Non Resident Indians (NRIs) always scout for options to invest their foreign exchange earnings in the Indian market. Investment in real estate has always been the preferred choice for the NRIs, especially after the rupee depreciation. Ease in Indian regulations and taxation has resulted in a spurt in investment, especially in the last decade.
This article decodes the regulations for the investment in real estate by NRIs and its impact on taxation.
FEMA empowers the Central Government to prescribe, in consultation with the RBI, rules pertaining to capital account transactions. Reserve Bank frames regulations to prohibit restrict or regulate the acquisition or transfer of immovable property in India by certain person residents outside India.
Acquisition of Immovable Property
Foreign Exchange Management (Non Debt Instruments) Rules 2019 permits an NRI or an OCI to acquire immovable property in India other than:
1. Agricultural land or
2. Farm house or
3. Plantation property.
Consideration for the acquisition of the immovable property should be made out of the:
1. Funds received in India through banking channels.
2. Funds paid through NRO/NRE or FCNR(B) Account
Acquisition by way of Gift: An NRI or an OCI can acquire any immovable property in India (except agricultural land/farmhouse/plantation property) by way of gift from a person resident in India or from an NRI or an OCI but they have to be a relative as defined under the Companies Act.
Transfer of Immovable Property
An NRI or an OCI may transfer any immovable property in India by way of sale to any person resident in India, an NRI or an OCI. However, in the case of transfer of agricultural land or plantation property or farmhouse, it can be transferred only to a person resident in India.
Provisions for Repatriation of Sale Proceeds
As per FEMA, in the event of the sale of immovable property other than agricultural land/farmhouse/plantation property in India by NRI / PIO, the Bank will allow repatriation of sale proceeds outside India provided;
i. The immovable property was acquired by the seller in accordance with the provisions of the law in force;
ii. The amount for acquisition of the immovable property was paid in foreign exchange received through banking channels or out of funds held in a Foreign Currency Non-Resident Account or out of funds held in Non-Resident External account;
iii. In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.
Kindly Note: In the case where an NRI or an OCI has acquired the immovable property when he was a resident in India or he has inherited from a person resident in India, the sale proceeds can only be credited to his NRO account. Repatriation from NRO account is limited upto $ 1 Million in a Financial year.
Provisions for Specific Countries
On acquisition or transfer of immovable property in India by citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau or the Democratic People’s Republic of Korea (DPRK), prior permission of the Reserve Bank is required. In case of a lease not exceeding five years, there is no requirement of prior permission.
Tax Implications on sale of Immovable Property
Since the immovable property qualifies as a “Capital Asset”, any profits or gains arising from the transfer of a capital asset shall be charged under “Income under the head Capital Gains”.
In the case of immovable property, the determination of income tax shall be determined depending on the period of holding.
Exemptions: NRI or an OCI can avail exemption from the long term capital gains by investing the sale proceeds on the purchase of one residential house in India within 1 year before or 2 years after the date of sale, or constructing a house within 3 years after that date of sale. Union Budget 2023 has proposed that the maximum cap of the exemption is limited to Rs. 10 Crores.
NRI can also avail exemption from long term capital gains upto Rs. 50 Lakhs under Section 54EC of the Act, if he invests in specified Government Bonds.
Tax Deducted at Source Provisions: In addition, whenever any property is sold by NRI in India, the buyer is liable to deduct TDS under Section 195 of the Income Tax Act, 1961, irrespective of the amount or nature of the payment. at the rate of 20% in the Long term capital gain and 30% in the case of Short Term Capital Gain. Additional, surcharge and cess would also be levied on these amounts.
However, if the tax liability of the NRI is lower, NRI can file an application in Form 13 with the Income Tax Department for Nil/ Lower deduction of TDS. The department computes the Capital Gains of the seller and issues a certificate, according to which the buyer is required to deduct the TDS.
Also, to repatriate money outside India received on the sale of property in India, the NRI would be required to submit Form 15CA & Form 15CB as per Income Tax Act to the Bank.
Many Countries levy tax on the sale of property by their Residents irrespective of the location of the property. However, to avoid the levy of double taxes, India has entered into Double Taxation Avoidance Agreements (DTAA) with several countries. These agreements state that if a person has paid Tax on the sale of property in India, then he can get a tax credit of the taxes paid in India which will reduce his tax liability in the other country by making proper disclosures.
All the above points are required to be considered while purchasing or sale of an immovable property situated in India by an NRI or an OCI. In case of any clarification or issues, feel free to contact us at connect@osganconsultants.com
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