Tax Laws for NRI Investments into Indian Real Estate – A Complete Guide
Most Non-residents of India settled in different countries like the USA, Dubai, Singapore, Australia, UK, etc. look out for various ways to send back money to the motherland out of their emotional connection. In India, Overseas investments have raised 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 Real Estate property commercial or residential property, except for agricultural land. An investor cannot purchase or invest in any 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 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 fiscal 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 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. At the same time, 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.
Income Tax Regulations
- An NRI should obtain a Permanent Account Number (PAN) in India for investing here.
- Only the income earned in India is taxable for an NRI, while income earned outside India remains untaxed.
- Income from salaries, capital gains, rental income and interest arising from bank deposits in India are taxable income for an NRI.
- Though income earned outside India is not taxed for an NRI, in some countries, the income that is exempt in India may be taxable.
- Also, the interest income through NRE(non-resident account) and FCNR(Foreign currency no resident) are non-taxable in India.
- Except for capital gains, all the other income of NRI earned in India are taxed at a slab rate which is the same as a resident of India.
NRIs obtain certain tax exemptions on fulfilling prescribed conditions. Incomes such as dividend income, long-term capital gains arising from the sale of equity shares, are exempt from tax.
NRIs are also entitled to claim deductions and exemptions just like the residents of India:
a. Deductions Under Section 80C
- Deduction of up to Rs 1.5 lakhs is allowed under Section 80C from total gross income for an NRI individual.
b. Deductions Under Section 80C, Applicable to NRIs are:
- Life insurance policy premium paid on the NRI's name, their spouse or any child's name.
- Tuition fees paid to an educational institution in India for the education of any two children of an NRI.
- Repayment of loan taken for buying a residential house property is also eligible for deduction.
- Unit-linked insurance plan (ULIPS) premium paid by an NRI is eligible for deductions
- Investments in ELSS allows NRI's to claim a deduction up to Rs 1.5 lakhs
Filing Tax Returns
NRIs need not file a return of income if their total income includes only investment income and long-term capital gains. Also, NRI's don't have to register income tax returns if you don't have any income here. However, if you accrue income in India through capital gains, rent, dividend or interest is beyond the threshold limit, you will have to file tax returns.
Tips on Tax-Saving
NRIs can save on these taxes by investing in tax saving insurance policies or mutual funds Pension plans are also great if you are planning to save tax. The repayment amount of home loan is also eligible for deduction up to 1 lakh, so buying a house property taking a loan will be great to save tax. You can buy a health insurance policy for yourself or your family and claim deduction up to 35,000 or just put your money in tax-saving bonds. These are a few ways NRI's can earn income and save paying tax as well.
Yes, NRI’s are liable to pay 1% on the sale consideration as TDS when buying a property which should be deducted from the property price payable to the seller.
If the NRI’s liable tax amount is less than the TDS that is applicable he/she can claim a refund on the excess amount paid.
All the income in the form of salaries, capital gains, and short term gains earned in India, a certain percentage is to be paid as a tax by an NRI.
NRI’s can claim tax exemptions on the sale of house property according to sections 54, 54F and 54EC and thus save tax on capital gains.