I’m a US NRI. I am currently in the process of purchasing land in my hometown in India. I have funds available in both my NRE and NRO accounts in India. From a tax perspective, would it be more beneficial to make the payment for the land purchase through my NRE account or through my NRO account?
From an Indian income-tax perspective, the taxability of capital gains on the subsequent sale of the property does not depend on whether the original investment was made out of funds lying in the NRE account or the NRO account. The rate of tax would remain the same in either case.
Capital gains
In case the land is held for more than 24 months, the gains arising on transfer would qualify as long-term capital gains and would be taxable at 12.5% plus applicable surcharge and cess. You may avail capital gains exemption upon reinvestment of such long-term capital gains, subject to satisfaction of the prescribed conditions.
On the other hand, if the land is sold within 24 months from the date of acquisition, the gains would be regarded as short-term capital gains and taxed at your applicable slab rate of tax in India, plus applicable surcharge and cess. The India-US DTAA does not offer any exemption or relief from the levy of capital gains in India.
FEMA rules
From a FEMA perspective, an NRI is not permitted to acquire agricultural land except by way of inheritance. Accordingly, the procured land should be non-agricultural in nature.
Additionally, sale proceeds can be credited only to an NRO account and can thereafter be repatriated outside India under the RBI's $1 million per financial year scheme.
Harshal Bhuta is partner at P. R. Bhuta & Co. Chartered Accountants.
