NRI

NRI

Non-Resident under Income Tax Act, 1961

An individual is resident if any of the following conditions are satisfied:

  • Liability to pay tax in India does not depend on the nationality or domicile of the Tax payer but on his residential status. Residential Status is determined on the basis of physical presence i.e. the number of days of stay in India in any year. Resident:
  • Resident:
  • A. An individual is resident if any of the following conditions are satisfied:
    • He stayed in India for 182 days or more during the previous year, or
    • He stayed in India for 365 days or more during the four preceding years and stays in India for atleast 60 days 9 182 days in case of an Indian citizen or a person of Indian Origin coming on a visit to India or 182 days in case of an Indian citizen going abroad for an employment during the previous year.
    • Stay in India for the above criteria may be continuous or intermittent.
  • B. Hindu Undivided Family (HUF) or firm or other Association of persons is resident of India except in cases where the control and management of its affairs is wholly situated outside India in the previous year
  • C. A company is resident in India if:
    • It is an Indian company, or
    • during the previous year, the control and management is situated wholly in India.
  • An NRI has to pay stamp duty as well as registration fees at the time of purchase of a property. He / she is entitled to avail all / any benefits at par with Indian residents on the interest paid for the home loan.
  • Proceeds from sale of property come under the head of income from property, therefore, standard deduction is applicable as per the standard slab. In this case, the NRI will have to pay the applicable tax if he is residing in the country where worldwide income is taxable unless the country has Double Tax Avoidance Agreement with India.
  • The special advantage for an NRI is the amount which is paid for the interest of home loan is deductible from NRI's taxable income without any upper limit. The NRI is legally responsible for the payment of capital gains tax as prescribed under the Income Tax Act, in case he sells off the property.
  • The Indian real estate market is attractive for non-resident Indians (NRIs) as it is easier to earn in a stronger currency and pay in Indian rupees. Things have further become easier as they can avail home loans from banks in India to purchase property here at attractive rates.
  • Anyone who comes under the definition of the Foreign Exchange Management Act, 1999 (FEMA) can avail a home loan in India. FEMA defines an NRI as someone who resides outside India for "employment, carrying on business or vocation in circumstances as would indicate an intention to stay outside India for an indefinite period". It also says that an individual will also be considered NRI if his stay in India is less than 182 days during the preceding financial year.
  • However, as an NRI you cannot buy more than two residential properties in India. This is regardless of if you own a property in the country that you are working in and residing in. There are no such restrictions on commercial property though. However, NRIs are not allowed to purchase agricultural land here."
  • This means that an NRI home loan can be availed to purchase, construct, renovate a new or existing house. You can also take home loans to purchase a plot of land for residential use.
  • The procedure to avail a home loan remains more or less the same as applicable to any resident Indian. However, there are some criteria to be kept in mind.
  • General permission is granted to NRIs and PIOs to repatriate the sale proceeds of property inherited from an Indian resident, subject to certain conditions. If those conditions are fulfilled, the NRI need not seek the RBI's permission. However, if the NRI has inherited the property from a person residing outside India, he or she must seek specific permission from the RBI.
  • The conditions for repatriation of such funds are not really complicated, the amount per financial year (April-March) should not exceed USD 1 million, and should be done through authorized dealers. NRIs must provide documentary evidence with regard to their inheritance of the property, and a certificate from a chartered accountant in the specified format.
  • What NRIs must pay attention to is the income tax implications in their country of residence. Many countries tax their residents on their income regardless of where it originates from, while others provide partial or total exemption on capital gains arising on sale of a residential house if certain conditions are met. The most important point to ponder is the income tax liability in the country of residence on the amount of gain, and whether claiming exemption under Sections 54/54F/54EC is really worth it. The NRI may, in fact, be better off claiming only partial or no tax exemption on the capital gains in India.
  • What is the capital gains tax applicable on sale of properties in India?
  • For all income tax purposes, the definition of NRI shall be the one as prescribed in the Income Tax Act. For all repatriation purposes, the definition of NRI would be one under FEMA.

    Long term capital gains:

  • As in the case of resident Indians, NRIs who sell property after three years from the date of purchase will incur long term capital gains tax of 20%. The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is nothing but the cost of purchase adjusted to inflation.

    Short term capital gains:

  • If the NRI sells the property before three years have elapsed since the date of purchase, short term capital gains tax at his or her tax slab is incurred. Short term capital gain is calculated as the difference between the sale value and the cost of purchase (without the indexation benefit). The NRI will be subject to a TDS of 30% irrespective of his or her tax slab.
  • NRIs selling their properties can apply to the income tax authorities for a tax exemption certificate under Section 195 of the Income Tax Act. To avail of certain tax benefits, an NRI may purchase another residential property within two years from the date of sale or allocate the sale proceeds to eligible bonds within six months, subject to the applicable provisions of the Income Tax Act.
  • Section 54 F Under this provision, if an NRI sells a residential property after holding it for more than three years from the date of purchase and uses the sale proceeds to purchase another residential property within two years from the date of sale, the capital gain may qualify for tax exemption up to the cost of the new property. For example, if the capital gain is ₹10 lakh and the cost of the new property is ₹8 lakh, the remaining ₹2 lakh will be treated as long-term capital gains and taxed accordingly. The property being sold may be either self-occupied or rented out. To retain the tax benefit, the newly purchased property must be held for a minimum period of three years.
  • NRIs cannot use the proceeds from the sale of a property in India to purchase a property outside India and automatically claim the benefits available under Section 54. However, certain recent rulings by appellate authorities have indicated that an exemption under Section 54 may be available even when the new residential property is purchased outside India. Since this position is not explicitly and clearly defined in the law, NRIs are advised to consult a qualified tax expert before purchasing property outside India with the intention of claiming tax benefits under Section 54.
  • Section 54EC - This section of the Income Tax Act states that if an NRI sells a long-term asset (in this case, a residential property) after three years from the date of purchase and uses the amount of capital gains to purchase bonds of NHAI and REC within six months from the date of sale, he or she may be exempt from capital gains tax. The bonds will remain locked in for a period of three years.
  • Non-Resident Indians (NRIs) are allowed to participate in the following areas of the Housing and Real Estate Sector under the Automatic Route of Foreign Direct Participation (FDI):
    • Development of services plots and construction of built up residential premises.
    • Participation in real estate activities covering the construction of residential and commercial premises, including business centers and offices.
    • Development of townships.
    • City and regional level urban infrastructure facilities, including both roads and bridges.
    • Participation in the manufacturing of building materials.
    • Participation in ventures mentioned in points (i) to (v) above.
    • Participation in housing finance institutions.