Tax Implications for Non-Resident Indians (NRIs) Investing in Real Estate

Introduction

Investing in Indian real estate has always been an attractive proposition for Non-Resident Indians (NRIs). The booming property market in cities like Mumbai, Pune, Ahmedabad, and Gurgaon offers lucrative opportunities. However, understanding the tax implications for NRIs investing in real estate is crucial to make informed decisions and maximize returns.

This article will explore the key tax considerations, including income tax, capital gains tax, and other applicable levies for NRIs regarding real estate investments.

Understanding Income Tax for NRIs Investing in Indian Real Estate

When NRIs invest in Indian real estate, they are subject to income tax on rental income and capital gains tax on the sale of property. Here's a detailed breakdown:

Rental Income:

1. Rental income from a property in India is taxable under the head 'Income from House Property.
   • A standard deduction of 30% is allowed for repairs and maintenance.
   • Interest paid on a home loan for purchasing the property is deductible.
   • The remaining rental income is added to the NRI's total income and taxed as per the applicable slab rates.
2. As an NRI owning a house in India, you need to comply with Indian tax laws by opening a Non-Resident Ordinary (NRO) account to receive rental income. This income is treated as current income for the Financial Year and can be repatriated subject to tax compliance.
3. If the tenant is also an NRI, use an NRE account, but rental income cannot be transferred from a resident savings account to an NRE account.
4. Register the lease agreement online, validate the tenant’s Form 26AS, AIS/TIS for rent received and TDS deducted, and obtain the TDS Certificate (Form 16A).
5. Ensure the correct rent and TDS amounts are reflected in your Form 26AS, and inform the tax department if there is a mismatch.

Capital Gains Tax:

• Short-term capital gains (STCG): If the property is sold within two years of purchase, STCG is applicable. These gains are added to the total income and taxed at the applicable slab rates.
• Long-term capital gains (LTCG): If the property is sold after two years, LTCG is applicable at a flat rate of 20% with indexation benefits. Indexation adjusts the purchase price for inflation, reducing the taxable gains.

Tax Deducted at Source (TDS) on Property Transactions

For NRIs Selling Property

When an NRI sells property in India, Tax Deducted at Source (TDS) is applicable on the transaction. The rate of TDS varies based on whether the gains from the property sale are classified as long-term or short-term capital gains.

1. Long-Term Capital Gains (LTCG):
   • Definition: If the property is held for more than two years, the gains from its sale are considered long-term.
   • TDS Rate: The buyer must deduct TDS at 20% of the sale proceeds.
   • Additional Charges: This 20% TDS rate may be further subject to applicable surcharge and cess, potentially increasing the effective tax rate.
2. Short-Term Capital Gains (STCG):
   • Definition: If the property is held for two years or less, the gains from its sale are considered short-term.
   • TDS Rate: The buyer must deduct TDS at 30% of the sale proceeds.
   • Additional Charges: Similar to LTCG, the 30% TDS rate may be subject to additional surcharge and cess, potentially raising the total tax liability.
3. Lower or Nil TDS Certificate
   • NRIs have the option to apply for a lower or nil TDS certificate if their actual tax liability is lower than the standard TDS rates.
   • This certificate, issued by the Income Tax Department of India, can significantly reduce the amount of TDS deducted at the time of the property sale.
4. Benefit:
   • Cash Flow: Obtaining this certificate helps improve cash flow for the NRI seller by ensuring that only the actual tax liability is deducted rather than the higher standard TDS rate.
   • Ease of Transaction: It simplifies the transaction process for both the buyer and the seller by clarifying the exact amount of TDS to be deducted.
5. Compliance for Buyers
   • Responsibility: On purchases of a property from an NRI, the buyer is responsible for ensuring TDS is deducted correctly. Failing to deduct TDS or deducting it at an incorrect rate can result in penalties and interest charges.
   • Deposit and Reporting: The deducted TDS must be deposited with the Income Tax Department within the prescribed timelines. The buyer must also report the transaction and TDS deduction through Form 26QB and provide a TDS certificate (Form 16B) to the NRI seller.

By adhering to these guidelines and understanding the implications of TDS on property transactions, NRIs can effectively manage their tax liabilities and ensure smooth property sale processes in India.

=> Read Also:- Ahmedabad Development Plan: Master Plan and Future Possibilities

For NRIs Buying Property:

1. Types of Property NRIs Can Purchase
   • NRIs (Non-Resident Indians) and OCIs (Overseas Citizens of India) have the privilege of investing in a wide range of properties in India. However, there are specific restrictions to keep in mind:
2. Permitted Purchases:
   • Residential Property: NRIs and OCIs can purchase multiple residential properties in India without any restriction.
   • Commercial Property: Investment in commercial properties is also allowed, providing opportunities in the burgeoning commercial real estate market.
3. Restricted Purchases:
   • Agricultural Land: NRIs and OCIs are generally not permitted to buy agricultural land in India.
   • Plantation Property: The purchase of plantation properties is also restricted.
   • Farmhouses: Similarly, buying farmhouses is not allowed for NRIs and OCIs.
4. Tax Deducted at Source (TDS) on Property Purchases for NRIs
   • When it comes to TDS on property purchases, different rules apply based on whether the seller is a resident Indian or another NRI.
   • Purchasing Property from a Resident Indian: If an NRI buys property from a resident Indian and the property price exceeds ₹50 lakh, the buyer must deduct TDS at the rate of 1%. The deducted TDS must be deposited with the Income Tax Department and reported accurately, ensuring that all legal obligations are met.
   • Purchasing Property from Another Non-Resident: When purchasing property from another non-resident, TDS is higher and deducted at the maximum rate, typically 30%. This rate may also include an additional surcharge and cess, leading to a potential total deduction of up to 39%. This higher rate ensures compliance with tax regulations and aims to prevent tax evasion in cross-border property transactions.
5. Ensuring Compliance
   • Document Verification: Ensure that all property documents are thoroughly verified and are in order. This includes title deeds, encumbrance certificates, and any necessary approvals from local authorities.
   • Legal Assistance: It is advisable to seek legal assistance to navigate the complexities of property laws and to ensure all transactions are legally sound.
6. Tax Obligations: Stay informed about your tax obligations in India and your country of residence. To avoid legal complications, NRIs must comply with the tax regulations in India, including timely deduction and deposit of TDS.

By adhering to these guidelines, NRIs can ensure a smooth and compliant process when buying property in India, leveraging the benefits of the Indian real estate market while staying within the bounds of legal and regulatory requirements.

Deductions and Exemptions Available to NRIs

Section 80C:

NRIs can claim deductions under Section 80C up to ₹1.5 lakh for investments in specified instruments, including principal repayment on home loans.

Section 24:

• Interest on home loans can be deducted up to ₹2 lakh for a self-occupied property.
• For rented properties, there is no upper limit on the interest deduction.

Exemption on LTCG:

NRIs can avail of exemptions on LTCG under Sections 54 and 54EC by investing in another residential property or specified bonds within the stipulated time frame.

Double Taxation Avoidance Agreement (DTAA)

India has a DTAA with several countries to avoid double taxation. This agreement ensures that NRIs do not pay tax on the same income twice in their country of residence and India. NRIs can claim credit for taxes paid in India while filing their tax returns in their resident country.

Reporting and Compliance Requirements

1. Filing Income Tax Returns:
   • NRIs must file their income tax returns in India if their total income exceeds the basic exemption limit.
   • They must also report all foreign assets and income while filing returns.
2. FEMA Regulations:
   • NRIs must follow the regulations under the Foreign Exchange Management Act (FEMA) when buying or selling property in India.
   • The property must be acquired using funds remitted through normal banking channels or NRE/NRO/FCNR accounts.

=> Read Also:- Pune Development Plan: Exploring the Master Plan and Future Prospects

Conclusion

Understanding the NRI tax implications for real estate is essential for making profitable investments in Indian cities like Mumbai, Pune, Ahmedabad, and Gurgaon. By being aware of the tax rules and utilising available deductions and exemptions, NRIs can maximize their investment returns and ensure compliance with Indian tax laws.

When considering investing, it is advisable to consult with tax experts and legal advisors to navigate the complexities of real estate taxation effectively. For those looking to explore properties in these cities, Adani Realty offers a range of options, including ready-to-move properties in Ahmedabad and luxurious penthouses in Shantigram.