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The rental income and short-term and long-term capital gains on the sale of property by NRI are liable to tax. They are eligible to certain exemptions like section 54, 54EC and 80C. This guide by H&R Block India explains the same.

Property Taxation for NRIs

Last Update Date : June 26, 2018

property taxation for nris

The word Repatriate means to send someone/something back to their/it’s home country. We often hear NRIs fussing over ways and the extent to which they can repatriate their Indian income from the property. There is a fair amount of confusion around the tax treatment to be given to property owned by NRIs in India.

Thus, for clear understanding, one must be able to identify a ‘non-resident Indian’ status. A non-resident Indian (NRI) is a citizen of India who holds an Indian Passport and has temporarily emigrated to another country for 6 months or more for employment, residence, education or any other purposes. To be precise, he/she must stay outside India for more than 182 days during the preceding financial year, between April 1st to March 31. For an NRI, income earned/collected in India exceeding rupees 250000 (excluding income taxable at a special rate like capital gain) is chargeable to tax in India.

Tax Implications on Property

NRIs tend to invest money in real estate in India. However, not all of them are aware of the tax implication of their properties in India.

Property income in India may be from two types of sources. Either by renting out the property or selling it off.

Rental Income

Income tax on Rent received by NRIs is taxable under the head House Property and is levied the same way as it is for Resident Indian.

  1. Out of the total rent received by the NRI, Municipal taxes are first allowed to be reduced.
  2. After that, from the balance amount – 30% is allowed as standard deduction and deduction for interest paid on home loan is allowed.
  3. In case if NRI owns more than one property but neither let out nor is used for residential purposes, then one can be claimed as self-occupied but notional rent is calculated, and tax is applicable on that the remaining properties.

Capital Gains

Capital gains to the NRIs will be either short term or long term based on the period of holding of the asset (property). In the case of capital gains, the cost of the property is the cost to the previous owner.

  1. When the asset is sold off within 2 years (from budget 2017-2018) of purchase, it is classified as short-term capital gains and chargeable to tax as per income tax slabs applicable to NRIs.
  2. When the asset (other than immovable property and shares) is sold off after completing a period of 3 years, it is classified as long-term capital gains and is taxed at 20% plus cess and surcharge after indexation. In case of immovable property, it is treated as long-term if it is held for more than 2 years.

Tax Exemptions

NRIs also enjoy exemptions on their capital gain income from the sale of the property. Following are the tax exemptions available to an NRI:

  1. Section 54 – Under this section, if NRI sells a residential property after two years from the date of purchase and reinvests the proceeds into another residential property within two/three years from the date of sale, the profit generated is exempt to the extent of the cost of new property. However, NRIs cannot invest the proceeds on the sale of property in India in foreign property and still avail the benefit of section 54. The exemption shall be limited to the total capital gain on sale. The property may be purchased one year before the sale or two years after the sale, in case of construction the period becomes three years.
  2. Section 54EC – If an NRI sells off a long-term asset, i.e. a residential property and invests the number of capital gains in bonds of NHAI and REC within six months from the date of sale, he/she will be exempt from capital gains tax. These are redeemable after five (earlier the lock-in was for 3 years) years. A period of six months is allowed to invest in these bonds. The NRI must show proofs to these investments to the Buyer to make sure TDS doesn’t get deducted.
  3. Section 80C – if the home loan has been taken then NRIs are eligible under section 80C for repayments of the principal amount of the loan. Stamp duty and registration charges paid on purchases of property can also be claimed u/s 80C. Deduction towards property tax paid and interest on home loan deduction is also allowed to be deducted u/s 24(b).

TDS Implications

As per the income tax act, when a payment is made to NRIs, TDS must be deducted at the applicable rate depending on the nature of income. So, when an NRI sells a property following TDS is applicable in case of sale of property by NRI, if the capital gain is long-term, the buyer must deduct a TDS of 20% on the sale price of the property. Similarly, in case of short-term capital gains, TDS at the rate of 30% is deducted. The TDS chargeable to NRIs is higher than that chargeable to resident Indians. In case the income amount exceeds the prescribed limit (50/100 lakhs) surcharge also needs to be collected. The deducted taxes are to be paid to the Income Tax Department along with a duly filled Challan 26QB.

Repatriation

The bank with which the NRI deals will allow for repatriation of income from immovable property subject to a few conditions.

  1. Money that was bought from outside for the purchase of property can be repatriated. However, sale proceeds of only two residential properties can be repatriated.
  2. Where the NRI has taken a home loan to purchase house property, the bank will allow him/her to repatriate an amount equivalent to what he brought in from abroad to pay back the loan.
  3. If the property was acquired out of NRIs rupees resources or the loan was paid by the relatives of NRI in India, the sale proceeds are credited into the NRI’s Non-Resident ordinary account.
  4. Repatriation will be allowed subject to furnishing of Form 15CA and Form 15CB (CA’s certificate)

In the case of property owned by NRI in India, the tax implications and exemption are similar to those of a resident Indian. However, the NRI must produce all the documents for claiming deductions. An NRI must make an informed decision to avail of all the benefits available to NRIs.

If you still haven’t filed your Income Tax Return, you are at the right place. File your IT returns with H&R Block to experience effective and hassle-free tax filing. Our tax experts will file your return for you while you sit back and concentrate on your work.

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