Are you an NRI and have either invested or want to invest in an immovable property in India? Here's how your income will be taxed.
Investments in immovable property or the real estate sector have always been a rewarding experience for NRIs. The income earned from investments in immovable property can either be rental income or capital gains. Both the incomes are taxable in the hands of NRIs at different tax rates. Before we go further to understand the intricacies of tax on such incomes, it would be imperative to first understand the concept of ‘NRI’.
The full form of acronym ‘NRI’ can either be ‘Non-resident in India’ or ‘Non-resident Indian’. Both of these terms may sound similar to a layman, but for a few provisions of the Income-Tax Act and the Foreign Exchange Management Act (FEMA), they are treated differently. A citizen of India or a person of Indian origin is treated as Non-resident Indian if he isn’t a ‘resident’ of India. All other foreign nationals are treated as Non-residents in India if they are not residents of India.
As a general rule, an individual is treated as a resident in India, if his stay in India during the financial year is of 182 days (or more). If this condition is not satisfied, then he is treated as a resident in India if his stay in India during the current year is of 60 days (or more) and 365 days (or more) in the last 4 years. There are a few exceptions to this rule which can be beneficial for those who have gone out of India for employment, etc.
A person of Indian origin has been defined differently under the Income-tax Act and FEMA. As per FEMA, a person shall be deemed to be of Indian origin if he is not a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan, who at any time held Indian passport or whose parents or grandparents were citizens of India. As per the Income-tax Act, a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.
While making investment in India in immovable property by a Non-resident Indian, the definition of person of Indian origin shall be referred to as per FEMA and the definition as per Income-tax Act shall be referred to while determining the tax liability of an NRI.
A Non-resident Indian can only invest in commercial or residential property. He cannot acquire agricultural property (including plantations and farmhouse) except by way of inheritance or gift to him. A person who is a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau or Hong Kong cannot acquire or transfer immovable property in India without prior permission of the RBI. However, they can obtain an immovable property on lease for a period not exceeding 5 years.
After acquiring a piece of immovable property, following tax provisions shall be relevant for an NRI to understand the taxability of income earned from such investments.
1. Applicability of DTAA
The taxing rights of any country are decided on the basis of residential status of a person and the source of income. To avoid the double taxation on one income, the concept of Double Taxation Avoidance Agreements came into existence. India has entered into DTAAs with more than 90 countries and under almost all these treaties, India has the right to tax the income arising from an immovable property, being rental income or capital gains from transfer of immovable property. An NRI can claim tax credit of taxes paid by him in India on income from immovable property in his country of residence.
2. Calculation of capital gains
India has a right to tax the profit arising from sale of an immovable property which is situated in India. Thus, an NRI shall be liable to pay tax on the amount of capital gains arising in India. An immovable property held for more than 24 months is treated as long-term capital asset. In that situation the owner can adjust the cost of acquisition with the impact of inflation using the notified CII. The indexation benefit is not available in case the property is sold before the expiry of 2 years from the date of acquisition. Long-term capital gains shall be taxable at 20% and short-term capital gains shall be taxable at the tax rate applicable to a non-resident.
3. Calculation of rental income
NRIs will be liable to pay tax on rental income received from a property located in India. Taxable value of the rental income shall be computed after providing deductions for Municipal Taxes, standard deduction at the rate of 30%, interest paid on a loan taken for acquisition or construction and pre-construction interest (allowed in 5 equal instalments).
4. Withholding of tax
Tenants are liable to withhold tax from the amount of rent in case of let-out property and from the amount of capital gains in case of sale of property. Such tax shall be withheld by the payer at the time of credit or actual payment, whichever happens earlier.
The taxes shall be withheld at the rate of 20% if the period of holding of property is more than 24 months and at the rate of 30% in another case. The taxes to be withheld shall be computed on the amount of capital gains. In case of a let-out property, the tenant shall withhold tax @ 30% from the amount of rent.
5. Exemptions from capital gains
An NRI can claim exemption under section 54/54EC/54F if capital gains are further invested. To claim exemption under Section 54 and 54F, the NRI has to make investment in a house property and for Section 54EC exemption, investment has to be made in NHAI or REC bonds. These investments should be made within the prescribed time limit.
6. Liability to file return
NRIs are also required to file return of income by July 31 of the relevant assessment year, if the total taxable income exceeds Rs 250,000. If the total income of NRI consists of only rental income and tax has been deducted from such rental income, he should file the return even if his income does not exceed Rs 2,50,000. Though it would not be mandatory for him to file the return, he should do it to claim the refund of taxes withheld and deposited by the tenant with the government.
7. Deductions allowable
The Income-Tax Act allows certain tax deductions under Section 80C to 80TTA to an Individual taxpayer irrespective of his residential status. Using these deductions, a non-resident taxpayer can reduce the burden of tax on his taxable income. Example, if an NRI has taken a housing loan, he can claim deduction for the re-payment of principal amount made by him under Section 80C up to Rs 1,50,000.
(By CA Naveen Wadhwa, DGM, and CA Shivi Agarwal, Assistant Manager, Taxmann.com)