NRIs: Plan on purchasing or selling real estate in India? Save on these taxes
Here's how taxes are calculated when an Indian expat purchases real estate back home
Dubai: NRIs can buy all sorts of properties in India except an agricultural land, farm house or a plantation property. However, to either of those exempted property types in India, they have to get approval from the Reserve Bank of India (RBI) and the government.
The RBI has given a general permission to banks and housing finance companies registered with the National Housing Bank to provide loans to NRIs for buying residential property in India. Sanctioned in Indian currency, the loan has to be repaid using the same currency.
However, the loan amount, according to the regulations, cannot be credited directly to the bank account of an NRI and has to be disbursed to either the seller's or the developer's account. The loan can be repaid using funds in an NRI's NRO, NRE account or FCNR deposits.
FCNR stands for Foreign Currency Non Resident account. This is a kind of fixed deposit account opened for depositing income earned overseas. The account is held in foreign currency.
(Note that interest on NRO account is taxable whereas interest earned on NRE account is exempt from tax. Interest income earned from your FCNR deposit accounts shall be exempt from tax till you hold Non-Resident Indian (NRI) status or Resident and Not Ordinarily Resident (RNOR) status.)
How tax is calculated when an NRI sells property in India
When an NRI sells a property in India, TDS (tax deducted at source) calculation is done at the rate of 20.6 per cent on long-term capital gains and 30.9 per cent on short-term capital gains.
In other words, when an NRI sells property, the buyer is liable to deduct TDS at 20 per cent, and in case the property has been sold before 2 years, which is reduced from the date of purchase, a TDS of 30 per cent shall be applicable. The final taxation rate is similar for NRIs and resident Indians.
Short-term capital gains taxes are paid at the same rate as you'd pay on your ordinary income. Both these rates are typically much lower than the ordinary income tax rate.
If an NRI has a lower tax slab applicable to him, he or she can apply for a refund of the TDS by filing their income tax return.
How an NRI can save tax on capital gains when selling a property in India
NRIs are allowed to claim exemptions under Section 54 and Section 54F under the Indian Income-tax on long term capital gains from sale of house property in India.
• Exemption under Section 54, Indian Income-tax Act
It is available when there is a long term capital gain on the sale of house property of the NRI. The house property may be self-occupied or let out. Please note – you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains. However, your exemption shall be limited to the total capital gain on sale.
Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale.
The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase.
If you have not been able to invest your capital gains until the date of filing of return (usually July 31) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it.
• Exemption under Section 54F, Indian Income-tax Act
It is available when there is a long term capital gain on the sale of any capital asset other than a residential house property.
To claim this exemption, the NRI has to purchase one house property, within one year before the date of transfer or 2 years after the date of transfer or construct one house property within 3 years after the date of transfer of the capital asset. This new house property must be situated in India and should not be sold within 3 years of its purchase or construction.
Also, the NRI should not own more than one house property (besides the new house) and nor should the NRI purchase within a period of 2 years or construct within a period of 3 years any other residential house.
Here the entire sale receipt is required to be invested. If the entire sale receipt is invested then the capital gains are fully exempt otherwise the exemption is allowed proportionately.
How tax is calculated when an NRI buys property in India
The tax liability for NRIs is different if the said property is bought for self-use, rental or for the sole purpose of investment.
No restriction on number of properties NRIs can buy in India
There is no restriction on the number of properties that NRIs can own in India. The most important consideration is that of whether the property purchase is for their own or their family’s actual use, or an investment for rental income and potential capital appreciation.
Tax liability different if property bought for self-use versus rental income
The tax liability be different in each of these cases - actual use, rental income, capital appreciation. There is no tax implication in case of one self-occupied property (i.e. property occupied for own residence or a property which cannot actually be occupied by the owner due to the fact that he has to reside at other place on account of his employment, business carried on at another place).
However, in a case where the NRI owns more than one self-occupied residential property, then only one of the houses will be treated as self-occupied and all other house ‘notional’ (explained below) rents are taxable.
NRIs should also remember that income from renting out a residential property (i.e. the annual value) is taxable. But a standard deduction of 30 per cent towards repairs and maintenance along with other deduction of municipal tax is permitted from the rental income.
Further, a deduction of up to INR200,000 (Dh9,884) is allowed towards interest payable on any loan taken with respect to the said property.
If a property is held for investment purpose only then capital gain shall arise on transfer of house property and taxable in the hands of the NRI. Such capital gains is characterised as a short-term capital gain or long-term capital gain based on period of holding of such property, like explained above.
Further, a deduction can be claimed if such capital gain is reinvested into a new residential house property or in specified funds as per the provisions of the Indian Income-tax Act.
Tax liability on commercial or residential property be the same
Will the tax liability be different if an NRI were to invest in a co-working space, co-living space or student housing versus a conventional office space?
A property held for commercial purpose would likely have more income-tax consequences compare to the residential house property. This is due to the beneficial provision available under the Income-tax Act, wherein notional rent of one self-occupied house property is considered as Nil.
The property for co-working space, co-living space or student housing likely to have a commercial usage resulting into rental income in the hands of a NRI. The taxability of rental income in this scenario would be same as discussed above.
Things domestic buyers should keep in mind before buying property from an NRI
An NRI buyer would require to comply with the tax provisions. The buyer is required to withhold tax at the rate of 20 per cent of the capital gains if the gain to the seller is a long term capital gain.
In case of short term capital gain to the seller, tax at the rate of applicable slab rate to NRI on the gain amount is to be withheld. However, an NRI (i.e. seller) may evaluate to claim a credit in his country of residence with respect to taxes paid in India as per the provisions of relevant Double Taxation Avoidance Agreement (DTAA).
To safeguard from any future tax litigation, the buyer can file an application to the tax officer for computing tax liability arising from sale of property for the purpose of withholding of tax.
The buyer should ensure that the sale consideration of house property is not less than stamp duty value of the property, else the deficit (between sale consideration and stamp duty value, if it exceeds INR50,000 or Dh2,472) shall be taxable in the hands of buyer.
The buyer would also require to obtain Tax Deduction and Collection Account Number (‘TAN’) for withholding of taxes.
NRIs don’t need special permission to invest in Indian real estate
All monetary transactions must be done in Indian currency and through normal banking channels via an NRI account.
NRIs can use either their own funds or avail of home loans from banks or other financial institutions in India. RBI mandates that all buyers, including NRIs, can avail of a maximum 80 per cent of the overall property value via loans from financial institutions.
NRIs must use inward remittances via NRO/NRE accounts in India. They can also issue post-dated cheques or opt for Electronic Clearance Service (ECS) from their NRO, NRE or Foreign Currency Non-Resident (FCNR) account.
While the loan process and benefits remain same as for resident Indians, the documents that an NRI must submit must meet certain eligibility criteria and also issue a Power of Attorney (PoA) – a key document required during NRI home loan processing.