Where a NRI is interested in investing in or selling off real estate in India, he is governed by the Foreign Exchange Management Act (FEMA) and the Indian Tax Act. This articles covers all the factors governing taxation (income tax, wealth tax & TDS) of real estate w.r.t. an NRI in India.

As per the said Foreign Exchange Management Act an Indian citizen who resides outside India is permitted to acquire any immovable property in India other than agricultural/plantation property or a farm house.  Thus, a Non-Resident Indian enjoys almost all the privileges which are enjoyed by a resident Indian with reference to purchase of immovable property in India.

The rules of FEMA as well as Income Tax have been summarized in this table:

These rules are applicable to:: 1) Non- Resident Indian (who is Indian Citizen)
2) Non-Resident Indian (who is Foreign Citizen of Indian origin) Other than Citizen of Pakistan, Bangladesh, Sri-Lanka, Afghanistan, China, Iran, Nepal or Bhutan

 

ACQUISITION OF PROPERTY THROUGH PURCHASE OR GIFT OR INHERITANCE

1) Acquiring a property by Purchase No permission is required.
2.) Acquiring a property by Gift from
a.) Person resident in India No permission is required
b.) NRI (Citizen of India) No permission is required
c.) NRI (Person of Indian origin) No permission is required
d.) Others Prior RBI permission is required
3.) Acquiring a property by Inheritance from
a.) Person resident in India No permission of RBI is necessary toacquire immovable property byway of Inheritance.
b.) NRI (Citizen of India)
c.) NRI (Person of Indian origin)
d.) Others
Source of Funds for purchase of property can be
  1. NRO Account
  2. NRE/FCNR A/c or Inward Forex remittance.
  3. Housing Loans are available against the security of immovable property proposed to be acquired.
 

TRANSFER OF RESIDENTIAL/ COMMERCIAL PROPERTY THROUGH SALE OR GIFT

1.) Transferring Property by Sale to
a.) Person resident in India No permission is required
b.) NRI (Citizen of India) No permission is required only if the seller is Indian citizen. All other cases prior RBI permission is required.
c.) NRI(Person of Indian origin) No permission is required only if the seller is Indian citizen. All other cases prior RBI permission is required.
d.) Others Prior RBI permission is required
2.) Transferring Property by Gift to
a.) Person resident in India No permission is required
b.) NRI (Citizen of India) No permission is required
c.) NRI(Person of Indian origin) No permission is required
d.) Others Prior RBI permission is required

 

OTHER IMPORTANT POINTS

Can you Rent out? YES
 
Repatriation of Rental Income / SALE PROCEEDS in case of sale YES It is allowed – An NRI who has sold a house property can repatriate the sale proceeds up to $1 million per financial year, provided all the taxes have been paid and a certificate to that effect has been obtained from a chartered accountant, subject to certain conditions.
 
Tax Deduction at source a) On Rent 

b) On Sale of Property

30% + Surcharge (as applicable)

The buyer of the property is obliged to withhold the tax at source at 20.6% of the gross consideration if the capital gains are long-term or at 30.9% of the gross consideration if the capital gains are short-term at the time of paying the seller. It is possible to obtain a lower/nil tax deduction certificate from the income tax assessing officer and furnish it to the buyer who would then deduct tax accordingly.

 Can NRI being an Indian Citizen receive sale proceeds from another NRI directly outside India A NRI who is an Indian Citizen can sell his Immovable Property (other than agricultural or plantation property or farmhouse) to another NRI.  However, such transaction has to be routed through India only.  In other words,  the buyer has to invest in India by way of remittance from abroad through normal banking channels or by debit to an his account maintained with an authorised dealer.The Sale proceeds of the property must be credited to your bank accounts maintained with an authorised dealer in India.

 

INCOME TAX ON SUCH PROPERTY

CASE 1. HOUSE HAS BEEN PUT ON RENT 1. Rent derived is taxable as Income from House Property.2. Following deductions are allowed from Rental Income:a) Municipal taxes paid by the ownerb) 30% Standard deduction for repairs and maintenance

c) Full deduction on Interest on borrowed capital without any limit

d) In case any Pre-EMI has been paid on property before possession, such Pre-EMI Interest is allowed as a deduction for a period of 5 yrs from the year of possession.

3. Deduction to the extent of Rs. 1 lakh on principal repayment of housing loan in the financial year is allowed u/s 80C.

CASE 2. HOUSE IS SELF – OCCUPIED BY OWNER/ FAMILY 1. Income from House Property is NIL.2. Following deductions are allowed from Income from House Property:a) Only a single deduction u/s 24 for interest on borrowed capital upto Rs. 1,50,000 is allowed.b) In case any Pre-EMI has been paid on property before possession, such Pre-EMI Interest is allowed as a deduction for a period of 5 yrs from the year of possession.

3. Deduction to the extent of Rs. 1 lakh on principal repayment of housing loan in the financial year is allowed u/s 80C.

CASE 3. HOUSE IS SOLD WITHIN 3 YEARS OF ACQUIRING THE PROPERTY 1. From the Sales Consideration, expenses incurred for sale, Cost of acquisition and cost of improvement w.r.t. to such property are deducted, and the Net Gain arising after such deductions, is called Short term Capital gains.2. Short term Capital Gains arising on sale of property are taxable in the hands of seller. The Short Term Capital Gains are added to the Income of NRI and taxed at normal rates applicable to NRI as per slab.3. In case there is Short term Capital Loss arising, such loss can only be set off against Other Capital Gains (Long term or short term) of any other capital asset. In case such loss cannot be set off in the current financial year, it can be carried forward for a period of 8 years and set off against any future capital gains in those 8 years.4. Effect of Sec. 50C of I.T. Act should also be analysed i.e. where the Sales Consideration received on sale of real estate is less than the circle rate adopted for stamp duty purposes, such value as per stamp authority is deemed the Sales Consideration of the property. This increases the Capital gains, and hence the Capital gains tax liability.

5. No deductions viz-a-viz Indexation and Sec. 54, 54EC, 54GB are given on Short term Capital Gains.

6. If the capital gains arise on or after 1 April 2013 and the total income exceeds Rs.1 crore, there is a surcharge of 10% leviable on the tax payable before computing cess.

CASE 4. HOUSE IS SOLD AFTER 3 YEARS OF ACQUIRING THE PROPERTY 1. From the Sales Consideration, expenses incurred for sale, Indexed Cost of acquisition and Indexed cost of improvement w.r.t. to such property are deducted, and the Net Gain arising after such deductions, is called Long term Capital gains.2. Long term Capital Gains arising on sale of property are taxable in the hands of seller @ 20%.3. In case there is Long term Capital Loss arising, such loss can only be set off against Other Long term Capital Gains of any other capital asset. In case such loss cannot be set off in the current financial year, it can be carried forward for a period of 8 years and set off against any future Long term capital gains in those 8 years.4. Effect of Sec. 50C of I.T. Act should also be analysed i.e. where the Sales Consideration received on sale of real estate is less than the circle rate adopted for stamp duty purposes, such value as per stamp authority is deemed the Sales Consideration of the property. This increases the Capital gains, and hence the Capital gains tax liability.

5. As stated before Indexation benefit is available on Long Term Capital gains. Cost Inflation Index is easily available on the Income Tax India website, and accordingly such benefit can be calculated.

6. Deductions u/s 54, 54EC, 54GB can be availed of to reduce long term capital gains tax liability.

7. If the capital gains arise on or after 1 April 2013 and the total income exceeds Rs.1 crore, there is a surcharge of 10% leviable on the tax payable before computing cess.

HOW TO REDUCE TAX LIABILITY

 

1) SECTION 54: Investing the sale proceeds in purchase/construction of another house property:

If a residential property is sold after being held for more than three years and the proceeds are reinvested for purchase of a new residential property, then the capital gains will be exempt to the extent of the amount reinvested. The exemption is subject to the new property being purchased within a year before or two years from the date of sale, or if new property is being constructed within three years from the date of sale.

2) Investment in Capital Gain Account Scheme:

If an NRI was not able to make the necessary investments, the Act provides that the amount can be kept in a nationalised bank under the Capital Gain Account Scheme before the due date of filing income-tax returns to avail the tax exemption. This amount is required to be utilised for purchase/construction of new property within a specified period.

3) SECTION 54EC: Sale proceeds invested in certain bonds:

NRIs can also claim exemption by investing the amount of capital gains in bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC). Investment in the specified bonds is to be made within six months of such sale and there is a lock-in period of three years for such bonds.

 

PAYING TAX ON SECOND PROPERTY IN INDIA

There is no limit on the number of residential or a commercial property (other than agricultural land/farmhouse plantation property) that NRIs can buy.

There is however one important taxation impact that is associated with owning more than one property in India that NRIs should be aware of.

PART A – INCOME TAX

a) If a person owns more than one property, then as per Indian tax rules, only one of these properties can be claimed as being self occupied. The second property in such a case cannot be claimed as self occupied, even if the owner keeps the property for their own use. The other one, whether you rent it out or not, will be deemed to be given on rent and in such cases, the rent will have to be calculated as per certain valuations prescribed under the income tax rules and the owner would have to pay tax on this deemed rental income.

b) Tax on inherited property – In a situation where you become the owner of a second property by way of inheritance, the same rule will apply and you would have to pay tax on the deemed rental income on the inherited property, whether you rent it or not.

c) Save tax on second property you own – For the second property, you may be able to claim full interest paid for the EMI* of second house. As per tax laws, you can claim full deductions for the amount paid as interest on loan for second house whereas for the first house you can claim up to 1.5 lakh Rupees in interest (for self occupied house).

PART B – WEALTH TAX

a) Wealth tax is applicable on residents, non-residents and residents but not ordinarily residents. Tax is payable on the aggregate value of chargeable assets minus the value of debts owed on valuation date.

b) Thus, even an NRI is liable to pay tax for their wealth in India. Tax would be levied on the assets which are mentioned under the ‘Wealth Tax Act’, and one such asset is a residential house.

c) Any one residential house is exempt from Wealth Tax. The other houses will be subject to Wealth Tax. The valuation of this house should be done on 31st March of each year

d) This tax is payable at the rate of 1% on the net wealth computed as above.

e) If you are liable to pay Wealth Tax where your net wealth exceeds Rs.30,00,000/-, you are required to file a Wealth Tax return. The return should be filed on or before 31st July following the end of the financial year on 31st March

 

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