Tax Implications for Interested NRI Property Buyers in India
A decision to purchase residential property is crucial and a long-term investment. There are several tax aspects to it. Owning a property is undeniably one of the greatest Indian dreams. It does not matter which part of the world you live in. A home in India is simply a must. The falling rupee and the ease in property market in many Indian cities are attracting NRIs to consider property investments in India. To add on, the Indian laws, over the years, have made this a fairly easy job. The Reserve Bank of India governs such transactions and they fall under the purview of the Foreign Exchange Management Act (FEMA).
Here are a few Tax implications for NRIs when buying, selling or renting property:
Ownership of property in India by an NRI : A non-resident Indian can buy either a residential property or a commercial property in India. Further, there is no limit on the number of residential or commercial properties that an NRI can purchase in India. However, the exception is, an NRI cannot buy agricultural land, plantation land or a farm house in India. He cannot even acquire such property as a gift. There is however, no bar on inheriting such property.
Income taxes applicable on house properties in India: According to the Indian Income Tax Act, if a person, whether resident or NRI, owns more than one house, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property. The other one, whether you rent it out or not, will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property, based on certain valuations prescribed by the income tax rules and pay the tax thereof.
The Income Tax Act does not specify if either or both these properties must be situated only in India. At the time of drafting the Income Tax Act, one did not envisage a situation where an Indian would own properties overseas. But now, more and more Indians are settling abroad. So from the reading of the Act, the rule of ‘more than one property’ will apply to global properties. What this means is that if you are an NRI and own only one property globally and that property is in India, you would not have to pay any income tax on it in India. However, let us say you are an NRI resident in USA. You own and live in a house in USA. You also own a house property in India. Even if you do not give the property in India on rent, you would have to pay income tax on deemed rent in India. The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act.
Home loans: The RBI allows NRIs to take home loans for buying property in India. You can also take a loan for repairs and renovations of your home. In recent years, India has been witnessing unprecedented growth in the real estate sector fueled by the increased business activity.
Real estate development in India is estimated at $12 billion and growing at 30% every year. Though all segments of real estate business such as corporate, retail and residential have been driving this growth, investment in residential property itself constitutes 80% of this sector.
Non-Resident Indians are one of the key contributors to the growth of the real estate industry and considering the immense potential in India, they are likely to step-up the investment in future.
Exchange control regulations: The Indian government has considerably eased the restrictions relating to investments by NRIs in house property. There is virtually no restriction or approval required for an NRI to invest in properties in India from funds received in India through normal banking channels or held in Non-Resident External (NRE) account/ Foreign Currency Non-Resident (FCNR) account (B)/ Non-Resident Ordinary (NRO) rupee account.
Sale/ Repatriation: An NRI can freely sell or gift his/ her property to another Indian resident or NRI or person of Indian origin. However, there are certain restrictions imposed on repatriation of sale proceeds. In case of investments made from inward remittances or out of NRE account or FCNR account (B), the repatriation of sale proceeds is permitted only up to the amount of initial investment. In case the repatriation is made out of balances held in NRO rupee account, where balances include sale proceeds of house property, then an amount of $1 million per calendar year can be repatriated. One of the significant restrictions placed on repatriation is that the NRI can repatriate the sale proceeds only up to two residential properties. This could dampen the interest of NRIs in residential property, as investors would like to have free flow of capital while making such investments.
Income tax: The income tax implications on house property income in India would be dependent on whether the property is kept vacant or let out. In case an NRI has only one property in India and if it is kept vacant, then it would be possible to say that there should not be any rental value for such property as the NRI was not able to occupy the same owing to his employment, business or professional carried out at any other place.
However, if he owns two properties and both of them are kept vacant, then he is required to pay income tax on one of the properties as if the property had been let out. The tax laws do not provide clear guidance on how the rental value is to be determined for such property. It simply states that the annual rent should be the sum which the property might reasonably be expected to let from year to year. In case of let out properties, the actual rental income, after reducing the municipal taxes, would be subject to tax. The tax law allows a general deduction of 30% on the rental income and also allows for deduction towards interest subject to certain conditions.
Tax payments: Under Indian tax law, the payer is required to withhold tax on rental income paid to a non-resident @ 30.6% where the income of the non-resident does not exceed Rs 10,00,000, otherwise at 33.66%. In case an NRI wishes to have a lower rate, then he has to apply to the tax authorities in a specified format for obtaining a certificate for deduction of tax at lower rate. The NRI would be required to file a return of income at the end of the year if the taxable income exceeds Rs 100,000. In case the NRI is taxed in the home country on the rental income derived from India, then he could consider claiming exemption or tax credit in the home country based on the double tax treaty agreement entered into India with such country, if any.
Other aspects: It is common practice to have joint ownership of properties by a husband and wife. However in case an individual intends to split the income between himself and his wife for tax purposes, then it is important to establish that both of them contributed for the investment in property and the share of ownership is clearly outlined. In case the entire investment is made by one person, then in all likelihood, the entire income would be taxable in that individual’s hands on account of the clubbing provisions that exist in India though the property may be jointly held.
