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Taxation of property transactions for NRI

It is better to know the tax treatment you get depending on your tax status and accordingly account for capital gain tax.

Dilshad Billimoria

The taxation of an individual is dependent on the residential status, which in turn is dependent on the presence of the individual in India.

The residential status of an individual in India is classified as under-
1. Resident in India-

a) Resident and ordinarily a resident (ROR)
b) Resident but not ordinarily a resident (RNOR)

2. Non Resident in India -

An individual is treated as a resident in India if any one of the following conditions are satisfied-
a) Individual's stay in India is 182 days or more in the financial year
OR
b) Individuals stay in India is 60 days or more in the relevant tax year AND 365 days or more in total; in the 4 years immediately preceding the tax year for which the residential status is determined.

If none of the above conditions is fulfilled, the individual is said to be a Non Resident.

A resident individual is treated as Resident Not Ordinarily a Resident - (RNOR) in India, if he satisfies ANY of the following conditions:
a) The Individual is resident in India, at least 9 out of 10 years preceding the tax year in which the residential status is determined.
OR
b) The individual is physically present in India for 729 days or less during 7 tax years preceding the tax year for which residential status is determined.

A resident individual not satisfying the above condition is said to be Resident and Ordinarily a Resident -(ROR)

In case an individual is ROR in India, in a given tax year, he is taxed on his worldwide income in India.

However, if the individual is also a resident of another country, and the two countries have a double taxation Avoidance Agreement (DTAA) signed, then the residential status will be decided as per the netting effect of the relevant countries laws.

When an NRI sells property in India, the taxation on capital gains is the same as applicable to Resident Individuals (Short term 3 years with indexation benefit)

The only difference being, that the buyer is liable to deduct TDS at 20% if the property sold is held for more than 3 years and 30% if the property sold is held for less than 3 years.

Exemption under Sec 54 of the Income Tax Act is applicable to NRIs also.

Sale of house property after three years, enables the NRI to benefit from Sec 54 rule of investing only the capital gains portion in another property within 1 year from the date of sale or two years before the date of sale, or construction of a house 3 years from the date of sale of current property.

Budget 2015-16 has clarified that the sale proceeds must be utilised to purchase the property in India only (not outside) and the exemption is allowed for purchase/ construction of ONE house property only, from the sale proceeds.

Remittance of sale proceeds amount can also be repatriated by the NRI upto 1 million USD in a calendar year and for a maximum of 2 properties.

NRIs/ PIOs are not allowed to invest in agricultural land, farmhouse and plantation land in India.

NRIs/ PIOs can freely acquire immovable property by way of gift and inheritance except for agricultural land.

Sale of property outside India, for example in UK, would be subject to capital gains based on the residential status of the individual in the relevant FY when property is sold and immediate preceding seven financial years to determine whether the individual is ROR or RNOR.

In case the individual qualifies as NR or RNOR in the relevant financial year of sale of property in the UK, the gains arising from sale of property will not be taxed in India, provided the amount remains in the overseas bank account. If the sale proceeds are deposited in the Indian bank account, then it would be taxable in India.

A point to note - mere remittance of funds from overseas bank account to Indian bank account does not attract tax implication in India.

However, if you are Ordinarily a resident of India, that is, you have stayed in India, for more than 729 days in the preceding 7 years, relevant to current Financial year, then global income shall be taxable in India, irrespective of source of place. Therefore, the gains arising from sale of property in the UK would be subject to tax in India with benefits available under the DTAA between India and UK.

The capital gains amount can be reinvested in another property or specified bonds as per Sec 54 of the Income Tax Act.

The balance amount of long term capital gains for ROR's will be subject to tax at 20.6 % assuming income exceeds basic tax exemption limit.

Disclosure of assets, immovable property and bank accounts held by Resident and Ordinarily a Resident, is mandatory in the Income tax filing.

Dilshad is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.

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First Published on Aug 31, 2015 11:36 am
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