Tax laws applicable for investing in Indian Real estate
Most Non-residents of India settled in different countries lookout for various ways to send back money to the motherland out of their emotional connect. In India, Overseas investments have raised up from USD 3.2 billion from 2011-13 to USD 7.6 billion during 2014-16. The Indian Real estate market over time has emerged as a hot spot for NRI investors. NRI’s usually invest in Indian Real estate with a thought of moving back and settling once they retire, or just for building and acquiring wealth at home.
A non-resident of Indian who’s planning to invest in a property in India should be aware of the concerning rules for purchase and sale of the property, as well as the tax implications for income earned from the property. In India, an NRI can buy or finance any kind of Real Estate property commercial or residential property, except for agricultural land. An investor cannot buy or invest in any kind of agricultural or farmhouse unless it is inherited or gifted. Also, the investment must follow and abide by the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India regulations.
Here are a few important regulations and laws about NRI investments in India.
Financing the investment: Investors can make a payment for the investment through normal banking channels. Non-resident ordinary (NRO), non-resident external (NRE) or foreign currency non-resident (FCNR) accounts can be maintained in India by the investor for funding an investment. NRIs can transfer the money to their NRO account in India and pay the seller from there or can directly transfer the amount to the account of the seller in India using normal banking channels.
Repatriation of funds: According to rules under FEMA, repatriation of proceeds from the sale of a property cannot exceed $1 million in a financial year. Only if the property is inherited or gifted to the NRI, there is an exception that they may repatriate more than $1 million per financial year. There is no restriction on NRIs repatriating rental income or even property sale proceeds as long as the total proceeds are within the set limit of USD1 million in a fiscal year.
However, there are a few conditions.
- The property sold must be acquired in compliance with foreign exchange regulations and the amount being repatriated cannot exceed the sale proceeds from the transaction.
- Only sale proceeds from a maximum of two residential properties can be repatriated.
- The maximum amount of repatriated funds from a Non-Resident Ordinary (NRO) account is capped at $1 million per fiscal year. Funds can be repatriated only after paying all applicable taxes and other charges.
- If the property is purchased with money received through inward remittance or debiting of NRE/FCNR/NRO account, the entire principal amount can be repatriated outside India immediately, while the balance must be deposited in an NRO account.
- NRIs must get a certificate from a chartered accountant (CA) in India, issued in a form called 'Form 15CB' to repatriate.
TDS and other rules:NRIs need to consider certain rules when buying, selling or renting out a real estate property.NRIs need to deduct TDS at the rate of 1% of the property value if the property’s value is above 50 lakh. While buying the property, NRIs have to withhold TDS from the price payable to the seller. On the sale of the asset, the buyer will deduct TDS from the amount payable to the NRI and the NRI can transfer the amount outside India or to his or her NRE account after paying due taxes. The TDS rate, in this case, is 30% for the short term and 20% for the long-term of the property value.
According to Indian law, any Indian resident or non-resident having an income of 250,000 Indian rupees earned in India should file their income tax returns.
NRIs earn returns from their investments in real estate, in the form of rental income and short or long-term gain.
Rental income earned in India is taxable irrespective of the residential status of the investor. Rental income is taxed under the head of Income from House property. The rental income of an NRI is nontaxable if it is occupied by a family member of the NRI.
Short-term capital gains:
Short-term capital gains refer to the profit earned through the sale of a property, within two years of its purchase. The difference between the sale proceeds and the cost of acquisition is the capital gain acquired through the sale of the property. It is taxed at a rate of 30%.
Long-term capital gains:
When the property is held for more than two years the income generated is regarded as Long-term capital gains that are taxed at a rate of 20 percent. But capital gains have the advantage of the exemption can be claimed under sections 54, 54 F and 54 EC. Long term capital gains are benefitted by low tax rates comparatively. The investor need not pay tax for capital gains if the gain is less than 250,000 Indian rupees.
Real estate investments can help you in building a good amount of wealth with proper planning. When considered for the long term it is also benefitted with less taxation, low risk, and high returns. Proper awareness about tax laws and related regulations will also help you taking apt decisions about your investing. Taking advice from an expert will also help you make the best out of your investment.