Tax implications of buying property abroad
Indians nowadays are increasingly buying properties overseas, particularly in London, New York, Singapore and Dubai. It is critical for them to study foreign exchange regulations and tax provisions of the relevant country as well as India before they make buying decisions. Some of the important aspects to be noted in this regard from Indian perspective are mentioned below:
Foreign exchange regulations: Under the Indian foreign exchange regulations, the limit for permissible remittance outside India (including for investing in property) by resident individuals is cumulatively $2,50,000 in a financial year per person. Each member of a family can remit out of his/her own balance $2,50,000 per financial year for the purpose of acquisition of property.
Taxation of rental income: If a person, who has invested in immovable property abroad, earns rental income, then he/she may have to declare such income in India as a resident. Ordinarily, resident individuals are subject to income tax on their worldwide income. Accordingly, the rental income from immovable property held abroad will also be taxed in India. The majority of tax treaties, which India has signed, provide taxing rights to both the countries, i.e. country of residence and the country where the immovable property is located. Further, wherever the tenant withholds tax as per tax laws of the foreign country, the person may claim tax credit withheld abroad against his tax liability in India. For this purpose, the person needs to obtain certain documentations like proof of tax paid abroad.
Disclosure requirement of foreign asset and income: Residents and ordinarily resident individuals are required to disclose the details of immovable property held outside India at any time during the previous year in income tax returns. Details in relation to property, like the country of investment, address of the property, date of acquisition, total investment, nature and amount of income derived from property.
Abolition of wealth tax: The Wealth Tax Act, 1957 has been abolished with effect from April 1, 2015. Prior to that, if a person (resident in India) was buying properties abroad in his own name and was already holding property in India, there was wealth tax implication (one house property was exempted).
The wealth tax was leviable @1 per cent on certain specified assets, including house property, if an individual who possessed a net wealth in excess of Rs. 30 lakhs. With the abolition of wealth tax, an individual can buy house properties without any wealth tax implication.
Capital gain exemption: Earlier, in the absence of clarity in the income tax provisions pertaining to reinvestment of capital gain in house property abroad, the benefit of capital gain tax exemption under section 54/54F was allowed. It is pertinent to note that after the amendment by the Finance Act, 2014 w.e.f. FY 2014-15, in order to claim capital gain exemption, ‘the purchase /construction of residential house must be in India and not outside India.’
