NRIs and OCIs Cannot Buy Agricultural Land, Farmhouses or Plantation Property in India: The FEMA Rule

Every year thousands of non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) close on flats in Bengaluru, offices in Gurugram and villas in Goa without a single approval from the Reserve Bank of India. Yet the moment the same buyer eyes a mango orchard, a paddy field or a country farmhouse, the transaction is void from the start. The dividing line runs through RBI Master Direction No. 12/2015-16 on Acquisition and Transfer of Immovable Property under FEMA, read with the Foreign Exchange Management Act, 1999. Under that framework an NRI or OCI may buy any immovable property in India other than agricultural land, plantation property or a farm house. This article sets out exactly what is permitted, why the bar exists, how the property is taxed in India and abroad once acquired, and how sale proceeds are repatriated.

FEMA / DTAA Position

The governing instrument is RBI Master Direction No. 12/2015-16, issued under the Foreign Exchange Management Act, 1999. Section 6 of FEMA 1999 treats acquisition of immovable property as a capital account transaction that needs RBI permission unless it is specifically permitted, and the Master Direction supplies exactly that general permission for residential and commercial property. The glossary entry on FEMA explains why capital-account transactions are regulated more tightly than current-account remittances.

The permission is deliberately carved out. An NRI or OCI can acquire by purchase any immovable property in India other than agricultural land, plantation property or a farm house. The same three categories are barred through the gift route as well: a resident, NRI or OCI relative may gift a house or a commercial unit to an NRI or OCI, but they cannot gift agricultural land, a plantation or a farmhouse. There is exactly one door that stays open for farmland: inheritance. An NRI or OCI may inherit any immovable property, including agricultural land, plantation property and farm houses, from a person who was resident in India, and may also inherit from another person resident outside India who had themselves acquired the property in accordance with the foreign-exchange law in force at the time.

The table below distils the three acquisition routes against the four property types recognised by the Master Direction No. 12/2015-16.

Where a DTAA (Double Taxation Avoidance Agreement) becomes relevant is not at the purchase stage but at the sale stage, when capital gains arise. Article 13 of India's treaties generally allocates taxing rights over gains from immovable property situated in India to India. No DTAA treats such gains as "exempt": India retains the right to tax long-term gains on property at 12.5%, and the resident country then grants relief. Our DTAA glossary note sets out how that credit mechanism works.

Tax Treatment in India

Because the buyer of an Indian house is almost always going to sell it one day, the tax that matters most is capital-gains tax on disposal. Following Budget 2024, effective 23 July 2024, long-term capital gains on land and buildings are taxed at a flat 12.5% without indexation. A grandfathering option survives: for property acquired before 23 July 2024, the seller may instead compute the gain at 20% with indexation and pay the lower of the two. Property held for more than 24 months qualifies as long-term; the LTCG glossary entry explains the holding-period test.

A feature unique to non-residents is that the buyer, not the seller, carries the compliance burden. Under Section 195 of the Income-tax Act, 1961, any person paying a sum to a non-resident that is chargeable to tax must withhold TDS at the applicable rate, and the statute expressly permits withholding at the DTAA rate or the Act rate, whichever is lower. On a long-term property sale that base rate is 12.5%, grossed up by surcharge and a 4% health and education cess. An NRI seller can pump up their consideration by filing Form 13 for a lower or nil withholding certificate; otherwise the buyer deducts on the entire sale value, not merely the gain.

Surcharge stacks on top of the base tax once income crosses thresholds. The rates below are drawn directly from the Finance Act framework applied across Oquilia's calculators.

For non-capital-gains income the surcharge climbs to 25% between Rs 2 crore and Rs 5 crore and stays at 25% above Rs 5 crore in the new regime — the old-regime 37% top rate does not apply in the default new regime. Surcharge on long-term capital gains, however, is capped at 15%, which materially lowers the effective load for high-value property sales. You can model the full stack on the NRI tax calculator.

Relief is available under Section 54 of the Income-tax Act, 1961: long-term capital gains on a residential house are exempt if the gains are reinvested in another residential house in India within the prescribed timelines — purchase within one year before or two years after the sale, or construction within three years. This exemption is open to non-residents on the same terms as residents, provided the new asset is a house situated in India. Rental income earned in the interim from a permitted residential or commercial property is taxable in India and can be estimated on the NRI rental income calculator.

Tax Treatment Abroad

Once India has taxed the gain, the NRI's country of residence taxes the same income again and then hands back a foreign tax credit for the Indian tax paid. Article 24 of the India-United States DTAA (in force from 12 September 1991) provides for a foreign tax credit in the country of residence, so a US-resident NRI who pays 12.5% Indian tax on an Indian property gain offsets that against US tax on the same gain. The foreign tax credit calculator shows how the offset is capped at the lower of the two countries' tax.

Treaty rates differ sharply by residence country and by income type, which is why the source country's withholding is only half the story. The comparison below uses verified DTAA rates for two of the largest NRI populations.

For UAE-resident NRIs the picture has a twist. The India-UAE DTAA (in force from 22 September 1993) confirms that capital gains on shares of an Indian company are taxable in India, and to claim any treaty benefit the resident must produce a Tax Residency Certificate showing a genuine UAE establishment, not merely a visa. Because the UAE levies no personal income tax on individuals, there is effectively no foreign tax to credit; the Indian tax becomes the final tax, which is why documentation of residence is scrutinised. The Tax Residency Certificate glossary note explains the Form 10F and TRC requirement.

US-resident NRIs face the opposite problem: the United States taxes worldwide income and does not recognise India's Section 54 reinvestment exemption, so a gain that is exempt in India may still be taxable in the US, with only the actual Indian tax paid available as a credit. The mismatch between an Indian exemption and a US inclusion is the single most common source of double-tax leakage for the roughly 4.5 million-strong Indian-American community, and it turns on the fact that Article 24 credits tax paid, not tax that would have been paid.

Repatriation Mechanics

Moving the money is governed by the same FEMA 1999 architecture that governs the purchase. Payment for a permitted property must flow through banking channels — funds remitted from abroad or drawn from a Non-Resident External (NRE), Non-Resident Ordinary (NRO) or Foreign Currency Non-Resident Bank, FCNR(B), account. No RBI approval is required for the permitted residential or commercial purchase itself. The choice of account at purchase decides how freely the eventual sale proceeds can leave India.

Where the property was bought with foreign-sourced funds through an NRE account or FCNR(B) deposit, repatriation of sale proceeds is liberal: RBI permits repatriation of the sale proceeds of up to two residential properties bought in this manner, subject to the payment having been made in foreign exchange. Interest on NRE deposits is itself income-tax exempt in India and both principal and interest are fully repatriable, which is why foreign-currency funding is the cleaner route for buyers who expect to take the money out again.

Where the funds came from an NRO account — the account into which Indian rent, dividends and resident-sourced money flow — repatriation is capped at USD 1 million per financial year across all sources, and the remittance must be supported by a chartered accountant's certificate in Form 15CB and an online declaration in Form 15CA. The USD 1 million window is the same limit that applies to inherited property, which is significant because inheritance is the only route by which an NRI can hold agricultural land: to take the money out after selling inherited farmland, the NRI routes it through the NRO account within the USD 1 million annual ceiling.

The mechanics can be modelled precisely on the NRI repatriation calculator, which factors the USD 1 million cap, the account type and the Form 15CA/15CB requirement. The table below summarises the repatriation route by funding source.

FAQ

Can an NRI buy agricultural land in India under any circumstance?

No. RBI Master Direction No. 12/2015-16 bars an NRI or OCI from acquiring agricultural land, plantation property or a farm house by purchase or by gift. The only lawful way to hold such property is by inheritance from a person resident in India, or from a person resident outside India who acquired it in compliance with the foreign-exchange law in force at the time.

What happens if an NRI buys farmland anyway?

Acquisition of agricultural land in breach of the Foreign Exchange Management Act, 1999 is not a valid transaction; Section 6 of FEMA 1999 makes the acquisition of immovable property a capital-account transaction that requires RBI permission unless specifically permitted, and no such permission exists for farmland purchase. The property can be attached and the buyer exposed to penalty proceedings under FEMA.

Can an OCI sell inherited agricultural land, and to whom?

An OCI who inherits agricultural land may sell it, but only to a person who is resident in India and a citizen of India. It cannot be transferred to another NRI or OCI. Sale proceeds may be repatriated up to the USD 1 million per financial year limit through the NRO account with Form 15CA and Form 15CB.

How much tax does an NRI pay on selling an Indian house?

Long-term capital gains (holding period above 24 months) are taxed at 12.5% without indexation from 23 July 2024, or 20% with indexation for property acquired before that date, whichever is lower. Surcharge on long-term capital gains is capped at 15%, and a 4% health and education cess applies on top. Section 54 exemption is available if the gain is reinvested in another Indian residential house within the prescribed timelines.

Does the buyer have to deduct TDS when buying from an NRI?

Yes. Under Section 195 of the Income-tax Act, 1961 the buyer must withhold TDS on any sum paid to a non-resident that is chargeable to tax, at the DTAA rate or the Act rate, whichever is lower. On a long-term property sale the base rate is 12.5% plus surcharge and 4% cess, applied to the sale consideration unless the seller obtains a lower-withholding certificate under Form 13.

How much sale proceeds can an NRI repatriate abroad?

If the property was bought with foreign funds through an NRE or FCNR(B) account, RBI permits repatriation of proceeds of up to two residential properties. If funded through an NRO account or if the property was inherited, repatriation is capped at USD 1 million per financial year, supported by Form 15CA and Form 15CB.

Is capital gain on Indian property ever "exempt" under a DTAA?

No. India retains taxing rights over gains from immovable property situated in India and taxes long-term gains at 12.5%. The DTAA does not exempt the gain; it prevents double taxation by allowing the resident country to grant a foreign tax credit for the Indian tax paid, as under Article 24 of the India-USA treaty in force from 12 September 1991.