What Is Fractional Real Estate Ownership For NRIs In India

   Fractional real estate investment is an innovative approach in which a group of investors pool in their funds to purchase a high-value property together. This offers passive income, low entry costs, and a dash of diversification to one's portfolio. And with SEBI reforms supporting it, this investment option has now become the talk of the town. 

This has also attracted the attention of non-resident Indian who want to own a share in the high-value properties of India. And with respect to NRIs, let us understand the fractional ownership of real estate for NRIs, including its benefits to fractional ownership, tax implications, process, and

What Is Fractional Ownership Of Property For NRIs

Fractional ownership is a type of investment in which different investors co-own a high-value property and receive returns with respect to their share invested. This is different from traditional real estate investments, as fractional ownership allows people with limited funds to invest in high-value properties in India.

Let us understand this with an example:

Imagine there is a very high-end premium office space worth Rs 100 cr in Noida. Now, if an individual had purchased it, he/she would have to invest Rs 100 cr to buy the property. But not everyone is this rich; only high-net-worth individuals can afford such a premium property.

Now, this is where the concept of fractional investment comes in: several investors come together, pool their money, and purchase that A-grade commercial property in Noida.

Here, each investor has partial ownership of the office, and the profit is divided proportionally to the amount of funds invested. This is how fractional ownership lets individuals with limited funds step into the A-grade premium segment of the real estate market. 

As the economy or inflation in India rises, the market value of the property will also increase, providing investors with good returns. 

How Does Fractional Ownership Work In India

In India, Grade A commercial or residential properties are usually listed on online platforms. However, the commercial properties usually have tenants. Now, as an NRI investor, you can contribute anywhere from Rs 10 lakh to 25 lakh or more, depending on the property's worth and the proportion of return you wish to enjoy.

The fractional ownership for every commercial property is executed through a specific purpose vehicle (SPV). Here, funds from all investors are routed through a trusteeship company or a limited liability partnership under which the SPVs operate.

SPV purchases the property, and each fractional owner of the property who has invested will own a share of the SPV holding the property proportionate to his/her fund contribution made in the property.

The entire Specific Purpose Vehicle is created solely to hold the property on behalf of the customer. The investment platform is liable for the Specific Purpose Vehicle (SPV) and the associated underlying property on behalf of the customers.

The property's fractional ownership is transferred to the investor through an SPV.

Additionally, NRI investors must sign the SPV agreements to be registered with the "Registrar of Companies (ROC)" under the Ministry of Corporate Affairs. Post signing, all related documents for the property, such as the property sale deed, rental, or lease agreements, along with a copy of the SPV agreement, are shared with the investors.

Benefits Of Investing In A Fractional Property for NRIs

For NRIs looking to invest in the luxury segment of the Indian real estate market, fractional ownership of real estate offers a range of benefits. Here are the best ones:

• Luxury In Affordability: Apart from high-net-worth individuals buying luxury properties in India, especially these days when inflation is at its peak, it is costly. With fractional ownership, NRIs can easily invest in premium properties at a fraction of the cost; however, the returns are proportional to what you have invested.
• Shared Responsibilities: As an NRI, owning a property in India is a challenge in itself, and the bigger challenge is maintenance. But with fractional ownership, the responsibilities and maintenance costs of the property are divided among the co-owners, making it relatively easy for an NRI to manage.
• Flexibility: It depends on the property, but fractional ownership allows investors to use the property for personal use during the designated time. As an NRI, this is an excellent benefit for you, as you can have a luxurious retreat while in India.
• Top-Notch Features & Amenities: High-end premium properties feature high-end amenities and world-class facilities, including meditation centers, fitness and spa, swimming pools, and more. Through fractional ownership, you have access to all of these luxury facilities. 
• The Capital Appreciation: Inflation and the Indian economy are booming, benefiting the fractional owner through capital appreciation. However capital appreciation is market-linked but inflation does have its impact onto it.

Fractional Property Ownership Tax Implications for NRIs

The tax implications of fractional property investments for NRIs are as follows:

• Rental Income: Taxed in India according to the Indian income tax laws. The tax deducted at source, which is usually 30%, is deducted before the payout to NRIs is made. However, this deducted tax can be claimed in your resident country under the DTAA (double taxation avoidance agreement) between Indian and your residence country.
• The Capital Gains: Upon selling your stake in the fractional investment, the capital gain tax is applicable, depending on how long you have held the property.
  • For short-term capital gains, meaning holding the property for less than 2 years, this is taxed under the NRI income tax slab.
  • For long-term capital gains (holding the property for more than 2 years), it is taxed at 20% with indexation benefits.

How Can NRIs Invest In Fractional Ownership In India

An NRI can easily invest in fractional ownership of a commercial or residential property in India. However, please ensure that FEMA does not allow agricultural land, farmhouses, or plantation property. Here are the steps:

Check FEMA Eligibility On NRI Investments In India

As per FEMA regulations, NRIs are allowed to invest only in residential or commercial properties.

Keep NRE/NRO Accounts and PAN Ready

NRIs, please ensure that your investments are made only through the NRE or NRO bank account. Having a PAN card is mandatory when dealing in the Indian real estate market.

Complete the KYC With The Fractional Platform

You must complete KYC verification by providing the required documents, including your PAN card, Passport, overseas address proof, and NRE/NRO bank details.

Choose The Property Deal & Review

As an NRI, before you make any fractional ownership in Indian real estate investment, review.

• The title due diligence report of the property.
• A lease agreement is required if the property is rented.
• The agreement of SPV.
• Management fees

Reviewing this beforehand ensures that the organization and the structure comply with FEMA.

Transfer Funds To SPV

NRIs must transfer funds from their NRE/NRO bank accounts to the SPV's escrow account. Then the platform issues fractional units and shares once all funds have been received.

Get The Regular Reports and Rental Payouts

After the investment is made, NRIs will receive monthly/quarterly 

• Rental income updates. 
• Tenant/maintenance report. 
• SPV financials. 
• And the payout will be credited directly to the same NRE/NRO account used for the investment. 

Repatriation Of The Payments

The repartition of rental income or exit proceeds depends on the source account from which the investments were made. 

If you have invested the fund through an NRE account, the rental and exit proceeds are easily repatriable without any restrictions. 

Whereas if you have used an NRO account to invest, Repatriation is allowed but subject to certain FEMA restrictions. 

Exit

The lock-in period and exit option for fractional investments vary from portal to portal. Some portals have a six-month lock-in period, while others do not impose any such restrictions. Now, when it comes to the exit, there are usually three ways to make it. 

Release your share through the investors' dashboard, in a private sale, or in a complete asset sale when the entire property is being sold. 

In a nutshell, exit after the capital gains or when the assest appreciation cycle ends. 

Risks Involved in Fractional Ownership As An NRI

The following are the risks that an NRI must consider before making a fractional investment. 

• Liquidity Risk: At times, NRIs may experience delays in their existing fractional ownership in Indian real estate investments due to limited buyer demand.
• Depend on Platform Reliability: This is a risk when investors rely entirely on the FOP's credibility and performance, which can directly affect investment outcomes.
• Managing the co-ownership disputes: The more the minds, the more the clash of thoughts, and hence in fractional ownership, you can encounter disagreements with the co-owners, which in turn has the potential to influence the overall returns. However, through a collaborative decision-making process and clear agreements, common disputes can be limited.

Fractional Ownership Vs Traditional Property Investment.

In a nutshell, for NRIs, fractional real estate ownership for NRIs offer diversification across properties, reduce risk, and provide exposure to high-value assets.

The Bottom Line

Fractional ownership of real estate for NRIs allows them to explore the premium and high-end segment of the Indian real estate market. This entire concept of fractional property ownership is innovative, cost-effective, and a viable option for NRIs.

It provides shared ownership, professional property management, and access to world-class amenities. This investment model is changing the pathway for NRIs to be a part of India's high-end market and generate good returns.

If you are an NRI contemplating fractional ownership and need expert guidance along the way until you make a purchase, Savetaxs will get the job done right.

We have been helping NRIs from 90+ countries make real estate investments in India, whether traditional or fractional, and our satisfied clientele speaks volumes about the services we provide.

Connect with us and explore the high-end segment of the Indian real estate market with Savetaxs. We serve our clients 24/7 across all time zones.