Tax Implications for NRIs Looking for House Property in India
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 tax implications for NRIs depend upon the end use of the house and the host country in which they reside.
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.
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 is a founder and writer of The Housing World, a real estate and mortgage news website. He brings with him 20+ years of rich experience in the real estate and mortgage industries. He has worked in senior roles in Delhi and NCR in the above-mentioned sectors.