Commercial Real Estate Rules for NRIs Explained

The FEMA investment rules for NRIs in Indian real estate have always remained a touchy subject among the said buyer group members. The FERA laws have left a bitter taste in their mouth owing to the arduous process NRIs had to go through to purchase land in India, However, the present FEMA laws have loosened up since. Therefore, knowing the following commercial real estate rules for NRIS may offer any prospective real estate purchaser some leeway when buying land.

Applicable provisions for commercial real estate rules

The present FEMA laws state that NRIs no longer require explicit RBI permissions in order to purchase some specific types of immovable assets in India. This makes the market ripe for the picking for NRI investment in real estate companies:

Types of properties available to NRIs

The FEMA laws only allow for certain types of properties to be made directly purchasable to NRIs. NRIs have the explicit right to purchase any kind of residential property or commercial property they so desire in India. The present commercial real estate rules as ordained by FEMA state that NRIs can own as many residential real estate properties they want without having to intimate the RBI. However, they are strictly prohibited from partaking in any agricultural real estate. This means NRIs cannot own any farmland or plantation. Even the farmhouses which are popular among NRI real estate enthusiasts are off the table.


Financial sourcing policies for NRIs when purchasing immovable property in India

NRI investment in real estate business in India can be paid via banking channels from abroad. NRIs can also mobilize funds from their NRE/NRO or FCNR accounts in such transactions. However, Procedure for NRI to buy property in India permits usage of legitimate banking channels only. Any options of availing property in lieu of foreign currency or traveler’s cheque are not possible. NRIs have the option for purchasing property with Indian currency as well provided any party such as their employer agrees to be their financer for the deal.

Loan process

NRIs can opt to pay for a loan from abroad if the purchase is made in Indian rupees. They can utilize funds from their NRE or NRO or FCNR accounts as well. Deposit cash in FCNR or NRE accounts can be utilized as well up to the mark of Rs 100 crore. An excellent alternative method of financing for the loan can be the rent received from the property itself.

Joint ownership privileges

Regardless of whether they are partaking in the transaction process or not, a secondary party cannot be allowed to hold co-ownership of property if they are Non-residents of India. An NRI can only make an NRI or any resident customers a joint owner of a property.

Ownership of land post-NRI status

It is interesting to note that recent NRI status holders are allowed to hold any kind of land they previously owned when they were residents in India. This includes agricultural and plantation properties. However, once they reach their NRI status they can only purchase the types of land NRIs are allowed to purchase. For an NRI buying property in India tax implications are next to negligible.

Commercial Property Investment Tips for Effective ROI

Since 2016 there has been a steadier uptake in commercial real estate purchases in comparison to real estate counterparts. The IT-ITeS sectors, the banking and finance services sector continue to influence the demographic for commercial land.

At the present, the market is teeming with tech start-up and e-commerce buyers who are looking for high quality office space in Mumbai, Delhi-NCR, Pune, Bengaluru, Hyderabad and Chennai. However, the demand is not met with the required rate of supply, and this has been the trend for a good 2-3 years now.

Profitable commercial property investment tips

This opens up a lucrative market for property owners who are in the business of lending space. It is more profitable to lease office space now rather than residential real estate. The yield is 8-10% high annually when it comes to commercial real estate. The annual yield from residential spaces is an unattractive 2-3% in comparison. This is not to mention the standard deduction of 30% on the rental that real estate owners usually have to bear in the form of repair and maintenance. Office leases are thus more profitable in comparison. One can even hike the rate by 5-10% every year.

Risks involved

There are certain risks involved in the process depending on which stage of property development you are investing in. Investment in commercial property in the construction stage or in the constructed but yet to be let, or even a property that has finished development and has been leased out- any of these stages come with their own sets of risks.

The highest risk and payout are both a characteristic of the under-construction stage. The safest is to invest in one which is developed and already let. Buying commercial property for investment is risky if the tenant is at the end of a lease. If there is an economic downturn the property may sit vacant and unyielding for a while.

Questionable elements in the commercial real estate market

Commercial property investment tips are also supposed to safeguard the buyer from the questionable schemes which usually come along with tags like ‘assured returns’. Firstly, the builder usually charges you for the ‘assured’ safeword. The price will be evidently more than similar buildings in the same location.

Secondly, there is no guarantee that a tenant will occupy the building immediately after completion, which means delayed rent. If the developer controls the tenant there is a delay on the payment of the so-called assured returns.

These types of schemes are not advisable for investing in the commercial real estate for beginners as they usually bring along buildings that are usually plagued by a soft launch.

Being sanguine with the fine print

One of the best commercial property buying tips that you can get is that it is always safe to bet on a unit located in an economically vibrant area. This way there is some assurance of drumming up business by the time the building is constructed. However, the best commercial property investments are the ones made in locations where the demand is NOT met with equivalent supply.

Income Tax exemptions on commercial property investment

When investing in commercial property, make sure to pay attention to legal components including income tax exemption on commercial property.

In the run up to the next big things for your business, if buying commercial property is a top priority for investment or trading use, then we bring you 5 pointers to consider from the legal perspective when buying commercial property.

  1. Opportunities to look for

Unlike the residential properties, commercial properties are not sold on the high street. They are in fact, sold on through private treaties or auctions that are also considered a source of good value for the beginners in the segment.

When buying commercial properties in auctions, it is necessary that care is given to the fact that there is no bargain because when successful, 10 per cent has to be given on the day and the payment has to be completed within a month.

Getting necessary advice from a commercial lawyer or chartered surveyor about possible income tax exemption on commercial property and instructing a good commercial agent to help beat the market are key aspects to consider when it comes to investment expertise.

  1. Leasehold or Freehold

The owner contractually holds the interest for a set period limited to the length of the lease which is decided by the relationship between tenant and landlord. Freehold owners generally control or own all of the property, any structures or the land itself etc. The part of ownership may be restricted by a third party, for example, a right of access over the property.

Over the years, business lease terms have reduced. Though some commercial property tenants have a legal right to extend the contractual term of their lease, there is also the potential to hold a long leasehold interest. Though you might spend more time in buying a freehold property, the return will be much greater as rent from commercial property income tax is there.  It is necessary to check if there are any restrictions on use, if you need consent for alterations, whether the building is listed or in a conservation area.

  1. Loan or cash buyer

Commercial property is also all about cash and quick deals. The loan provider should know each step on the way. Commercial property lenders are more interested in lending against the income generated by well-let properties than the vacant ones.

  1. Costs

There are numerous costs like VAT, stamp duty and land registry fees, Surveyor, estate agent and solicitor charges and environmental report charges etc. It is necessary to obtain due diligence advice as there is no standard format for commercial properties. But there are tax deductions for commercial property.

  1. Tenancy

Always think about a tenant when buying commercial properties because well-let properties are more income-generating which means rent from commercial property income tax is beneficial. It allows you to budget your costs with a fixed rent, payment in advance and rent reviews also increase.

Impact of GST Rate on Commercial Property

After the implementation of the Goods and Services Tax (GST) across sectors in India, the impact on various sectors has been tremendous. One of the prominent sectors is GST rate on commercial property as well as residential ones.

Pre-GST period

The landlord was to obtain a service tax registration if the total taxable service including the rental income from all the properties exceeded Rs 10 lakh a year. Commercial properties that were let-out were to attract service tax even if a residential property was used for commercial purposes. The service tax was 15 per cent of the rent for commercial properties. The rental income from residential properties also didn’t attract service tax.

Post-GST period

According to GST Act, immovable property rent out would be treated as a supply of services. GST would be applicable for types of rent such as when a property is rented out or licensed to occupy or when a property is leased out including an industrial, commercial or residential property for a business.

Effect of GST on rent

When a residential property is rented out, it is exempt from GST. But any other type of leasing out or renting out would attract a GST of 18 per cent as it would be considered a supply of service.

From the threshold limit of Rs 10 lakh before GST, the limit has been increased to Rs 20 lakh which makes landlords at ease now of up to Rs 10 lakh.

If a taxpayer earns more than the exempted limit, then he/she will have to register under GST and pay taxes.

GST on commercial property in India is calculated at 18 per cent on the taxable value where rent would be treated as a taxable supply of service. But if it is a charitable trust or a religious organisation, it is free of GST. When the rent of rooms is less than Rs 1,000 per day, the rent of shops and other spaces for business is Rs 10,000 per month or the rent of open areas or community halls is Rs 10,000 per day.

Income tax credit when GST is charged on rent

If all the provisions to claim tax are fulfilled, then income tax credit can be claimed on GST on rent paid on commercial property.

Provision of tax deduction on income tax for rented property

The GST on rent on commercial property has to be collected from the person paying the rent to the owner of the property. On the GST on rental income from commercial property, 10 per cent income tax will be deducted at source. If the rent for property exceeds, Rs 1.80 lakh per year, then TDS is applicable both on commercial and residential properties. This means there will be no GST on TDS.

Under Reserve Charge Mechanism, GST rate on commercial property is charged for immovable properties by the local authority or government. The Government would itself deduct GST when the property is rented to an unregistered person.