This article explains how to deal with property of NRIs. NRIs are not exempt from Income tax in india, except under certain conditions. Their properties are taxable like any other ordinary Indian citizen. However, understanding the tax regime they are subject to can be complicated. The article covers different scenarios of taxable NRI property.
The Foreign Exchange and Management Act, 1999 defines Non Resident Indian (NRI) to be an India citizen or a foreign national of Indian origin who has left the country for the purpose of doing business or employment, which indicated his intention to stay outside for an indefinite period. An individual will also be called a NRI if his stay in India has been less than 182 days in the previous financial year. The Income Tax Act, 1961 indirectly, mentions about an NRI. Section 6 of the IT Act mentions criteria for a person to be a resident of India and those who do not fulfill it are non-resident. According to this Act, an individual will be treated as resided of India if he/she resides for at least 182 days in India for the preceding financial year or for at least 365 days in the previous 4 years and 60 days in the continuing year.
The options available to NRIs are: purchase of the property, sale of the property, and rent of their property.
Section 6 (3), (4),(5) of the FEMA, 1999 empowers RBI to make regulations from time to time for governing the properties of NRIs .The Income Tax laws are also to be taken care for paying taxes in these properties. The property, whether acquired or purchased, has to be taken care by paying proper tax, otherwise, if it is becoming difficult to maintain that property, it will be feasible to sell it.
An NRI having a valid Indian passport can acquire any number of immovable properties in India, both residential and commercial, other than an agricultural land, plantation property and farmhouse, unless it is acquired as a result of succession or gift. Section 80C on the Income Tax Act, 1961 empowers an NRI to claim a deduction of Rs. 1 lakhs on the acquisition of the property. Every purchase of property comes with stamp duty, registration charges and service tax, which will differ accordingly if the property is under construction or is an apartment.
Citizens of Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan, China, Afghanistan, Iran cannot acquire any immovable property in India without the permission of RBI.
The NRI has to take the permission of Reserve Bank of India for selling his property in India. Also, if the NRI wants to sell his inherited agriculture land, farmhouse or plantation land, it should be sold to an Indian citizen only who is a resident Indian. Though the NRI who inherited or owned a property at the time when he/she was Indian resident can gift or transfer, sale, rent etc. The NRI has to pay tax based on the capital gains.
Tax payable: What tax is to be paid depends upon whether it is a long term capital gain or short term capital gain. Gains are calculated by taking out difference between sales value and indexed cost. Indexed cost is that cost of purchase which is adjusted with inflation. A chartered accountant can help to get the indexed cost.
When any house property is sold within two years from the very date when it was owned by an NRI, it comes under the ambit of short term capital gains otherwise, if the house property is sold after two years, it is counted under long term capital gains. In the Budget of 2017, the period of three year was reduced to two years for calculation of capital gains.
But when the property has been acquired by way of inheritance, the NRI has to calculate the capital gains from the date when it was purchased from the original owner to see whether it will come under short term or long term capital gains and pay the tax accordingly.
The long term capital gains are taxed at the rate of 20 percent and e short term capital gains are taxed as per the normal tax bracket applicable.. When the NRI sells property, the buyer is liable to deduct the ‘tax deductable at source’ (TDS) at the rate of 30 percent, if property is sold within two years of purchase, and TDS of 20 percent if sold after 2 years.
The NRI can gift his property and remit the money outside India. But there are certain restrictions on gifting of property; in case of gifting of inherited property, it can be given only to the one who is a resident in India or NRI or PIO. In case the property is gifted to a non-relative, then the person receiving the property has to pay tax based on the market value of the property got as a gift.
A person who is NRI based on the income tax laws has to offer some part of his income earned from the inherited property in India. If the inherited house property is vacant that is if he/she has kept it for their stay when they are in India will be not covered under taxation. In contrast if they have more than a single house property including the inherited one and they are keeping it vacant than they have to chose one of them as self- occupied and has to pay notional rental income according the prevailing market rates. The NRI has to file his income tax returns in India based on income tax slab rates for NRI.
Yes, NRIs can rent their property in India and the income generated from it will be repatriated in NRE/NRO Account. It will be taxed in India and the rent payer has to deduct 30 percent TDS from the rental income. Any NRI whose total, income including rental income, is less than 1.6 lakhs rupees can avail TDS exemption.
Exemption can be availed under Section 54 of the Act and Section 195 mentions about provision of tax exemption certificate. Tax exemption is available on total capital gain on sale and only on long term capital gains on sale of house property. It must be noted that the house property should be self occupied or let out. The property to be sold can be acquired a year before the sale or 2 years after the sale of the property acquired by a person. The capital gains can also be invested in construction of a property in India alone, which has to be completed in 3 years. This exemption is only available for a single house property.. The new house property should be bought in India itself.
In case you are not able to invest the capital gains until the return filling date in the financial year in which the property is sold, it is mandatory to deposit that amount in any bank as per the Capital Gains Account Scheme, 1988 and this amount will be tax exempted.
Section 54F of the Act provides exemption on sale of any capital asset other than a residential house property. Under this provision, exemption can availed if the NRI has purchased a house property within one year from the date of transfer or after 2 years from the date of transfer of capital asset. Else, if it is under construction, it should be completed the within 3 years from the date of transfer of capital asset and also the house property should not be sold within 3 years .
Section 54 EC of the Act exempts if capital gains are invested in Bonds issued by National Highway Authority of India or Rural Electrification Corporation specified for this purpose only. These bonds cannot be sold within 3 years as it will be redeemed after that period. Investment in these bonds could be up to limit of fifty lakhs rupees. It has to be taken care that no TDS is deducted on capital gains or if deducted it will be refunded at the time of filing of return.
For repatriation the definition of NRI given in FEMA will be followed. The amount to be taken back from India by an NRI should not exceed US$ 1 million in one financial year.
When immovable property is purchased and sold: A person referred in Section 6(5) of FEMA or their successors except with prior permission of RBI cannot send money of sale proceeds outside India. When an immovable property is sold other than agriculture land or farm house the authorized dealer will allow repatriation of sale proceeds if all regulations of FEMA are met like the property sold was legally acquired at that time; the amount to be repatriated should not exceed the amount paid out of fund in FCNR Account or NRE Account or received from any other banking channel.
When immovable property is inherited: The NRI must produce the documents of the property acquired or inherited. The gains of the property that is sold, or the rent incomes, will be repatriated by NRO Account (Non Resident Ordinary rupee account). If remittances exceed the limit of US$ 1 million in a financial year, the prior permission of RBI is mandatory In case of a deed of settlement by parents or close relatives, tax clearance certificates and NOC from income tax authorities is to be presented for remittance.
The NRI has to obtain the certificate from a chartered accountant in India and submit it to the bank to get the money transferred abroad. The certificate is called Form 15CB Form 15CA has to filed with the tax authorities as well. All this procedure is to validate that the money which is being transferred abroad is legal.
NRIs can purchase any immovable property (other than agriculture land, plantation property, farm house) in India. NRI can also transfer any immovable property in India to any resident Indian. He/she can also transfer any immovable property (other than agriculture land, plantation property, farm house) to any other NRI or Person of Indian Origin (PIO). NRIs must ensure that they do not get caught with fake property dealers and thus, must seek legal advice. Remittance of funds from sales of property can be easily done following lawful procedure. The government and RBI are trying to boost investment of NRIs in India and are simplifying the laws for this. Since any immovable properties, whether purchased, sold or on rent, will be evaluated for tax purposes, NRIs must be care and conscious about their property dealings; each dealing must be well-thought out.Copyright 2023 – Helpline Law - HLL001