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NRI Property: The 6.5% Return Trap in an 11-Year Hold
A ₹22.6 crore property returned 10.7% in rupees but just 6.5% in dollars over 11 years. Tax law ignores currency erosion, taxing phantom gains. FEMA, TDS, and POA rules add complexity.
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A chartered accountant ran the numbers on a real NRI property deal: bought for ₹22.6 crore, sold for ₹60 crore. The rupee-denominated annual return was 10.7% over 11 years. In dollar terms, that collapsed to 6.5%.
The difference is currency depreciation. Indian tax law calculates capital gains in rupees only, ignoring the dollar-value erosion entirely. The result is a tax charge on phantom gains – profits that exist on the tax authority's books but not in the buyer's home currency.
Chartered accountant Sidhant Agarwal, who worked the example, said the dollar-adjusted return roughly matches what a simple global index fund would have delivered, without property's illiquidity, construction risk, or compliance burden.
The funding account matters for repatriation.
Purchases funded through NRE or FCNR accounts allow full repatriation of the principal – but only for two residential properties. Beyond that, the standard $1 million annual limit applies. Commercial properties face no such restriction, Agarwal said.
NRO-funded purchases hit the $1 million limit regardless of how many properties are sold. And the funding source only protects the principal. Any appreciation still falls under the repatriation limit.
Two NRIs cannot settle directly.
"If both the buyer and the seller are NRIs, they cannot settle the property transaction directly through their NRE or any foreign bank accounts. Doing so would violate FEMA rules and could attract significant penalties," CA Ajay R Vaswani of ARAS and Company said.
Sale proceeds must be credited to the seller's NRO account when transferring from the buyer's bank account.