Investing in Real Estate in India: What Not to Do for NRIs

Investing in Real Estate in India: What Not to Do for NRIs

The Non-Resident Indian (NRI) status is hugely important from a taxation perspective. Because taxation is an evolving body of rules and regulations the definition of NRI is also prone to changes. Find out whether you qualify as an NRI or not, here.

Note: To avoid confusion, we will consider OCI cardholders and citizens of India living outside the country as NRIs for the purpose of this guide.

As an NRI investing in real estate in India, avoid the common mistakes that others have made and suffered from. Do read on for some helpful insights into what you can do to avoid amateur mistakes while investing in real estate in India.

Mistake #1: Restricting Your Investment to One Place

It’s perfectly understandable if you want to invest in real estate in your hometown (if applicable to you), given your sentiments.

Investments yield long-term returns, and this should not make you restrict yourself to one site—even if it is your hometown.

Look for favorable locations that suit your budget and generate more rental income. Get in touch with an experienced real estate advisor for getting higher returns on your investment.

India is a massive country, and several Tier II and Tier III cities are emerging as hotbeds of real estate investments. Research before investing, as you may be giving up several percentage points of capital appreciation by restructuring yourself to a market with ordinary real estate returns.

Mistake #2: Waiting to Invest due to Uncertainty of Relocation

Why wait to invest when you can multiply your earnings every year? The liberalization of repatriation rules enables NRIs like you to benefit from the growing real estate market in India.

Procrastinating investment until you are certain of your relocation might seem like a good idea, but it might be a financial pitfall. Either you might lack the premium to invest in properties, or you could miss out on lower prices that you can get today.

Buying any asset in its development stage rather than when it’s fully constructed translates into a massive differential of your earnings out of it. Purchase assets and sell them after they appreciate in 2 to 3 years. Build up a corpus to slowly work towards investing in bigger properties in the future.

Mistake #3: Leaning on Unprofessional Advice

It might seem like a good idea to take advice from friends and family. But, this might cloud your judgment and end up not being the best for you.

Word of mouth is a common trend among Indians, and it might be tempting to invest alongside your family. While this might seem like a good idea at the time, it also might not suit your financial situation or your investment portfolio. Carefully weigh different avenues before investing.

Unless your family adviser is a professional in wealth management, seek professional advice. Spending a few thousand on professional advice in a market as complex as India is worth it.

Mistake #4: Failing to Consider Tax Liabilities

Taxes are tricky, especially when you have multiple assets in India and abroad. This can often lead to double taxation headaches on accrued income.

We will discuss the Indian income tax aspect here.

Consider the short-term and long-term natures of your property investment. If you sell your property within 24 months of buying, it’s treated as a short-term capital asset, with a corresponding tax liability. If you sell your property after holding it for more than 2 years, you will then be liable for long-term capital gains tax.

Also, rental income from your property will also be taxed, and your tenant is supposed to deduct tax at source, at 30% (additional cess and surcharges as applicable).

Consult a tax expert before deciding which property to buy and the tax implications that accompany it. Make sure you read the fine print to avoid falling into traps.

Mistake #5: Fixating on Your Fixed Deposit (FD) over Real Estate

This might seem like a wise idea initially, but with time, real estate yields more than FD. The inflation rate is higher than interest rates for fixed deposits, which means your money is losing its worth every year.

There is also the issue of dealing with taxes. So, the profit you might make in fixed deposits might yield you less than what real estate yields.

It might seem like breaking your FD is not worth it, considering the penalty you may have to pay for the premature withdrawal. However, also considering you will pay an interest of at least 10% to a lender if you take a loan for buying property, it’s much better to use your FD to reduce the loan amount.

Interest earned on FD is taxable. You can get tax exemptions to certain limits based on your prepayment of loan principal and interest amount (subject to limits) every year.

Do not shy away from trying again just because the first investment might not have been good. With time, real estate investment tends to bear good profits. Consider your options, and review potential investments to avoid making any costly mistakes.

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