Over the years, non-resident Indians (NRIs) have invested substantial sums into Indian real estate, either purely from an investment perspective or due to an emotional attachment to the country of origin. Either way, the Indian government sees this as an important source of fund inflows.
And, to make real estate buying even more attractive for NRIs, it offers multiple benefits to NRIs by way of tax exemptions. To start with, the term NRI is legally defined under the Foreign Exchange Management Act (Fema), 1999 and the Income Tax Act, 1961. Fema defines an NRI as a citizen of India who either resides outside the country or is a person of Indian origin (POI) and doesn’t reside in India for at least 183 days or more.
Simultaneously, Section 6 of the Income Tax Act states that an individual is deemed to be NRI if:
If he/she is not in India for a period of 182 days or more in that year; or If he/she is not in India for a period of 60 days or more during the previous year and 365 days or more during four years preceding that year.
Once established, NRIs must know that they enjoy all tax benefits as locals residing in India, except the TDS rate during the property sale. Moreover, if they avail home loans for buying property in India, they can enjoy multiple tax benefits which eventually reduces their overall tax outgo.
Tax benefits on home loans
Several banks and non-banking financial institutions offer home loans to NRIs. However, the tenure of the home loan may vary, and the rate of interest is usually higher for them. So, let’s understand some of these major benefits.
1. Deduction on principal repayment and stamp duty and registration charges: As per Section 80C of the Income Tax Act, NRIs can claim tax deduction on home loans on repayment of the principal amount and also avail deductions for stamp duty and registration charges paid to purchase the property. The maximum deductions on both these amounts available are Rs150,0000 (Dh7,786.70) per annum.
However, to claim this benefit, the house should not be sold within five years of possession.
2. Deduction on repayment of interest charges Under Section 24 of the Income Tax Act: One can claim tax deduction on the interest amount of the EMI up to a maximum of Rs200,000 per annum for a self-occupied house. Budget 2019 further extended the benefit of self-occupied property to two houses, which means that if one occupies more than one property, the notional rental income on second property is exempted from income tax.
3. Further deduction for first-home buyers: If an NRI is availing a home loan to buy his first home, he/she is entitled to an additional deduction of Rs50,000 per annum on the repayment of interest under Section 80EE. However, the loan amount should be 3.5 million rupees or less while the property cost should not exceed Rs5 million.
4. Tax benefits on joint home loan; In the case when the home loan is taken jointly, each co-owner can claim tax benefits separately. As an NRI if you are looking to buy property, your wife can become a co-owner too, and both of you can individually claim tax benefits. Under Section 80C of the Income Tax Act, each co-owner can claim tax deduction on the principle loan amount to a maximum of Rs150,000 each. Hence, to claim larger tax benefit, it is advisable to take up home loan on a joint basis.
Therefore, it is imperative that NRIs looking to buying property in India consider these points and avail home loan so as to reap in major tax benefits offered to them by the Indian government.
Shajai Jacob is CEO — GCC at Anarock Property Consultants.