Tax tips for NRIs investing in India

Non-Resident Indians (NRI) constitutes a significant portion of buyer percentage when it comes to real estate transactions in India. Irrespective of constituting a considerable portion, they still face a lot of hassles in the process of taxation when buying or selling properties.

Rajan Pillay representing his client who is an NRI asked Magicbricks, “My client purchased a flat around 10 years back when he was working in India. Now, for the last three years he is working outside India. He wants to sell this flat. Is he liable to pay 20 per cent income tax as an NRI?

Vaibhav Sankla, director, H&R Block India Private Limited says, “Sale of the flat will give rise to long-term capital gains which are taxed at 20 per cent, plus applicable surcharge and education cess. There are few important points that one should take a note of by your client.”

Find below the details:

i) The taxpayer would be eligible for indexation benefit. This means that the cost of the house would be multiplied by the cost inflation index of the year of sale and would be divided by the cost inflation index for the year of purchase. These indices are notified by the income tax department every year. This would result in an increased cost of the house for calculation of capital gains and would result in lowering the amount of long-term capital gains

ii) While calculating the amount of long-term capital gain, s/he can claim a deduction on the expenses related to sale such as brokerage fees, travel expenses, etc.

iii) The taxpayer can claim exemption from the long-term capital gains by reinvesting in another house in India. The amount of deduction is lower of the cost of the new house and the amount of long-term capital gain. Therefore, if the cost of new house is equal to or more than the amount of long term capital gains, Therefore, if the cost of new house is equal to or more than the amount of long term capital gains, the entire gains are exempt from income tax.

The new house should be purchased either within 2 years from the date of sale of the old house or within a year before the date of sale of the old house. Further, if such investment cannot be made by the due date for filing the tax return for the year of sale, the amount should be invested in a capital gains deposit scheme with a nationalized bank. The balance in the account can be utilized for making the payments towards the purchase of the house within the stipulated period

iv) Alternatively, the taxpayer can claim an exemption by investing in capital gains tax saving bonds. Investment in such bonds should be made within 6 months from the date of sale of the house. The amount of exemption is lower of the amount invested in bonds and the amount of long-term capital gains. The maximum amount which can be invested in the bonds is restricted to Rs 50 lakhs. The bonds are locked in for a period of 3 years and carry interest @ 6 per cent per annum. Interest on the bonds is taxable

v) The taxpayer being a non-resident may suffer a TDS of around 23 per cent on the transaction value. An application can be made with the income tax department for a lower or nil rate of TDS.

vi) The taxpayer should check the income tax implications in the country of his residence. Countries such as US, Australia, Canada, etc. require their residents to pay income tax on their worldwide income. And in case the taxpayer is liable to pay income tax in the country of residence a) he would receive a credit of income tax paid in India on such gains, and b) In most cases, he is better off paying income taxes in India rather than claiming exemption by reinvesting in bonds or another house.

Satish Kohli another NRI living abroad for the past five years asked, “I have paid all property tax dues till date. How much per cent tax is applicable to pay while selling a Rs 2 crore property if I don’t intend to reinvest in India?

While understanding that the property owned by Kohli is in the nature of a house and is in the nature of a long term capital asset (meaning holding period > 3 years), Sankla says, “If the total taxable income of your property in India for the year exceeds Rs 1 crore then including surcharge and education cess, the income tax rate would be 23.07 per cent. Otherwise, it would be 20.6 per cent (includes basic income tax @ 20 per cent and education cess @ 3 per cent of income tax).”

“If you are required to pay income tax on this capital gain in the country of your residence, you would be able to the claim credit of income tax paid in India,” he added.