Income Tax: Tips for NRIs buying property in India

Non Resident Indians (NRIs) buying a piece of property in India may find it hard to comply with all the rules due to their non-familiarity with Indian laws. Taxation is another complex issue for them.

The Foreign Exchange Management Act (FEMA) allows an Indian citizen residing outside the country to invest in Indian real estate. However, it comes with a few exceptions. For instance, the property should not be an agricultural land, a farmhouse or plantation property. If exempted properties are gifted or inherited, then NRIs will need government and RBI approvals to be the legal owners of such properties.

NRIs can transfer any immovable property to a person resident in India. They can transfer immovable property other than agricultural land, plantation property, or farmhouse to an Indian citizen or PIO resident outside India.

RBI rules
Here are some rules mandated by the RBI for NRIs handling immovable property.

NRIs can make payments for the acquisition of immovable property.
Funds can be received in India through normal banking channels by way of inward remittance from any place outside India or by debit to his NRE/FCNR(B)/NRO account.
Such payments cannot be made by traveller’s cheque, foreign currency notes, or other modes, except those specifically mentioned as per the RBI.
An NRI who has purchased residential/commercial property under general permission is not required to file any documents with the Reserve Bank.

All payments must be done in Indian currency and through banking channels via an NRI account. Adhil Shetty, CEO, BankBazaar.com, says, “NRIs can use their funds or avail home loans from banks or other financial institutions. RBI allows buyers, including NRIs, to avail 80% of the overall property value via loans from financial institutions.”

Tax implications
There are tax implications to acquiring property. To understand these better, it is important to identify whether the seller is a resident or a non-resident as per the Income Tax Act. An NRI who purchases an immovable property in India must deduct TDS which is calculated based on the residential status of the person selling the property and the nature of capital gains.

If an NRI purchases immovable property in India from a resident, he must deduct TDS at 1% if the sale consideration exceeds Rs 50 lakh. If the NRI purchases a property from a non-resident, and if long-term capital gains are applicable, then TDS should be deducted at 20%. In case short-term capital gains are applicable, TDS at 30% needs to be deducted. Short-term capital gains are applicable when a property is sold within two years or less of acquiring it. If the property is sold two years after it is acquired, there is a long-term capital gain.

Also, remember that the tax deducted is to be deposited within 30 days of such deduction. Non-deduction or late deduction of tax will attract late deduction of TDS penalty at the rate of 1% per month. It is applicable from the date on which tax was deductible to the date of actual deduction. The I-T Act also provides certain tax exemptions to NRIs under Section 54 if they don’t buy or sell properties for short and long-term gains. Tax exemptions will be applicable based on how the property is used, like self-occupied or let-out. The exemption will apply to the total capital gain on the sale, not the total sale amount.

The buyer must make sure that the sale consideration is not less than the stamp duty value of the property; otherwise, the deficit if it exceeds Rs 50,000) will be taxable in the hands of a buyer. The buyer will also need to obtain a Tax Deduction and Collection Account Number (TAN) for withholding of taxes.

Rules for nris
NRIs cannot buy agricultural land, a farmhouse or plantation property in India
If the NRI buys property from a non-resident, and LTCG is applicable, then 20% TDS is to be deducted
On buying from a resident, an NRI must deduct 1% TDS if the sale price exceeds Rs 50 lakh
NRIs can take home loans up to 80% of the overall value of the property