The tax implications for NRIs buying property in India

The falling rupee and the lull in the property market in many cities are attracting Indians settled abroad to consider property investments in India. Non-resident Indians are allowed to purchase residential or commercial property in India but not agricultural land / plantation property / farm house, says Amarpal S. Chadha, Tax Partner, EY. There are no upper limits for inward remittances and normal banking channels and NRE, NRO or FCNR accounts can be used.

NRIs can also take interest-free loans from close relatives who are resident in India. The lender is subject to the FEMA limit of $200,000 per financial year under the Liberalised Remittance Scheme. NRIs are also subject to TDS withholding (at the rate of 1 per cent) for property purchases over Rs 50 lakh.

We look at the tax implications for a non-resident Indian when buying, selling or renting property.

How would the rent received from the property be treated?

Rent received is taxable in India and NRI has to file a tax return in India in case the rent received along with other income exceeds the threshold limit.

The rent may be additionally taxed in the NRI’s country of tax residence. There may be some tax relief available under the Double Tax Avoidance Agreement (DTAA) for NRIs who are tax residents in certain countries. This may allow one to get credit for Indian taxes paid.

What are the deductions one can get against the property?

It is the same as for residents. Municipal taxes paid during the year and housing loan interest payment are deductible. Standard deduction of 30 per cent of the net rent (gross rent less municipal taxes) can be obtained for repair and maintenance, irrespective of actual expenditure.

Housing loan principal repayment, stamp duty and registration charges are allowed as deduction from one’s gross income under the overall limit of Rs 1 lakh per year, under Section 80C.

How does one handle a vacant property?

Again, treatment here is similar to a resident. A property which is not rented out is treated as a self-occupied property and the taxable value is NIL. The only deduction available against such property is interest on housing loan up to Rs 1.5 lakh per year. When there are more than one property that is not rented, then the owner can choose one property as self-occupied and all the other un-rented properties shall bedeemed to be let out, even if not actually let out. For these, the rent that the property would likely fetch is considered as gross rent and all other deductions as applicable for a rented property will be allowed.

Deduction for principal repayment on housing loan can be obtained on all property, whether it is rented, self-occupied or deemed to be let out.

How is wealth tax applicable for NRIs?

An NRI is exempt from wealth tax on a property that has been rented for more than 300 days. Also, one vacant house property can be declared as self-occupied property and is exempt from wealth tax. The value (net of outstanding loans) of second and subsequent vacant properties would be subject to wealth tax, at the rate of 1 per cent on the value in excess of Rs 30 lakh, says Parizad Sirwalla, Practicing Chartered Accountant, KPMG.

What are the tax payments to consider during a sale?

NRIs are subject to capital gains tax in India, similar to what is applied to residents. They can get long-term capital gains rate for property held for over 36 months and can claim exemption by investing in another house property or specified bonds. Capital gains may also be taxable in the NRI’s country of residence. Relief may be available in the form of credit for Indian taxes paid, in case the NRI is a tax resident of a country with which India has a DTAA.

Are there any limits on the amount that can be repatriated?

Limits and conditions for repatriation are different based on the funds used for buying property. If the property was acquired as per the foreign exchange laws, the amount of repatriation is restricted to the extent of the initial purchase cost of the property. For example, assume the purchase price was $100,000 (Rs 40 lakh, with an exchange rate of Rs 40) and the sale price was Rs 75 lakh. Assuming the prevailing exchange rate at the time of sale is Rs 60, one can repatriate Rs 60 lakh ($100,000).

Gains made on foreign source funded properties (Rs 15 lakh in the example above) as well as all proceeds from property purchased with rupee sources, can be repatriated under the general limit of Rs 10 lakh per financial year.