Tax Implications for NRIs Looking for House Property in India

Published on: Jul 21, 2015 @ 18:29

The  depreciation  of  the  Indian  rupee  has  made  investments  in  India’s  real  estate  sector extremely  lucrative and  are  attracting  NRIs  to  consider  property  investments  in  India.  A house  property  is  a  good  tax  saving tool  for  both  resident  and  non-resident  Indians.

The  mere  acquisition  of  house  property  does  not  attract  income  tax  for  both  residents  and non-residents. However, they  have  to  pay  the  taxes  if  they  are  selling  this  property,  any income  accruing  from  the ownership  of  it  such  as  the  rental  income,  annual  value  of  the house  or  capital  gains  on  the  sale  of  this house  property.

The  tax  implications  for  NRIs  depend  upon  the  end  use  of  the  house  and  the  host  country  in  which they  reside. It  would  be  advisable  to  use  the  services  of  a  property  tax  consultant  in India  for  the  specific  cases in the taxation  matters. We  look  at  the  some  tax  implications  for NRIs  when  buying,  selling  or  renting  a  house property:

The  tax  benefits  on  housing  loan  for  NRI  are  very  similar  to  a  resident  Indian. An  NRI  is entitled  to  avail all sorts  of  benefits  at  par  with  Indian  residents  on  the  home  loan  for buying  or  constructing  residential property.

NRIs  have  to  pay  tax  and  file  a  return  in  India  if  their  income  from  sources  in  India exceeds  Rs 2,50,000 in a  financial  year. You  can  claim  from  your  gross  income  a  Rs 1.5 lakh deduction  of  housing  loan  principal repayment,  stamp  duty  and  registration  charges. For financial  year  2015-16,  a  maximum  deduction  of  Rs 1,50,000  is  allowed  under  section  80c of  Income  Tax  Act  of  India.

For  a  property  which  is  rented  out, the  income  it  earns  is  taxable  in  India  and  NRI  has  to file  a  tax  return in  India  in  case  the  rent  received  along  with  other  income  exceeds  the threshold  limit. You  will  have  to  pay the  applicable  tax  if  you  are  residing  in  the  country where  worldwide  income  is  taxable  unless  the  country has  Double  Tax  Avoidance  Agreement (DTAA)  with  India.

There  may  be  some  tax  relief  available  under  the  DTAA  for  NRIs  by  avoiding  paying  tax on  the  same income  twice- once  in  the  country  of  residence  and  again  in  India. As  per section  24  of  the  IT  Act,  a standard  deduction  of  30  per  cent  is  allowed  to  be  claimed from rent  income  of  house  property.
According  to  the  IT  Act  of  India,  when  there  are  more  than  one  house  property  in  India owned  by  NRI , only  one  of  them  is  deemed  as  self-occupied . There  will  be  no  income  tax on  a  self–occupied  property rented for  more  than  300  days.

The  other  one,  whether  you  rent  it  out  or  not,  will  be  deemed  as  let-out  and  added  to  the taxable  income. You  will  have  to  calculate  deemed  rental  income  on  the  second  property based  on  certain  valuations prescribed  by  the  income  tax  rule  and  pay  the  tax  thereof. The deduction  available  against  such  property  is interest  on  housing  loan  up  to  Rs. 2.0 lakh  per year  under  Section  24  of  the  IT  Act  of  India.

NRIs  are  subject  to  capital  gains  tax  in  India,  similar  to  what  is  applied  to  residents  on sale  of  immovable property  located  in  India. When  you  decide  to  sell  the  property,  the  profit of  sale  shall  be  subject  to  capital gains. If  you  have  held  the  property  for  less  than  or  equal to  3  years  after  taking  actual  possession  then  the short  term  capital  gains  are  added  to income  and  taxed  at  the  normal  rate  of  tax.  And,  if  the  property  has been  held  for  more than  3  years  then  the  capital  gains  would  be  long  term  and  subject  to  20  per  cent  tax plus applicable  cess.

Capital  gains  may  also  be  taxable  in  the  NRI’s  country  of  residence  if  it  does  not  have  a DTAA  with  India. Relief  may  be  available  in  the  form  of  credit  for  Indian  taxes  paid, in case  the  NRI  is  a  tax  resident  of  a country  with  which  India  has  a  DTAA. However,  in case of  sale  of  immovable  property  in  India  it  would  be taxed  in  India  as  the  DTAA  with  most countries  provide  that  the  capital  gains  would  be  taxed  in  the country where  the  immovable property  is  situated.

You  can  claim  exemption  by  investing  in  another  house  property  or  specified  bonds. The long  term  capital gains  on  sale  of  a  residential  house  can  be  invested  in  buying, constructing another  house,  within  the prescribed  time. The  exemption  is  restricted  to  the  amount  of capital  gains  or  amount  invested  in  new   house, whichever  is  lower. As  per  the  financial budget,  a  cap  of  Rs 50 lakh  has  been  imposed  on  investment that  can  be  made  in  capital tax saving  bonds.

Ajay Verma

Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.

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