7 min read.Updated: 30 Jul 2020, 04:50 PM ISTVikas Vasal
If the stamp duty value of the property sold is higher than the sale consideration, then the stamp duty value would be regarded as sale consideration
In our previous article ‘NRI investments in India–key considerations’, we had discussed the regulatory and tax implications with respect to investments in equity shares and mutual funds in India. In this article, we have focused on the real estate sector which is another popular investment avenue for non-resident Indians (NRIs).
There are some important tax and regulatory considerations that non-residents should take note of before making investments in this sector, as generally, these investments are from a long-term perspective.
Foreign exchange regulations
The key foreign exchange regulations governing investments in real estate are as below:
Who can invest: Investments in Indian real estate can be done by NRI i.e. an Indian citizen who is resident outside India and by Overseas Citizen of India (OCI) i.e. a person resident outside India who is registered as an OCI Cardholder.
Types of permitted real estate: An NRI/ OCI can invest in any immovable property in India, other than agricultural land, plantation property or a farmhouse.
Ways to invest: Investment in real estate may be in different forms. This includes, by way of direct purchase or as a gift from a person resident in India or a gift from an NRI/ OCI relative. ‘Relative’ as per foreign exchange regulations means husband, wife, brother or sister or any lineal ascendant or descendant of an individual.
Real estate may also be received by way of inheritance from a person resident in India or from a person resident outside India who would have acquired the said property in accordance with the provisions of the foreign exchange law in force at the time of acquisition.
It is interesting to note that while an NRI/OCI cannot acquire agricultural land, plantation property or a farmhouse by way of direct purchase or gift, the NRI/OCI can, however, inherit the same.
Further, there is no restriction on the number of permitted immovable properties that both NRIs or OCIs may hold.
Mode of payment: Investment in real estate by way of purchase should be necessarily made through regular banking channels. The purchase could also be by way of debit to the Non-Resident (External) Rupee Account Scheme (NRE Account) / Non-Resident Ordinary Rupee Account (NRO Account) / Foreign Currency (Non Resident) Account (Banks) Scheme (FCNR Account) held by the NRI/ OCI in India. Payment cannot be made by any other mode, for example, traveler’s cheque or foreign currency notes.
Whether spouse of NRI/OCI can invest: Investment is permitted in joint name in only one immovable property. Such property is required to be jointly owned in the name of the NRI/OCI and his/her spouse. It is pertinent to note that the marriage should have been registered and subsisted for a continuous period of not less than two years immediately preceding the acquisition of such property.
Repatriation of rental income: Rental income can be repatriated freely from India without taking any specific permission.
Transfer/sale of immovable property: NRI/OCI can transfer any kind of immovable property to a person resident in India or another NRI or OCI. In case the transfer is by way of gift, the transferee NRI or OCI should be a relative. Further, agricultural land, plantation property or a farm house received by way of inheritance can be transferred only to Indian residents.
Repatriation of sale proceeds outside India: In case the transferred property was acquired when NRI/OCI was resident in India or such property was inherited from a person resident in India, then the NRI/OCI is permitted to remit up to $1 million per financial year out of the sale proceeds. Any remittance of an amount in excess of the aforesaid limit would require a specific approval from the Reserve Bank of India (RBI).
In cases where the property is acquired from remittances made from outside India while the person was an NRI / OCI, the funds can be freely remitted from India on transfer / sale of such property, provided that the acquisition was made in accordance with the foreign exchange regulations existing at that point in time.
It is pertinent to note that in the case of sale of residential property, the repatriation of sale proceeds is restricted to not more than two such properties. Any repatriation for more properties would require an approval from the RBI.
Key tax implications
At the time of investment in an immovable property: There will be no income tax implications at the time of acquisition, if the consideration paid for acquiring the property is equal to or more than the stamp duty value of the property. However, in case the stamp duty value is higher than the consideration and such difference between stamp duty and purchase consideration is higher of the following, then the differential shall be taxable in the hands of the buyer.
a) 5% of the consideration, or
The above tax implication shall not arise in case the property is received from a relative or on the occasion of marriage or under a will or inheritance or in contemplation of death of the payer or donor. The term ‘relative’ as per the tax laws includes spouse, brother, sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant of self or spouse, and spouse of the aforesaid persons.
Further, a person buying immovable property (other than agricultural land) from an Indian resident (resident as per the domestic tax laws of India) is required to withhold tax at source @ 1% of the sale consideration if it exceeds ₹5 million.
Consideration shall include all incidental charges like club membership fee, car parking fee, electricity or water facility fee, maintenance fee, advance fee or any other charges of similar nature.
Lease rentals: Under the domestic tax laws of India, any lease rent earned on a property situated in India is generally liable to tax under the head ‘income from house property’. Accordingly, tax is required to be paid on the lease rentals.
There are certain deductions allowed from the lease rental income like a standard deduction @ 30%, property taxes actually paid and mortgage interest paid during the year, as specified. The net lease rental amount would be subject to tax as per applicable slab rates on the basis of which individuals are liable to pay taxes in India.
Recently, a new personal tax regime has been introduced which provides for lower tax rates; however, the aforementioned interest deduction shall not be available as per this regime. A taxpayer can calculate his/her tax liability under the old tax regime as well as under the new tax regime and choose the one whichever is more beneficial.
At the time of sale of immovable property: On sale of immovable property, tax is required to be paid on capital gains in India. The rate of tax would depend on the period for which the property is held. Gain arising on a property held for less than 24 months is treated as a short-term capital gain, which is taxable as per applicable slab rates in the hands of the seller. Long-term capital gain is taxable @ 20%.
If the stamp duty value of the property sold is higher than the sale consideration, then the stamp duty value would be regarded as sale consideration.
Also, one can optimize tax on long-term capital gains by re-investing the same, as per the provisions of the Income-tax Act. For example, long-term capital gain from the sale of a residential property can be re-invested in the purchase or construction of another residential property located in India, subject to certain conditions.
The amount of capital gain not utilized before the due date of filing return of income can be deposited in a capital gains account scheme as notified by the central government.
Taxes can also be optimised by investing long-term capital gain in bonds issued by the National Highways Authority of India or by Rural Electrification Corp. Ltd or in any other bond specified by the central government. However, investment in such bonds should not exceed ₹5 million and the investment should be made within six months from the date of transfer.
Lastly, in addition to income tax, implications under the goods and services tax and stamp duty laws should also be considered.
Real estate continues to attract investments from NRIs. As it’s a long-term investment, it’s important that necessary care and caution is exercised, along with complying with various requirements under the tax and regulatory regime in India.
Important note: The tax rates mentioned in this article are exclusive of applicable surcharge and education cess, as applicable. This should be taken into account to compute the actual / effective rate of tax. Further, NRIs can avail the benefit of lower tax rates under the Double Tax Avoidance Agreement between India and the country of their residence, as applicable.
Nilpa Keval Gosrani contributed to this article
Vikas Vasal is national leader (tax) at Grant Thornton India LLP.