Remittance tax by US may hit real estate in India

Anyone who has gone house-hunting in India's metros would have come across the ubiquitous NRI (non-resident Indian) home owner, especially in the newer condominiums. The broker gets the house keys from a caretaker, who tags along, to show you the apartment. At times, the broker might offer to show you a couple of other flats close by, owned by the same NRI. Of course, NRI is a loosely used term in everyday parlance; it covers anyone who lives abroad.

In fact, NRIs buying up homes has been one of the key reasons for the boom in the premium real estate sector in India's big cities over the past couple of years. A large amount of the remittances from abroad — money sent home by Indian-origin people working abroad — gets parked in real estate. And, a big chunk of that comes from the US.

RBI data shows that Indian-origin people working in the US sent back $32 billion to India in 2023-24. That was roughly Rs 2.70 lakh crore back then, at the prevailing exchange rate. How big that number is can be gauged from the fact that the total income tax collections that year stood at Rs 10 lakh crore.

Estimates suggest that about 6-7 per cent of all remittances go into the property market. If that is true, then Indians living in the US would have invested roughly Rs 18,000 crore in real estate in India in 2023-24. Some of it — especially the money entering Punjab — would have gone into buying agricultural land or plots in villages. But, a significant chunk, in terms of value, would have entered the urban housing market.

Now, US President Donald Trump is threatening to throttle this flow of money by levying a tax on all outward remittances from the US. The initial proposal was to impose a remittance tax of 5 per cent, but that has been brought down to 3.5 per cent. Despite the small relief, experts say this will have a disproportionate impact on the money flows into real estate and equities.

Most NRI investments in real estate are for capital gains. Many buy flats when a new project is announced, hold it for a few years, and then cash out. They then move that money to another upcoming project. In each case, the aim is to make the most of the rise in property value when the secondary market opens up.

Real estate investments, therefore, are a way to diversify one's investment portfolio in India, along with equities. Most non-resident home owners put their flats out on rent while they wait for significant capital gains on their property. But that is just a holding operation since rental yields are very low in India. Even the most sought-after 'builder' flats fetch just 2-2.5 per cent in annual rent on the price of that flat. After adjusting for repairs, maintenance and property taxes, very little is left.

Now, imagine that you are an NRI who wants to buy a premium apartment in Gurugram for Rs 6 crore. After Trump's remittance tax, the same flat would cost you Rs 6.21 crore. In the past one year, real estate prices have gone up by an average 13 per cent in Gurugram. Earlier, that would have fetched you a return of Rs 72 lakh; now it would get you Rs 51 lakh. So, your net return would drop to roughly 9 per cent.

What is true for real estate is true for all other kinds of investment. Take the share market. In the past three years, Nifty has given an average return of 15 per cent per year. If an NRI were to invest Rs 20 lakh of his/ her savings in a Nifty-indexed fund and get the same average return, his/her investment would rise to Rs 23 lakh the next year. With Trump's new remittance tax, one would have to invest Rs 20.70 lakh to get the same return. In other words, his net gain would drop to 11 per cent.

This is a significantly lower return from investments than what the NRIs have been used to till now. In fact, after adjusting for currency costs, it might not even be worth their while to invest in India. Let me explain this using a simple example. If an NRI were to bring in $1,00,000 to India, he would get about Rs 85 lakh for it. Let us assume that he splits this and invests equal amounts in Gurugram real estate and shares.

In our estimates, the two investments will give him an average of 10 per cent return in one year — 9 per cent on real estate and 11 per cent on equities — after we adjust for the new remittance tax. So, the Rs 85 lakh amount will become a little more than Rs 94 lakh.

But in the past five years, the rupee has depreciated at an annual average rate of 2.5 per cent. If it weakens at the same rate over the next year, one US dollar will exchange for a little more than Rs 87. If the NRI was to reconvert his investments into dollars, he would get about $1,08,000 at the end of the year. That would work out to a return of just 8 per cent, when we adjust for both currency fluctuation and the remittance tax.

Compare that to the yield on the world's safest asset — the one-year US treasury bond. The current yield on that is more than 4 per cent. Even a riskier investment in the US — the Dow Jones, for example — has given an average return of nearly 10 per cent in the past three years.

In almost every case, once you take the proposed remittance tax into account, it makes very little financial sense for NRIs to invest in Indian assets.

Of course, 80 per cent of the remittances from the US are sent to families back home to improve their standard of living. Even that will take a hit, even if marginally.

The Indian government must address the issue during trade negotiations with the US and try and reverse the tax, or, at least, minimise its impact.

Aunindyo Chakravarty is a senior economic analyst.