The Law Relating to NRI's & Foreign Nationals

The following pages contain commentaries and definitions of the FEMA rules relating to foreign investment in India which came into force in 2000. They are all very much the same but I have included different interpretations extracted from the Internet for the benefit of the reader.

The author is Divisional Head of Karur Vysya Bank in its Bangalore Division.

Investment in properties by NRIs

There are very clear cut regulations on property transactions for NRIs, PIOs and foreigners in the country. T R SHASTRI explains the various implications of these laws.

THE real estate prices in Bangalore are increasing and everyone in the market predicts that this time the boom is realistic and not speculative since the actual users are buying and not the investors. There is an influx of people from other States; there is also an influx of people from other countries. Yes, there are a number of foreigners who have chosen to live in Bangalore.

More importantly there are a number of Indians who are working presently abroad and hence are “Non-resident Indians” (NRIs) who would like to return to India preferably to Bangalore. Many of them wish to own a house or flat in Bangalore for either their future use or as an investment. Some of them may even be holding a foreign passport. A few of them may be interested in buying farm houses or agricultural lands nearby or commercial properties.

Having purchased one such property, some would like to sell it and then wish to know whether the sale proceeds can be taken out of India etc. There are a few NRIs who have settled abroad permanently but with inherited property in India. Naturally they would like to sell the property and take the money out of India. Parents of such NRIs who live face many such queries from their wards abroad. On their own also, many parents would like to advise their children abroad of how to invest in real estate and what the related rules are and so on.

In an economy where there are no restrictions on movement of capital (popularly known as capital account convertible economies), the investor in real estate has only to think about the capital gains or loss by such investment and also the tax implications. In our country, where the capital account convertibility has not yet been implemented fully, the investors should also know the exchange control regulations relating to such investments like the number of properties that can be purchased or sold, the repatriability of the sale proceeds, the method in which the funds are remitted, the types of properties that can be acquired etc. This article attempts to explain these aspects in simple terms.

Forex regulations

Transactions between a person resident in India and one outside India or transactions between two persons in India but in a foreign currency are subject to Reserve Bank of India (RBI) rules. Earlier the rules were governed by Foreign Exchange Regulations Act 1947 which were modified subsequently in 1973 and then again in 1993. All these were replaced by an act called Foreign Exchange Management Act 1999 which is effective from June 1, 2000.

Subsequently a number of changes have been made by government and RBI published through notifications, regulations etc. While these are available in the web page of Reserve Bank of India, a summarised version is discussed below. While the words resident or non-resident are apparently simple to understand, the legal definition is provided under the Foreign Exchange Management Act.

A person resident in India means a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year (April-March) and who has come to or stays in India either for taking up employment, carrying on business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In other words, to be treated as “a person resident in India”, under FEMA a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of the purpose/intention of stay.

In case of doubt whether a person is to be considered as a resident or otherwise, he has to prove his residential status as per law. e.g. RBI does not give a status certificate. Generally this status is clearly applicable to most of us. But in case of businessmen or dependents of non-residents who travel regularly, students studying abroad, Indians who have acquired foreign citizen but have come to India for work on deputation etc there may be scope for interpretation. It is advisable to consult experts before entering into transactions.


NRIs can purchase residential and/or commercial properties without any restriction. In other words, there is no ceiling on the number of such properties, he can buy, the size or value of such property etc. There is no ceiling on the value of such properties he can buy so long as it is only residential or commercial property i.e. it can be a villa, penthouse, shopping mall or all the shops on M G Road! There is no document or statement or any such details to be sent to RBI, government of India or to any bank before, during or after such purchase.

This freedom is available to all non-residents who are either citizens of India (i.e. holding Indian passports) or who are Persons of Indian Origin (PIO). The permission is for buying residential or commercial property and not purchase of agricultural land or plantation property or farm house in India.


There is a legally valid definition for this term PIO. In simple words, however, a PIO is one who held an Indian passport any time earlier or who or whose father or grandfather was a citizen of India. Thus if a person migrates and later acquires local citizenship, he, his children and his grand children also have this permission.

However, to avoid complications arising out of citizenship before partition and other related issues, the local citizenship acquired should not be of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan.


On the other hand, a foreign national of non-Indian origin resident outside India (e.g. Mr George Bush) cannot acquire any immovable property in India by way of purchase. Moreover property cannot be purchased jointly in the name of one eligible person with one non-eligible person even as a second name. That means an NRI or PIO cannot buy a property jointly with a foreigner (i.e. who does not even have the PIO status).

However, a foreign national resident in India does not require approval of RBI to purchase any immovable property in India. This is because once he is a resident in India, he gets the rights like any other resident. This freedom of course is not available to citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan. Thus if you propose to sell your property to a “foreigner” because the price is attractive, better verify his residential status!

Such “ineligible persons” (e.g. foreign nationals of non-Indian origin and also citizens of certain countries specified above) can acquire residential (not commercial) accommodation on lease not exceeding five years without any RBI permission.

Property gift

The above explained permissions relating to purchase apply to acquisition by means of gift also. That means NRIs & PIOs can acquire residential/commercial property as gift but not agricultural land/plantation property/farm house in India. Foreign nationals of non-Indian origin cannot acquire any of these as gift also. Normally gift of immovable property is rare. But this sub-rule has been introduced to prevent any deliberate action aimed at misuse and tax evasion.

However, non-resident person (i.e. NRI, PIO or a foreign national of non-Indian origin) can receive such property by way of inheritance from a person resident in India or person outside India (the latter subject to RBI permission). This means that if an Indian, resident in India dies and his legal heir or person named to receive the property is abroad, he can own the property so left by the deceased even if such heir is not eligible to buy such property (e.g. being a foreigner of non-Indian origin like our Mr George Bush).

In certain communities, certain elderly persons only remain in India and their present generations may have migrated abroad e.g. to Israel. These rules become relevant when such elderly persons in India die either intestate or with specific rules for devolution of property.

Agricultural land

The NRI or PIO cannot purchase or get as gift farm house, agricultural land or plantation property. But it is possible that he may have been owning them before becoming an NRI or PIO. The law does not stipulate that such holdings are illegal or that they have to be sold immediately on becoming NRI or PIO. On the other hand, the law stipulates the rules relating to sale of such property if he so desires any time when he is a non-resident.

The NRI or PIO can let out his property and the rent received is freely repatriable. In other words, even if he has a property owned by him out of local resources or owned before becoming an NIR or PIO, he can take the rent out of the country by converting it into US dollars at his bank. Of course, he cannot ask his tenant to pay the rent in dollars!

To be continued

The author is Divisional Head of Karur Vysya Bank in its Bangalore Division.