Legal Considerations In The Transfer Of Property To Non-Resident Indians
Author: LawSphereX
Category: Property & Real Estate
Published:
Updated:
LEGAL CONSIDERATIONS IN THE TRANSFER OF
PROPERTY TO NON-RESIDENT INDIANS
Tiya Saini, Symbiosis Law School, NOIDA
ABSTRACT
“Non-resident Indians (NRIs) & Persons of Indian Origin (PIOs)” have seen a major growth in opportunities for investment in India in recent years, thanks to reduced rules under the “Foreign Exchange Management Act of 1999”. This study explores the historical development of the “Foreign Exchange Regulation Act of 1973 (FERA)” to FEMA, focussing on how these changes have affected NRIs and PIOs' purchase & transfer of immovable property. Key sections of FEMA, such as the approvals issued by the Reserve Bank of India (RBI) for property transactions & the distinction between current & capital account transactions, are also examined. This study also looks at specific rules for NRIs, PIOs, foreign embassies, diplomats, & foreign nationals, concentrating on what kind of properties they can buy & also the payment methods allowed.
Furthermore, it analyses repatriation limits on sale profits according on the source of money & gives insight into current legal rulings affecting property transfers. Understanding these policies & implications allows NRIs and PIOs to better navigate the Indian market, therefore guaranteeing legal compliance & maximising investment prospects. Keywords: Non-Resident Indians, FEMA, Approvals, Repatriation of Sales
1 INTRODUCTION
In recent years, investment opportunities for NRIs and PIOs have increased significantly. Nonresident Indians (NRIs) have a special status under Indian foreign investment laws. The GoI has also streamlined the criteria for NRIs. “The Foreign Exchange Management Act of 1999 (FEMA)”, authorises RBI to issue rules prohibiting, restricting, regulating the acquisition or transfer of property particularly immovable done by non-Indian nationals in India. Section 2(v) of FEMA, 19991 defines NRIs as Indian nationals who have resided abroad for more than 182 days in the previous year for work or business and intend to stay outside India forever. A person residing outside India is someone who does not live in India. A person living in India for more than 182 days in the previous financial year is considered a resident.
However, the “Department of Industrial Policy and Planning (DIPP)” expanded the definition of NRIs under the FDI policy to include OCIs and PIOs via Press Note 7 of 2015 also. A person of having origin of India is person, who is not Bangladeshi or Pakistani, and who has an Indian passport, or has parents or grandparents who were Indian citizens, or is the spouse of such a person. 2
1.1. Historical Background
Prior to the introduction of the “Foreign Exchange Management Act (FEMA), the Foreign Exchange Regulation Act of 1973 (FERA)” was in effect. Section 31(1) of FERA stated that "Non-Indian citizens & companies which are not incorporated in India were prohibited from acquiring, holding, transferring, or disposing of any kind of immovable property in India without prior general or special permission from the Reserve Bank of India (RBI)." After the enactment of FEMA, it implemented a new regulatory framework that divided foreign payments into 2 categories: current account transactions & capital account transactions. The Central Government was given power to control Current Account Transactions, while the RBI was given sole jurisdiction over Capital Account Transactions. According to section 6(3)(i) of FEMA (now removed), the RBI had the exclusive authority to ban, limit, or control purchase
1 (§)2(v), FEMA, 1999.
2 Sravanthi S., Investment Schemes for NRI in India & Guidelines for them, International Research Journal of Social Sciences [2013], Vol. 2(11). or transfer of immovable property by people residing outside India, with the exception of leases lasting no more than five years. Following amendments made by the Finance Act of 2015, Capital Account Transactions are now classified into two types: those using debt instruments and those that do not. The RBI retains the ability to govern transactions including debt instruments, while the govt. of India has the authority to oversee transactions that don't involve debt instruments.
1.2. Research Objectives
a) To study the rules & regulations which govern transfer & acquisition of prop. (immovable) by “Non-Resident Indians (NRIs) in India. b) To analyse recent legal precedents and their application on property laws regarding NRIs.
1.3. Scope
and Limitations of the research
Scope
of the research is analysing the regulatory & legal structures that supervise the sale and transfer of immovable prop. by NRIs under Indian law, with particular focus on FEMA. The paper also examines significant decisions by the Supreme Court that have influenced NRIs' understanding of property laws, as well as practical issues like as payment methods and sale profits repatriation. However, the study is confined to Indian law and does not look at property transfer rules in other nations. It focusses purely on immovable property and not on moveable assets.
2 LITERATURE REVIEW
2.1. Articles and Research Journals
The study of (S, 2013) talks about multiple investment possibilities accessible to NRIs in India, such as shares, mutual funds, term deposits, real estate, & gold investments. It outlines the regulatory requirements, such as the necessity for NRE/NRO accounts and adherence to FEMA criteria. Furthermore, it emphasises the significance of adequate paperwork & legal compliance for NRIs investing in India, as well as the requirements for repatriating the revenues of their investments.
The article (Ahmad, 2011) covers FDI policy in the Indian real estate market, focussing on entrance options for investment, sector liberalisation after 2005, and related growth. It dives into the fundamental Indian real estate laws, difficulties such as transparency and legal title concerns, and proposes changes to existing FDI regulations and local legislation. (Bolar, 2023) examines into the Foreign Exchange Management Act (FEMA) laws governing NRIs' purchases & acquisitions of immovable property. It specifies the sorts of properties that NRIs may acquire, the methods of payment, and the requirements for repatriation of sale proceeds. The article also discusses the laws for foreign nationals and the transfer of property via inheritance or gift.
2.2. Supreme Court Precedent
Case: Asha John Divianathan v. Vikram Malhotra & Others [CIVIL APPEAL NO. 9546 OF 2010]3 Decided On: 26. 02. 2021 Bench: A. M. Khanwilkar, Indu Malhotra and Ajay Rastogi, JJ. Facts - The owner sold a prop. to the buyer on 05-04-1976. Later, the owner executed a gift deed of a certain portion of the land to Resp. No. 1 w/o taking the approval of the RBI as required by Sec. 31 of FERA. 4 On 04-12-1982, the transferor signed a ratification contract for selling the prop. to the transferee. She also received RBI approval and completed the transaction on April 9, 1983. On July 30, 1983, the owner filed a lawsuit to cancel the sale deed. Later, she died on January 8, 1984. Following this, successors of both the parties filed suits in the matter, one prayed for declaring gift deed as void and the other prayed for possession of property.
Analysis and decision: The main objective of Section 31 of FERA is to prohibit foreigners & result, the SC determined that the relevant Gift Deeds were void, unenforceable, and not binding on the Appellant. Ratio Decidendi: A gift deed which is executed without RBI's mandatory authorisation under Section 31 of FERA is void and therefore, unenforceable. If any penalty is imposed by legislation for preventing an act from being done on the basis of public policy, then such banned act would be considered invalid if performed, even if the penalty was unenforceable.
3. NRIs – ACQUISITION & TRANSFER OF PROPERTY IN INDIA (IMMOVABLE)
In India, NRIs have historically gained preferential treatment due to their strategic importance in attracting foreign investments. “The Master Direction titled Acquisition and Transfer of Immovable Property,5 under the Foreign Exchange Management Act, 1999”, outlines the process for acquiring and transferring immovable property to non-resident Indians and overseas citizens of Indian origin. According to it, the Reserve Bank of India (RBI) allows an NRI/OCI with a valid Indian passport to purchase immovable property in India. Such a person can also transfer any immovable property in accordance with the law. In such circumstances, the investor/purchaser does not need to obtain RBI specific approval. NRIs/OCIs do not need to notify the RBI before purchasing commercial or residential prop. in India.
An Indian who is not a resident of India, can acquire as many homes as they desire under the aforementioned categories, subject to RBI restrictions and income tax legislation. A NRI can purchase a property either separately or jointly with another NRI with RBI's general consent. They are also permitted to donate or sell such immovable properties to another NRI/OCI or an Indian resident.
3.1. Purchase and Acquisition of Property (Immovable) by NRIs
A “non-resident Indian (NRI)”, can buy any property which is immovable in India (except farm houses, property used for plantation, & agricultural land).6 Through inheritance from a person outside India who bought it in conformity with foreign currency rules or RBI regulations, or from a resident of India, NRIs can obtain property in India. An NRI who purchases either 5 Reserve Bank of India, ‘Master Circular on Acquisition and Transfer of Immovable Property in India’ (Reserve Bank of India, 1 July 2013) https://www.rbi.org.in/commonperson/english/Scripts/Notification.aspx?Id=1175 accessed 6 August 2024.
6 Ibid.
residential or business property with general clearance is not required to file any documents with the Reserve Bank. Such property can also be transferred to a resident of India. Method of payment for NRIs for any property which is immovable are as follows:
1. Money received in India through regular banking methods as incoming payments from
any place abroad, or which are debitted to his NRE, FCNR(B), or NRO accounts.
2. Payments cannot be made with traveler's checks, foreign currency notes, or other
methods than those listed above.
3.2. PIOs – Acquisition & Purchase of Immovable Property
Similarly, a Person of Indian Origin (PIO) can buy any immovable property in India, with the exclusion of plantation property, agricultural land & farmhouses. Further, PIO can also get any immovable property as a gift from a person residing in India, a "Non-Resident Indian" (NRI), or another PIO. Moreover, by inheritance also he can buy a prop. in India. This inheritance might come from a person resident in India or a person residing outside India who bought the property in accordance with the applicable foreign exchange laws or "Foreign Exchange Management Act (FEMA)" rules in effect at the time of such transaction.
3.3. Foreign Embassies/Diplomats/Consulate Generals
According to “Regulation 5A of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations 20007”, a consulate general, diplomat, or foreign embassy may sell or buy any prop. which is immovable in India if:
1. For any such purchase/sale, clearance has been obtained from the Ministry of External
Affairs, GoI.
2. The payments for the acquisition any prop. which is not movable in India has been done
with monies which are received from overseas through standard banking procedures.
3.4. Foreign national of non-Indian origin residing outside India
Individuals who are not of origin from India and also do not live in India cannot get immovable 7 Regulation 5A, Foreign Exchange Mgmt. (Acquisition & Transfer of Immovable Prop. in India) Regulations, 2000. prop. in India provided they inherit the prop. from an Indian resident. Even if such persons acquired immovable property in India through inheritance, they are subject to further limitations. Particularly, if the property has been inherited by getting approval from the Reserve Bank of India, (RBI) then they cannot transfer or sell it without prior authorisation from the RBI. This assures that any transfer of prop. which is immovable initiated by non-Indian origin persons residing outside India is controlled and in accordance with Indian laws and regulations.
4. CERTAIN LIMITATIONS ON PURCHASE OF PROPERTY (IMMOVABLE) BY
NRIs
4.1. Repatriation Of Sale Proceeds
However, the legislative laws and regulations make no mention of any restrictions as to how many residential/commercial properties that NRIs may acquire. The sole restriction is that they may repatriate sales revenues. Repatriation restrictions for properties acquired and sold after becoming an NRI are determined by the source of cash used to purchase the property.
1. If there has been any purchase of propoerty in foreign currency or through “Non-
Resident External (NRE)/Foreign Currency Non-Resident (FCNR (B)) accounts”, the whole selling profits got from the immovable property can be repatriated. Important thing to be kept in mind is that sale revenues from only 2 residential properties (other than agricultural land) throughout your lifetime can be repatriated. Otherwise, one needs to acquire RBI clearance for the same.
2. If the property is purchased by NRO account or through Indian income, only up to USD
1 million every fiscal year can be repatriated.
For example: A, who is an NRI and has bought 5 homes in XYZ place by using cash from his NRE account. Now, if he chooses to sell all the homes, he can repatriate the selling proceeds from two of the five properties, which had been purchased using non-resident monies from his NRE account. He cannot repatriate the other remaining homes. Another example can be: A’s brother, B, also an NRI, before going abroad, has worked for many years in India. He had purchased 3 homes with their revenue produced in India and further, transferred them into his NRO account. B sold all 3 homes at $4 million after deducting taxes. Now, he is only allowed to repatriate up to ,000,000 every FY because he bought those properties with his Non-Resident Ordinary A/C.
CONCLUSION
Property transfer to Non-Resident Indians (NRIs) is a rigorous and regulated process under Indian law. Historically, the shift from the FERA to FEMA was a significant change because it simplified and clarified the processes enabling non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) to buy & transfer immovable property inside India. FEMA provides NRIs and PIOs with expedited property transaction procedures, including the option to acquire residential and commercial properties without previous RBI permission. However, limitations still apply, such as the prohibition on acquiring agricultural land, plantation property, and farmhouses. Furthermore, the repatriation of sale earnings is dependent on certain criteria which is based on the source of funds and type of property involved.
Overall, NRIs must carefully negotiate the legal landscape, according to FEMA regulations and other applicable legislation. Proper due diligence, understanding of the limits and circumstances, and acquiring the relevant permits are critical steps for non-resident investors in India to guarantee smooth and legitimate property purchases.
BIBLIOGRAPHY
Journals and Articles Ahmad, D. T. (2011). Foreign Direct Investment in Real Estate in India: Challenges and Implications. The IUP Law Review, 50-63. Retrieved from Technolex: http://www.site.technolexindia.com Bolar, D. D. (2023). Tax Guru. Retrieved from https://taxguru.in/rbi/property-acquisitiontransfers-india-guide-fema-regulations-nri-oci-foreign-nationals.html S, S. (2013). Investment Schemes for NRI in India and Guidelines for them. International Research Journal of Social Sciences, 37-40. Rules and Regulations Regulation 5A, Foreign Exchange Mgmt. (Acquisition & Transfer of Immovable Prop. in India) Regulations, 2000. Foreign Exchange Regulation Act, 1973. Foreign Exchange Management Act, 1999.