What an NRI or OCI Can and Cannot Buy: FEMA Rules on Acquiring Immovable Property in India

For a non-resident Indian (NRI) or an Overseas Citizen of India (OCI), the single most consequential rule about Indian real estate is not a tax provision at all - it is a foreign-exchange one. The Reserve Bank of India's Master Direction on Acquisition or Transfer of Immovable Property under FEMA, updated on 01 September 2022, draws a hard line: an NRI or OCI may freely purchase any immovable property in India except agricultural land, plantation property or a farm house. Get that distinction wrong and the transaction is void from inception, because Section 6 of the Foreign Exchange Management Act, 1999 makes any capital account transaction outside the permitted list dependent on prior RBI permission.

This guide walks through the four layers every cross-border buyer must clear before signing a sale deed: what FEMA actually permits, how the Income Tax Act, 1961 taxes the asset while you hold and sell it, how your country of residence treats the same gain under the relevant double-taxation avoidance agreement (DTAA), and finally how the sale proceeds can lawfully leave the country. Each layer has its own rulebook, and the penalties for confusing them - particularly the agricultural-land bar - are severe.

FEMA / DTAA Position

The governing instrument is the RBI Master Direction issued under the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, last updated on 01 September 2022. It confirms that an NRI or OCI holding a valid Indian passport or OCI card may acquire by purchase any immovable property other than agricultural land, plantation property or a farm house. The same person may also acquire such barred property only by way of inheritance from a resident, or as a gift from a relative as defined in Section 2(77) of the Companies Act, 2013 - never by purchase.

Payment for a permitted purchase is equally prescribed. Under the 2022 Master Direction, the consideration must be paid only through banking channels by way of inward remittance from abroad, or by debit to the buyer's Non-Resident External (NRE), Foreign Currency Non-Resident - FCNR(B) - or Non-Resident Ordinary (NRO) account. No payment may be made in foreign currency notes or by traveller's cheque. A resident, by contrast, can remit only up to USD 250,000 per financial year under the Liberalised Remittance Scheme, but that ceiling does not apply to an NRI buying with funds already held in India.

The table below summarises the FEMA position on the three modes of acquisition. Note that the bar on agricultural land applies regardless of how wealthy or long-resident the buyer is - there is no value threshold or waiver short of a specific RBI approval under Section 6.

On the treaty side, the DTAA does not create a right to buy property - that is purely FEMA's domain - but it allocates taxing rights on the income and gains the property generates. For every major treaty partner, India retains the right to tax capital gains arising on Indian immovable property. The India-United States treaty (effective 12 September 1991), the India-United Kingdom treaty (effective 26 October 1993) and the India-UAE treaty (effective 22 September 1993) all preserve a 12.5% long-term capital gains rate in India and none of them treats such gains as exempt.

Tax Treatment in India

Once the property is owned, the Income Tax Act, 1961 governs everything that follows. Rental income from an Indian property is taxable in India in the year it accrues, and the tenant or paying agent must deduct tax at source under Section 195 before remitting rent to a non-resident landlord. You can estimate the net liability with our NRI rental income tax calculator, which applies the standard 30% deduction under Section 24(a) after municipal taxes.

The bigger event is the sale. Immovable property held for more than 24 months is a long-term capital asset; held for 24 months or less, the gain is short-term and taxed at the seller's slab rates. For transfers on or after 23 July 2024, long-term capital gains on land and building are taxed at a flat 12.5% without indexation, per the Finance (No. 2) Act, 2024. The optional 20%-with-indexation route that the same Act preserved for assets acquired before 23 July 2024 is available only to resident individuals and HUFs - an NRI cannot use it and must apply the 12.5% flat rate.

The most painful surprise for buyers is TDS. When you purchase from an NRI seller, you - the buyer - must deduct tax under Section 195 on the entire sale consideration, at 12.5% plus surcharge and 4% health-and-education cess on long-term gains, not the modest 1% that applies under Section 194-IA to a resident seller. Where an NRI buys from a resident, the NRI buyer must still deduct 1% under Section 194-IA if the value is Rs 50 lakh or more. Surcharge on capital gains is capped at 15% even where total income crosses Rs 2 crore, and in the new regime the overall surcharge ceiling is 25%, never the 37% that applied in the old regime.

To avoid over-withholding, an NRI seller can apply to the jurisdictional Assessing Officer for a lower or nil-deduction certificate under Section 197 before completing the sale. Reinvestment relief is also available: Section 54 exempts long-term gains on a residential house if reinvested in another residential house in India within the prescribed window, and Section 54EC allows up to Rs 50 lakh of gains to be parked in specified bonds within six months of transfer. Model the net outflow with the NRI capital gains and tax calculator before you commit.

Tax Treatment Abroad

Because the property sits in India, India taxes first - but your country of residence usually taxes the same gain again and then gives credit for the Indian tax. This is where the DTAA's foreign-tax-credit (FTC) mechanism matters. Under Article 24 of the India-US treaty, for instance, the United States allows a credit in the country of residence for tax paid in India, so a US-resident NRI who pays 12.5% LTCG in India sets that off against the US long-term capital gains tax (federal rates of 0%, 15% or 20% depending on income, plus any state tax). The credit is limited to the lower of the two liabilities, so the property gain is taxed once at the higher of the two effective rates, not twice over.

The rate India retains under each treaty is the anchor for the whole calculation. None of the major DTAAs exempts capital gains on Indian immovable property - the lowest treaty rate is still the 12.5% India charges domestically.

The UAE is the instructive exception. Because the UAE levies no personal income tax on individuals, a Dubai-resident NRI who sells Indian property simply bears the 12.5% Indian tax and has no second-country liability to credit it against - the treaty's FTC article is effectively dormant for individuals. To claim any treaty benefit, the seller must hold a valid Tax Residency Certificate and file Form 10F, as required under the India-UAE DTAA effective 22 September 1993. Our DTAA benefit calculator and foreign tax credit calculator help you compare the two scenarios side by side.

Repatriation Mechanics

Owning and selling are only useful if the money can come out. Repatriation rights depend entirely on which account funded the purchase, governed by the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 and the same 01 September 2022 Master Direction. The cleanest position arises where the property was bought with inward remittance or from an NRE/FCNR(B) account: sale proceeds of up to two residential properties may then be repatriated freely through the NRE route, with the repatriable amount capped at the original foreign-currency consideration paid.

Where the property was bought with rupee funds through an NRO account, or acquired by inheritance, the proceeds sit in the NRO account and are repatriable under the general USD 1 million per financial year limit that the RBI permits on NRO balances. Repatriation under this route requires Form 15CA and a chartered accountant's Form 15CB certifying that applicable Indian tax has been paid, both filed on the income-tax portal before the bank releases the remittance.

A practical sequencing point: the 12.5% Section 195 TDS is deducted at the sale stage, so by the time funds reach the NRO account most of the tax is already settled; the Form 15CB certificate then confirms the residual position. Plan the remittance against the financial-year clock, because the USD 1 million limit resets each year on 01 April and unused headroom does not carry forward. Use the repatriation calculator to map proceeds against your remaining annual allowance.

FAQ

Can an NRI buy agricultural land in India?

No. The RBI Master Direction updated on 01 September 2022 expressly bars an NRI or OCI from purchasing agricultural land, plantation property or a farm house. Such property can only pass to an NRI by inheritance from a resident, or by gift from a relative - never by purchase. Acquiring it through a purchase deed breaches Section 6 of FEMA, 1999 and the transaction is void.

How much TDS is deducted when I sell my Indian property as an NRI?

The buyer must deduct tax under Section 195 on the full sale consideration - 12.5% plus surcharge and 4% cess for long-term gains on property sold on or after 23 July 2024. This is far higher than the 1% Section 194-IA rate for resident sellers, so apply for a Section 197 lower-deduction certificate from the Assessing Officer to avoid blocking cash unnecessarily.

Can I use indexation to reduce capital gains tax on property?

Not as an NRI. The Finance (No. 2) Act, 2024 reserved the optional 20%-with-indexation route for resident individuals and HUFs holding land or building acquired before 23 July 2024. An NRI must apply the flat 12.5% long-term rate without indexation on any transfer from 23 July 2024 onward.

How much money can I repatriate after selling Indian property?

If the property was bought with inward remittance or NRE/FCNR(B) funds, proceeds of up to two residential houses are repatriable through the NRE route, capped at the original foreign-currency amount paid. For NRO-funded or inherited property, repatriation falls under the general USD 1 million per financial year limit, subject to Forms 15CA and 15CB.

Is the capital gain exempt under the DTAA if I live in the US, UK or UAE?

No. India retains the right to tax capital gains on Indian immovable property at 12.5% under every major treaty, including the US (1991), UK (1993) and UAE (1993) DTAAs. The treaties grant a foreign-tax credit in the country of residence, not an exemption in India.

Do I need to deduct TDS if I, an NRI, buy property from a resident seller?

Yes. As the buyer you must deduct 1% under Section 194-IA where the consideration is Rs 50 lakh or more, regardless of your non-resident status. You will need a TAN only if buying from another non-resident under Section 195; for a resident seller, your PAN suffices for the 194-IA challan.

Can a returning NRI keep these properties after becoming a resident again?

Yes. Property lawfully acquired while non-resident may continue to be held, sold or gifted after you regain resident status, and the sale proceeds can be credited to your domestic accounts. The repatriation caps above apply only while you are non-resident; once resident, the USD 1 million NRO route and LRS rules realign with resident remittance norms.