Are you looking for guidance about tax implications regarding property?
Here it is! You can come across every point that is bouncing at the back of your mind.
Let’s begin with the kind of property that a non-resident can invest into.
Which kind of property can NRI buy?
The NRI can buy any residential property or real estate that is not an agricultural land, plantation property or farm house-this is what the Foreign Exchange Management Act (FEMA) states. It means that the Indian citizen residing in the USA or any other country can purchase the property for self- use, rental income or sole purpose of making investment.
The tax liability differs according to the usage of that property.
How many properties can he buy in India?
You, being an NRI, can buy more than one property in India. There is no restriction over it. But, the point of consideration is the aim underlying the purchase of that fixed asset. That aim can be bought for rent, family’s accommodation and potential capital appreciation.
Tax liabilities or implications for NRI to know before buying a property in India:
The tax liabilities or implications differ in each case-personal use, rental income and capital appreciation. Let’s go through each case sequentially:
- If an NRI has one property: If the NRI occupies just one property for self-accommodation, there shall have no tax liability. It is the case of self-occupied property, although he is living abroad on account of his employment.
- If he has more than one property: In this case, the resident holds more than one property, which (all) can’t be treated as self-occupied. However, it’s a provision not to levy tax on the residential property. But, it’s a case of holding multiple properties. Therefore, just one property will be assumed for self-accommodation, which is exempted from tax. The law assumes that the rest of the properties are bought for notional rental income, which is ‘Income from House Property’.
- Rental income is taxable: The Income Tax law directs imposition of tax, if the resident with an Indian passport rents out his residential property for income. It is titled as ‘income from house property’.
But, the tax authority relieves a bit. It allows a standard deduction of 30 percent towards the repair and maintenance of the property, which includes other deductions like municipality tax, from the rental income.
- If the property is bought for investment only: Renting it out reveals the intention of generating extra income. Plainly speaking, the non-residents focus on this investment with the view of making money. It rises on transferring it after selling. The sale of NRI property may attract long-term or short term capital gain.
Do NRIs require permission for investment in real-estate? What documents should they have for selling property in India?
No, they don’t need to take any permission in terms of transactions. But, they should keep into account these points while following the procedure of buying/selling property in India:
- Transact through an NRI account of the normal banking channels.
- Pay in Indian currency.
- Pay through reserve funds of own or through home loans from banks/ financial institution of India.
- RBI permits 80 percent (max) of the overall payment through loans from financial institution/banks.
- Use inward remittance via NRO/NRE account in India. Alternatively, they can pay through post-dated cheques or Electronic Clearance Service (ECS) from NRO/NRE or FCNR accounts.
- Power of Attorney (PoA) can also process the payment.
- Besides, they should be aware of the fact that the monetory value (sale consideration) of house property is not less than its stamp duty value. If they ignore this fact, the deficit shall be taxable in the hands of buyers. It generally happens when the sale consideration and the stamp duty value exceeds INR 50,000.
- The buyer should ask for Tax Deduction and Collection Account Number (TAN) for withholding of the tax.
How can NRI buyers deduct tax on selling property?
The characterization of the capital gain depends on period of holding that property. If one holds it for 24 months or less, it is a short-term capital asset. Its owner shall pay the tax according to its tax slab for NRIs. On the flip side, the same can be a long-term capital asset if it is held for more than 24 months. The latter case of capital asset attracts tax @ 20 percent plus applicable surcharge and cess.
The non-resident may claim for deduction if he invests the capital gain into a new residential property or government funds, as prescribed in the Income Tax Act, 1961.
Also, he, as a seller, may claim a credit in the country wherein he is temporarily living. The claim of credit shall be with respect to taxes paid in India as per DTAA (Double Tax Avoidance Agreement).
ROI (Return on Investment) according to different real-estates, as researched by ANAROCK:
| Residential Property Classes | Approximate ROI (%) |
| Affordable | 8-10 |
| Mid-segment | 6-8 |
| Luxury | 3-5 |
| Ultra-luxury | 2-3 |
| Commercial Property Classes | Expected Rental Income (%) | Estimated Capital Gain (%) |
| Grade A Office | 8-10 | 10-12 |
| Grade B Office | 5-7 | 6-8 |
| Warehousing Property | Expected Rental Income (%) | Estimated Capital Gain (%) |
| Warehouse | 4-6 | 5-7 |
- Impact of RERA: RERA (Real Estate Regulatory Act) was coined on March 10, 2016 and became effective from May 1, 2017. It acts as an impetus or regulator to boost formalization of the sector. It enforces formalization through transparency in transactions, the tax reduction and certainty in tax positions.
Benefits of RERA for Industry, Developers, Buyers (NRIs) and Agents:
| Industry | Developers | Buyers | Agents |
| Ø Governance, regulations with transparencyØ Boost efficiency & robust deliveryØ Maintain standardØ Confidence appreciationØ High ROI with PE funding | Ø Common & best practices for all developersØ Enhance efficiencyØ Consolidated supply & workØ Promote corporate brandingØ Organized funding | Ø Protect buyers from defaultersØ Timely delivery while using quality productsØ Balanced agreements/contractsØ Transparency on saleØ Money security amid transparency | Ø State registration for consolidationØ Maintain transparencyØ Boost efficiencyØ Less chances of litigation |
Tax liability for NRIs on commercial and residential property
It’s obvious that the tax liability on commercial storefront/ office/ property shall be more as compared to the residential property. The Income Tax Act highlights that the self-occupied residential property for NRIs attracts ‘zero’ notional rent.
On the other hand, the commercial co-working space and co-living space generates rental income in hand. Thereby, the imposition of the tax in this scenario of capital gain is obvious.
Tax implications in Budget 2019 for property investment:
The middle-class taxpayers can heave a sigh of relief. They can get one-time tax exemption on the capital gain worth INR 2 crores on selling the property. It is applicable only if the seller invests for the purchase or construction of two residential houses. One of them shall be exempted from notional rent provisions.
