, the vacancy risk always prevails unless there is an agreement in place. On the other hand, residential property is not linked with market ups and downs. Moreover, the basic purpose of the residential property is to provide temporary living space to tenants. So the owner does not face any kind of risk, however he needs to be active enough that his property is rented out on the continuity basis.

If we look at the rental income, there is no doubt that the commercial property will fetch more rent. This is because the tenant is willing to take the property on rent for commercial purpose I.e. to earn profits. Residential property, on the other side, will fetch returns but that will be comparatively lesser than that of the commercial.

In case of the repairs and maintenance of the commercial property, the responsibility lies on the tenant. Whereas in case of the residential property, it is the responsibility of the landlord to pay for the repairs and maintenance of the property.

Rental income from the commercial property, in any case, is better than that of the residential property. However, the investor has to bear the cost in terms of higher investment amount and the vacancy risk. If the investor is ready to bear the risk, he may have commercial property. If not, it is better to have residential property.

How crucial is the Involvment of Human Touch in Real Estate?

The real estate sector is in a state of constant flux. There are issues besides corruption and lack of transparency in agreements, realtors reneging on the contract, and consumers pulling out their investment. Thanks to some of these aforementioned issues, and the lack of skilful real estate professionals, the industry is banking largely on the digital platform for conducting business. The question remains, if the lack of a human contact makes the process and the business as a whole more profitable and accurate, or not. The subject maintains a slippery slope given the equal amount of pros and cons related to the matter of human interaction.

The digital spectrum has snaked its way into our life in various forms. From streamlining business process cycles, to giving us the gift of the Internet and consequently e-commerce. Gone are the days when folks would have to venture out for all and sundry; now they sit in the comfort of their homes while the world remains at the their beck and call. A lot of processes in the real estate business sector as well has turned to the digital spectrum for relief. Some processes have been improved for the better while some have become more complicated, much to our chagrin.

The lack of a human mind and its fickleness accounts for accuracy in numbers projected in transactions. Filtering searches becomes easier. Communication becomes easier and foremost of all, even a commodity like real estate feels as small as the thumbnail it represents, making geographic distance no factor at all! The rut in the real estate market stemmed from the sudden stagnancy of sales due to the unreliable nature of the business thanks to flouting ethics and policies. The participance of computers in real estate was only good for analytics and surveys for a while.

The average Indian consumer, or any consumer from any part of the world, aspires for empathy, and an audience. ‘Dehumanizing’ the real estate market may have made it easier for consumers to escape the clutches of shady realtors and their corrupt practices, however, it has also made the consumer pine for a human ear to listen and answer their queries and complaints. The faith in the fool-proof nature of the digital process also started dissipating once consumers started realizing that malpractices, such as false advertising namely, has become a part of the digital avatar of the real estate market as well.

The prime reason for the disappearance of the ‘human factor’ is owed to the fact that for a good part of a decade or possibly more, the real estate sector had little value for core professionals, which is why majority of skilled, ethical individuals decided to migrate to IT and other industries. To make up for the lack of skilled professionals, businesses had to resort to digital applications to take care of all details pertinent to conducting the real estate business. The digital medium, once acquainted with, proved to be better at filling database after database worth of numerical data that helped businesses grow and manage their resources smarter.

However, the industry seems to be in dire need of the human touch what with the real estate market generating a buzz stronger than it has in the last few years. Business is looking up, and consumers are looking for more than a digitial version of the business agreement for satisfaction. The convenience of e-commerce still has not been able to substitute for the warmth of a human voice discussing pros and cons of an investment, with the consumer.

Also the digital medium made any follow up process more rigid; consumers need the flexibility of the human mind and its ability to jump between permutations and combinations of decision making to carry the reviving industry.

 

NRI Special: How to invest in commercial properties in India

For NRIs looking to invest in India, it is no better a time to understand how to invest in commercial properties in India. We bring you a comprehensive list of how to go about it.

For those NRIs or Non-Resident Indians keen to invest in India, investment in commercial spaces can work wonders. According to industry experts, NRIs prefer commercial properties. In a quest for high yields, high networked individuals or HNIs also continue to throw hat in the ring. Coupled with the sheer pride of ownership along with diversification of portfolio, these investments act as a cushion against stock market volatility and inflation.

We bring you commercial property investment tips to ease your investment journey.

Location

First and foremost is the location of the commercial property by analysing its soundness and its market dynamics of demand and supply, NRIs can get a sense of the area. Without sufficient research, one may end up buying into micro markets with higher vacancies. So it is important to ensure that job market, economy and population growth are healthy.

Type

There are different types of commercial properties in India including office and retail. Smaller spaces are much easily available as well. As per experts in the industry, it is much more preferable to look for commercial spaces in high streets rather than a mall because there is no control over tenant and trade mix as there is no guarantee to attract customers.

Expected returns and the outlay

For a commercial property investment in India, a minimum budget of Rs 3-4 crore is necessary, state experts. It is important to note the commercial rental yields from properties as it represents the productivity of the price. So, a commercial rental yield in India of at least 11-12 per cent is to be ensured. If the rental yield is less, the property stands overvalued. Since there is no profit on the sale of appreciated commercial property, the rental cash flows of a good location-based shop or office space is considerable. When it comes to commercial vs residential property investment in India, the income that can be generated from commercial property determines its value and with good research, investment in commercial property in India is a high-returns game, as per experts.

Ensure due diligence

Just like investment in residential properties, commercial property investment also calls for due diligence. Make sure the credential of the developer are checked, quality of property management, essential amenities, access to public transport and potential for infrastructure development are paid attention to.

For example, investment in a retail store needs pointers like frontage, dynamics and footfall to be considered. NRIs need to be very careful while looking at an income-producing office asset through checking cash flows, expenses such as property tax, building insurance, lease terms, expiry dates, long-term capital appreciation, refurbishment, vacancy issues, lock-in period, refinancing among others.

NRIs investing in commercial properties in India need to be aware of the neighbourhood area, understand the dynamics of the environment and take sound decisions as per their needs.

Top trends in office real estate sector in NCR [2018]

For the corporate and office occupiers, India’s real estate has a huge potential.

Since Indian cities offer the largest corporate spaces in Asia, emerging trends hint towards huge potential in the next few years for the further development of the office real estate in India. Many of such office occupiers are confident about this trend and see it as a bright opportunity for developing brand value while stressing on employee-friendly and environmentally-conscious spaces as well.

Pre-committed spaces for future needs

Considering the shortage of good quality office spaces, multinationals are going a step ahead and choosing to pre-commit spaces for future needs and portfolio optimisation. Examples include Google, Bank of America, Gartner and BCG which are pre-committing spaces in properties including NCR’s Unitech Signature Tower and Cyber Park by DLF.

Buying instead of leasing

Instead of leasing properties, many corporates are opting for buying properties as part of their long-term vision of longer occupancy such as Lava International which secured a large land for setting up its manufacturing unit in Greater Noida, IKEA’s buying of close to 10 acres of land parcel from HUDA in Gurgaon, Hyundai buying commercial space in Sector 29, Gurgaon and relocating its office there, or GSK’s buy-in of close to 60,000 square feet of space in Hines One Horizon Centre On Golf Course Road, Gurgaon.

Longer lease terms

Instead of standard lease terms of 9 years, corporates in Delhi NCR are negotiating a 12-15 year lease term for want of occupational rights for longer terms and to protect themselves from rental rises.

Agile workplaces and collaborating spaces for employees

The design of a workplace reflects its whole philosophy and the culture that it prides itself in. Occupiers have a strong commitment towards building a habitat/working space that reflects intrinsically on the employees and owners.

Sense of belongingness and extended use of technology

It is important that the place the occupier chooses gives a sense of belongingness, trust and efficiency to the employees as well as the owners. Many of the corporates are aware of the fact and are investing in emerging technologies like automation and robotics. For instance, Amazon which invested in a robotic company, Kiva Systems in 2012, has more than 45,000 robots in various centres.

Entering in to partnerships with co-working brands

Corporates are paying close attention to the widespread choices when partnering with co-working brands. These also include benefits like flexibility in lease terms, attractive design and vibrant environment for employees. The occupiers can lease need-based office space by hour or day or month or on long-term basis.

Achieving office real estate space efficiencies

Through real estate consolidations or merging multiple office spaces in to one, corporates have been able to achieve 40-45 per cent savings in their operational costs as well as gain employee satisfaction, improve logistics and increase overall profitability of business.

Environment-friendly spaces which are smarter as well

Occupiers have plenty to gain from environment-friendly spaces which consume optimal energy and are also a hub of amenities, last mile connectivity, rich landscape and requisite infrastructure.

Corporate real estate strategies are focussed around increasing business operations and their profitability by catering to the various stakeholders that matter to it.

Rental income from residential or commercial property in India: What you should know?

Real estate is the most proven stream of creating strong passive income stream with possibilities of wealth creation too in the long term. But which type of property should be your pick – it is all about commercial vs residential property investment in India? We analyse the pros and cons of each.

Most people don’t realise the significant difference between commercial vs residential property investment in India and therefore, end up focussing on only one type. The leasing businesses in each type of property investment have completely different dynamics.

Rental housing as a concept evolved in India owing to the need of affordable homes. Since a tenant in a residential housing set-up requires only minimal and functional infrastructure, the operating expenses are minimal. However, when comparing commercial vs residential property investment in India, it is important to note that investment in commercial property in India entails high vacancy risks and high investment. Also, the commercial property investment in India is affected directly by the dynamics of the real estate cycles and the economy. But in the case of residential properties, they are not related with the market with huge shortage and being highly user-driven.

  • With high investment, commercial property in India are costlier compared to residential ones, unless investment is in individual shops.
  • Compared to residential spaces, commercial rental yield in India is higher and with longer lease periods.
  • While in the case of residential spaces, the onus of repairs and maintenance falls on the landlord, the tenant is generally responsible when it comes to commercial properties.

 

Despite being complicated in terms of legal matters, commercial properties get higher yields and have longer lease periods. However, unlike commercial properties, the rental value doesn’t fall in the case of residential properties when the market is slow. Depending on the location and quality of the property, rental yields can be anywhere between six to 10 per cent for commercial property investment in India. But capital appreciation is limited. For medium to long-term investments, the commercial property investment segment is being preferred.

While for a new investor, residential practices are far easier to understand, commercial property practices are much complicated though it can fetch more income. By investing in a property worth Rs 4-5 crore at a prime location, Rs 40 lakh can be expected as annual income.

Even if the rental returns on commercial properties are seen to be higher vs residential properties, it is important to take note of factors such as location, prevailing market conditions, procurement price and the correct property selection.

It is important to take note of pointers like availability of tax benefits for residential properties as compared to location-specific income from tenants on commercial properties. Whereas residential property is a life-long asset which can be passed on to the next generation, rental value of the commercial spaces increases with capital appreciation over time.

Cash flows may be affected by vacancy in commercial spaces and the investor needs to take regular risks for higher amount of capital. In residential spaces, the cons include high maintenance and delay in possession of the property.

 

Commercial property ROI: Pointers to keep in mind

When it comes to commercial property ROI (Return on Investment) in India, average yield falls in between 5 and 10 per cent for a good property as per industry standards.

Depending on the viability of the property in terms of location, amenities, access to commuting options, configuration and builder’s brand, residential properties’ Return on Investment or ROI were generally good. But that has fizzled out owing to slowdown in the market which has affected the capital appreciation. For those looking at commercial realty, office spaces are far more attractive.

Buying commercial property for investment is an ideal choice because office properties in the right project and location attract quality corporate tenants which can lead to good commercial rental yields in India. Also, investors need to be careful about how they calculate rent on commercial property in India.

When comparing investment in commercial property vs residential property, it is important to note that while the average yield of a residential property is as low as 1.5 to 3 per cent, the average yield from a commercial property is in the range of 6 to 10 per cent. Similarly, capital appreciation can produce satisfactory yields for the right office assets.

With the need for continued employment generation and the first REITs listings, the demand for office assets is quite high. A steady and dependable ROI is generated through office properties in well-located Grade-A buildings, logistics centre and InfoTech Parks.

Even Tier-II and Tier-III cities are becoming popular destinations for commercial properties in India. There has also been a development of SEZs, industrial corridors and IT parks in the smaller cities.

In the current market scenario with a lot of manpower rationalisation, IT and IT-enabled services are looking to optimise commercial property ROI. Keeping the economies of scale in mind, firms are likely to consolidate operations and offices across various locations. Since such good office spaces will be in demand in the long-term as well, long-term leases may be terminated to reduce operating costs. The commercial property spaces would then be sold post-consolidation. This would lead to quality spaces in areas where there is a need.

Start-ups rule the roost: As start-ups lead to more employment and investment opportunities in sectors such as retail, manufacturing, life science and biotech and with the Government push towards Digital India, the need for office spaces that are modernised with architectural design technology has increased. This has also led to efficiency and transparency of real estate brokerage and research services.

While residential realty has gone from being investor-driven to end-user driven, commercial realty has captured the imagination of investors as well as institutional funds. As the need for office spaces that fit the working environments of start-ups and enterprises begin to emerge, so will the demand for residential housing spaces in the neighbourhood given the employment generation aspect of such commercial realty.

As developers respond to such demand, there is an automatic creation of demand for future housing around such office projects. All of it, according to experts, bodes well for the future of the real estate market in India.

Quick guide to commercial rental yield in India

For commercial rental yield in India with higher liquidity, the investment on commercial properties is more. This is not the case with residential properties.

Before making a life-changing decision of a property investment in India, it is necessary to consider various factors. These factors vary depending on commercial vs residential property investment in India. The commercial segment and the commercial rental yield that it generates tend to attract the ones who have greater understanding of the commercial realty space compared to the first-time buyers who mostly go for residential properties.

While commercial spaces offer more liquidity to investors when compared to residential properties, the funds needed for commercial investment are far greater.

Factors such as location, price movement, connectivity, infrastructure development and sustainable practices play a role in determining a good deal for a commercial property in India. Experts from the industry believe that giant leaps from e-commerce companies and IT as well as IT-enabled companies are taking up much of the commercial rental yield in places such as Noida NCR.

Global conglomerates and global organisations are increasingly looking to set up base in the country and taking up space which is tied to their overall corporate strategies considering that they continue to offshore and send product or knowledge-based work in India. This means that the need for commercial properties is growing and will continue to grow. Considering that India does well on parameters such as cost effectiveness, scalability and talent pool, the numbers are only going to increase according to experts from the industry.

The growth prospects will be enhanced by public-private partnerships with states so that overseas investments can be attracted towards India’s growing and expanding urban centres. With the growing list of smart cities, sustainable practices and government’s push towards infrastructure and essential services across cities and towns, even in Tier-I and Tier-II cities, the demand is only going to grow, according to industry experts. For the growth of long-term commercial realty in India, the growth and development of transport hubs will also be essential. Infrastructural development in themselves, like Bullet Train and Monorail can develop prospects for future housing in the nearby areas.

When it comes to the investor or buyer’s side of things, it is important to consider commercial rental yield in India against the highest rental yield in India, and the growth prospects. For a buyer, it is no longer a debate of commercial vs residential property investment in India but it is much more than that. Other factors that make a commercial property viable are factors such as connectivity, proximity to residential areas, amenities, presence of other business establishments and safety among others.

The survival of the fittest for the long-term should be taken into consideration for the big units. For generating revenue immediately, it is good to start investing in pre-leased assets.

As per the terms and condition of the lease agreement, investors also stand to gain in terms of commercial rental yield in India through periodic increase in rentals.