NRIs buying property in India: tax implications to consider
For the most part, the world’s 32 million non-resident Indians (NRIs) are treated the same as resident Indians when it comes to the Indian real estate market. An NRI buying property in India doesn’t require any special permission, except in the case of agricultural land, and NRIs are entitled to own any number of properties in the country. Still, there are tax implications to consider, particularly if a buyer plans to resell.
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NRIs are predicted to be a major driver of growth in the Indian property market between 2021 and 2025 for various reasons. A more detailed explanation of the factors motivating NRI investment can be found in our previous blog post, “Invest at home: the NRIs snapping up dream homes in India.” However, overseas property purchases are rarely simple.
An NRI buying property in India will need to familiarise themselves with the laws around moving money into and out of the country, as well as the relevant income tax implications. Read on to learn about the key rules governing NRI investment in Indian real estate.
Basic rules for an NRI buying property in India
NRIs face certain restrictions and regulations when purchasing Indian real estate, for example:
- NRIs are not permitted to buy agricultural land or farmhouses in India without obtaining permission from the Reserve Bank of India (RBI).
- Under the Foreign Exchange Management Act (FEMA), NRIs must carry out all transactions involved in buying Indian property in Indian rupees through local banks.
- The above requires the use of one of the following kinds of Indian bank account: a Non-resident External (NRE) account, a Non-resident Ordinary (NRO) account or a Foreign Currency Non-resident account (FCNR(B)).
- NRE accounts can hold foreign earnings, while NRO accounts are used for income from Indian sources. FCNR(B) accounts are deposit accounts in a foreign currency.
Taxation of NRIs
Determining NRI status
Under the Finance Acts of 2020 and 2021, the Indian Government introduced changes to the criteria for determining NRI status. Before the end of March 2020, NRIs could spend up to 181 days of the financial year in India and still be considered a non-resident for taxation purposes. Since this date, that amount has been reduced to 120 days for any NRI whose taxable Indian income is above 1.5 million rupees.
Standard taxes on real estate purchases
Just like resident buyers, NRIs purchasing homes in India are liable to pay stamp duty, registration charges and property taxes. These are calculated at the same rates for NRIs as for residents, and vary from state to state. Indian stamp duty rates also differ according to the age, type and location of the property, as well as the age and gender of the buyer.
Tax on rental income
As of the financial year 2021-22, NRIs who earn above 240,000 rupees on rental income from Indian property are taxed on that income at a rate of 31.2%. This is deducted at source and paid to the government by the tenant through an online form.
Under Indian income tax rules, a person can only claim two residential properties as self-occupied. This means that if an NRI owns more than two homes anywhere in the world, any subsequent properties in India will be treated as rental properties, regardless of whether they are let out or not. The owner will be expected to pay tax on deemed rental income for these additional homes.
Just like Indian residents, NRIs are allowed to claim certain deductions on income from residential property in India. As well as a standard deduction of 30% of the net annual value of the property, they can deduct the cost of stamp duty, registration charges, repairs and maintenance, property taxes, municipal taxes and interest on home loan repayments.
Tax implications for NRIs planning to resell Indian property
If an NRI resells their Indian property within two years of purchase, they’re liable to pay short-term capital gains tax in India, which is calculated according to income. If they resell after two years, they’re liable for a long-term capital gains tax of 20%. India’s 4% health and education levy applied above the basic tax will also be added to this liability, plus any applicable surcharges. Surcharges apply to properties above a value of 5 million rupees.
India’s income tax laws allow the seller to avoid paying long-term capital gains tax if they use the proceeds from the property sale to invest in another home in India within two years, or invest in Capital Gains Bonds within six months.
When reselling, NRIs should also be aware that if they have claimed a deduction on their home loan repayments and then decide to sell the property within five years, the earlier deduction will be considered income in the year of sale.
Repatriation of proceeds from an Indian property sale
If an NRI resells an Indian property and wishes to send the proceeds overseas to their current country of residence, they will have to abide by RBI repatriation rules, which stipulate that:
- For a property bought using funds from an NRE or FCNR(B) account, the sales proceeds moved abroad cannot exceed the amount originally paid for the property, or the foreign currency equivalent as of the date of purchase.
- For a property bought with funds from an NRO account or inherited, the amount moved abroad in any financial year cannot exceed US$1 million. Remittances exceeding this amount require permission from the RBI.
- To send funds abroad, an NRI must obtain the required documentation, including a Form 15CA – self declaration by remitter of funds (NRI) – and a Form 15CB, a chartered accountant’s certificate certifying the appropriateness of taxes deducted and paid.
An NRI buying property in India can avail of all the same tax benefits a resident buyer can access, but they’ll also face various levies when buying, renting out and reselling Indian real estate. Before considering a house purchase back home, experts advise NRIs to make sure they have a thorough understanding of these tax implications and the regulations around transferring money into and out of India.
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