Tax talk: How property deals in India affect NRIs’ tax outgo

FOR NRIs wishing to invest in property in India, there are a variety of factors to be considered.

A NRI can transfer any immovable property held to an Indian resident. However, he can transfer the property in India (other than agricultural land, plantation property and farm house) to a person resident outside India only if the transferee is an NRI or a PIO.

FOR NRIs wishing to invest in property in India, there are a variety of factors to be considered. These include income-tax and foreign exchange regulations, among others. Under the exchange control regulations, there is a specific definition of a non-resident Indian (NRI) in the context of acquisition and transfer of immovable property.

An NRI is an Indian citizen who resides outside the country. Further, a PIO is defined as an individual who, at any time, held an Indian passport, or who, or either of whose father/mother or whose grandfather/grandmother were a citizen of India. Certain nationals are, however, not eligible for this status.

A liberalised foreign exchange regime allows NRIs/PIOs to invest in property except for agricultural land, plantation property and farm house in India. An NRI/PIO can buy a property with the funds remitted from abroad through normal banking channels, or through the balance held in any non-resident account (NRO/NRE/FCNR) in India, in accordance with regulations.

A NRI can transfer any immovable property held to an Indian resident. However, he can transfer the property in India (other than agricultural land, plantation property and farm house) to a person resident outside India only if the transferee is an NRI or a PIO. There are separate rules for PIOs in this regard.

On transfer of the property, an NRI/ PIO can repatriate his investment and its appreciation as follows:

Where the initial investment was made through an NRE or FCNR account or from remittance abroad, there is no cap on repatriation of the amount of initial investment. Such repatriation is restricted to a maximum of two residential properties acquired by way of purchase. Any balance sale proceeds that cannot be remitted based on these limits can be credited to the NRO account and remitted under the $1-million facility available to NRIs every financial year.

For instance, X, an NRI, purchased a house in 2004 for $60,000 by remitting money from his US bank account and has sold it in 2015 for $150,000. He could, therefore, remit his original investment of $60,000 (assuming that this is either the first or second remittance on sale of property purchased by him) and the balance $90,000 that has been credited to his NRO account can be remitted under the $-1 million facility.
Where the initial investment was made through an NRO account/rupee-denominated account, the initial investment, along with the appreciation, would be covered under the liberalised foreign exchange regime wherein NRIs could remit up to $1 million.

An NRI should also be aware of certain withholding tax obligations at the time of purchase of the property. Further, any income accruing from such an ownership in the form of rent (if it is actually let out) /notional rent (applicable in certain situations) would be subject to tax in India as per the normal provisions of tax laws. NRIs will be entitled to avail of all tax deductions available to Indian residents.

Short-term capital gains are taxed as normal income at applicable slab rates. Long-term capital gains attract tax at 20%. For the purpose of calculating capital gains, the cost of acquisition would be eligible for indexation even if the acquisition is funded by inward remittance of foreign exchange.

The NRI will also be required to file tax return for such income and taxes paid on it. As NRIs may also have to pay tax on the income generated from real estate investment in India in their country of residence, they should check for the relief available under the domestic tax law of that country and the applicable double-tax avoidance agreement, if any.