Non-resident Indians (NRIs) often choose real estate as their preferred investment in India. According to Indian laws, an NRI can make investment in a residential property for personal use. This property can be a house or a piece of land to construct a house therein.
When taking a loan for a self-occupied house, NRIs can enjoy a deduction of up to 150,000 Indian rupees (Dh8,120) in income tax against principal and interest payments made towards the repayment of the loan. NRIs can also invest NRIs can also invest in rental residential and commercial property.
Similar to Indian residents, provisions relating to long-term and short-term capital gains are applicable to NRIs. Cost inflation index has also been made available to NRIs, which helps reduce their tax liability. NRIs are also allowed to repatriate rental income and property sale proceeds of up to $1 million (Dh3.67 million) in a financial year (April to March). Reverse mortgage, which allows homeowners more than 60-years-old to take out loans against their home’s equity, while keeping ownership of the property, is also available to NRIs.
The taxation rates and policies with regards to real estate are uniformly applicable in all states in India. Having said that, stamp duty charges and registration charges with regards to property transactions differ from state to state, and are subject to local laws. The stamp duty charges vary from 1-6 per cent in different states.
Although the government has offered a bundle of benefits to attract NRI investors, there are certain legal and tax terms that need to be understood. Here are some of those according to A. R. Gupta, Senior Partner at AR Gupta and Associates:
Service tax is 15 per cent of the gross value of the property. But as there is a government abatement of 75 per cent (increased from 67 per cent), the 15 per cent service tax will be levied only on an amount equivalent to 25 per cent of the property’s gross value. The effective rate of service tax at present is therefore only 3.75 per cent. The service tax has gone up from 14.5 per cent to 15 per cent effective June 1 due to the introduction of a 0.5 per cent Krishi Kalyan Cess (KKC) on the value of taxable services.
Service tax is leviable only on property under construction and sold or agreed to be sold before the completion certificate is released.
Although paying service tax is mandatory, it can be avoided if:
a) The builder has obtained a completion certificate from the issuing authority.
b) The buyer has paid the entire amount only after the building completion certificate had been obtained by the builder.
Service tax on rent of immovable property is paid as per the rates in force, i.e. 15 per cent as of June 1 and subject to exemptions that in force.
There is basic exemption of service tax up to 1 million Indian rupees and leasing of residential property is exempted from service tax.
The Finance Bill 2013 requires purchasers of immovable property (land, building or part of a building other than rural agricultural land) worth at least 5 million Indian rupees to deduct 1 per cent of the price of the property as tax deducted at source (TDS) before paying the seller. TDS is generally a process of deducting and depositing tax at the time of transaction, rather than the government collecting it at the later stage.
According to the TDS rules, the property buyer will have to deposit the 1 per cent amount in the government treasury.
NRIs not assessed for any income in India, but acquire property by purchase or any other means shall be liable to TDS of 10 per cent on the entire amount of the sale proceeds of any property the NRI would sell.
Capital gain on property
Long-term assets refer to those held for more than three years. The tax rate for long-term capital gain is 20 per cent, along with indexation benefits for long-term capital gain. On the other hand, short-term capital gain is added to the income and taxed as per the income tax slab rate.
There are also tax-saving instruments such as capital gain bonds for long-term capital gain. The gain that one makes from the sale of the real estate can be invested in such bonds, which generally have a lock-in period of around three years. The maximum limit for an individual to invest in these bonds is up to 5 million Indian rupees.
Any capital gain from the sale of a property held for more than three years, if invested in residential property, will be fully exempt from capital gain tax, provided the owner holds the property for a minimum of three years. Such investment has to be made within a period of two years from the date of sale of the property, if it is invested in a constructed house or apartment, otherwise, the capital gain can be used in constructing a house within three years.