Tax Laws Every NRI Investor in Indian Real Estate Market Should Know!

Due to their emotional attachment to India, most non-residents of India living in countries such as the United States, Dubai, Singapore, Australia, and the United Kingdom search for various methods to send money back to the homeland. Overseas investments in India increased from USD 3.2 billion in 2011 to USD 7.6 billion in 2014-16. The Indian real estate sector has been a hotspot for NRI investments in India over time. NRIs typically invest in Indian real estate with the intention of returning and settling after they retire, or just to grow and accumulate money at home.

A non-resident of India who wishes to invest in real estate in India should be aware of the regulations governing the acquisition and sale of real estate, as well as the tax consequences of property income. Except for agricultural land, an NRI can purchase or finance any business or residential property in India. Agricultural or farmhouse properties can only be purchased or invested in if they are inherited or donated. The Foreign Exchange Management Act (FEMA) and Reserve Bank of India laws must also be followed and abided by the investment.

Also Read: NRI Investment in India – 101 Guide to Real Estate Investment

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.

Also Read: NRI Investment in India – Best Investment for NRI in India.

• 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

1. An NRI should obtain a Permanent Account Number (PAN) in India for investing here.
2. Only the income earned in India is taxable for an NRI, while income earned outside India remains untaxed.
3. Income from salaries, capital gains, rental income and interest arising from bank deposits in India are taxable income for an NRI.
4. Though income earned outside India is not taxed for an NRI, in some countries, the income that is exempt in India may be taxable.
5. Also, the interest income through NRE(non-resident account) and FCNR(Foreign currency no resident) are non-taxable in India.
6. 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.

Tax Exemptions

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

Also Read: Golden Rules For NRI Investments In India During Market Dip

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.

How to save tax on Capital Gains

NRIs can claim exemptions on long-term capital gains from the sale of a residential property in India under sections 54 and 54EC.

• Exemption under section 54

It is applicable if the NRI has made a long-term financial gain on the sale of his or her home. The dwelling property can be used by the owner or rented out. Please keep in mind that you only need to invest the amount of capital gains, not the total sale receipt. Of fact, the new property’s purchase price may be more than the amount of capital gains. Your exemption, however, will be restricted to the whole capital gain on the sale.  Additionally, you have the option of purchasing this property one year before to the sale of your current home or two years following the sale of your current home. You may also use the proceeds toward the construction of a home, but the work must be finished within three years of the selling date.

Only ONE dwelling property can be acquired or developed from capital gains to claim this deduction, according to the 2014-15 Budget.

This new dwelling property must also be located in India beginning with the assessment year 2015-16 (or financial year 2014-15). The exemption under section 54 would not be applicable for properties purchased or erected outside of India.

If you haven’t been able to invest your capital gains until the end of the financial year in which you sold your property, you can deposit them in a PSU bank or other banks under the Capital Gains Account Scheme, 1988. You don’t have to pay tax on it if you claim it as an exemption from your capital gains on your tax return.

• Exemption under section 54F

It is accessible when the sale of any capital asset other than a residential home property results in a long-term capital gain. To qualify for this exemption, an NRI must acquire or construct one home property within one year before or after the date of transfer of the capital asset, or within three years after the date of transfer of the capital asset. This new house property must be located in India and cannot be sold within three years of acquisition or completion.

Furthermore, the NRI shall not possess more than one home property (apart from the new house) and should not acquire or construct any other residential house during a two-year period or within a three-year period.

The full sale receipt must be invested in this case. Capital gains are totally exempt if the entire sale receipt is invested; otherwise, the exemption is given proportionally.

• Exemption is also available under section 54 EC

If you invest your long-term capital gains in specific bonds, you can save money on taxes. For this aim, bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC) have been designated. These shall not be sold before the lapse of 5 years (before to 2018, it was 3 years) from the date of sale of the house property and are redeemable after 5 years (prior to 2018, it was 3 years). 

It’s important to note that you can’t use this investment to offset any other expenses. You have a 6-month window in which to invest in these bonds, but you must do it before the return filing deadline to qualify for the exemption.

Also Read: Everything To Know About Long-Term Capital Gains On NRI Investments

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 a 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.

Also Read:  Foreign Remittance – New Tax Collected at Source(TCS) Law

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