With liberalisation of overseas investment norms, securing an overseas property has become popular. Among other aspects, income tax and foreign exchange regulations in both countries, and factors, such as stamp duty, inheritance tax and estate tax, need to be considered.
A person resident in India (PRII), as per Indian Foreign Exchange Management Act, 1999 (Fema), can purchase overseas property only under prescribed circumstances, without RBI approval. The property may either be purchased out of foreign currency acquired or held by him outside India, or out of foreign exchange held in his Resident Foreign Currency Account.
Property may also be purchased by PRII under the Liberalized Remittance Scheme (LRS), within the overall limit of $200,000 per FY per individual. Accordingly, a family of four should be eligible to remit up to $800,000 for such a transaction. Also, investor can retain/invest income from such property overseas. Income relating to an overseas property would be taxed in the hands of an individual only if he qualifies as a resident and ordinarily resident (ROR) in India in a given FY, or if any related income is received directly in India by the individual. If the individual qualifies as a non-resident or not ordinary resident, there would be no Indian tax implications, if income is received outside India.
No distinction in respect of tax implications is made based on whether the property is situated in India or overseas. The annual value of any one self-occupied property is considered as Nil.
The other properties are taxed as let-out (where actually let-out) or deemed to be let-out, as the case may be. The rental income is subject to tax at normal rates after allowing deductions towards municipal taxes, standard deduction of 30% and interest payable on housing loan (for self-occupied property, deduction is restricted to $150,000 per FY). Also, any loss from the property for a particular FY can be set-off against other income of that FY. Any unadjusted loss can be carried forward for adjustment against house property income for eight subsequent years.
As in the case of domestic properties, gain/loss on sale of overseas property is also treated as capital gain/loss and is subject to the same tax regime. If the property is held for more than 36 months, the income is classified as a long-term capital gain (LTCG) and subject to 20.6% tax (with indexation benefit). If the holding period is shorter, the gains are treated as short term capital gain (STCG) and taxed at normal rates.
In case of LTCG on sale of residential property, if the investment is made either in another residential house or specified bonds, exemption may be availed, subject to conditions. In case of LTCG on sale of other asset, if the investment is made in a new residential house, exemption may be availed subject to the given conditions. To claim this exemption, you should not own more than one house (other than the new house), on the date of sale.
n The writer is executive director, Tax, KPMG