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Things NRIs must remember before buying any property in India

While an NRI can buy any number of properties in India, the tax liability is different if the asset bought is for self use, generates rental income or if it has been bought for the sole purpose of investment.

Representative image
Representative image

The Foreign Exchange Management Act (FEMA) stipulates that an Indian citizen residing outside the country can invest in Indian real estate, provided that the property in question is not agricultural land, plantation property or a farmhouse. Having said that, the tax liability for NRIs is different if the said property is bought for self use, rental or for the sole purpose of investment.

No restriction on number of properties NRIs can buy in India

There is no restriction on the number of properties that NRIs can own in India. The most important consideration is that of whether the property purchase is for their own or their family’s actual use, or an investment for rental income and potential capital appreciation, said Shajai Jacob, CEO – GCC, ANAROCK Property Consultants.

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Tax liability different if property bought for self use versus rental income

The tax liability be different in each of these cases - actual use, rental income, capital appreciation. There is no tax implication in case of one self-occupied property (i.e. property occupied for own residence or a property which cannot actually be occupied by the owner due to the fact that he has to reside at other place on account of his employment, business or profession carried on at such other place).

However, in a case where the NRI owns more than one self-occupied residential property, then only one of the houses will be treated as self-occupied and all other houses will be treated as deemed let out and a notional rent is taxable under the head Income from House Property.

NRIs should also remember that income from renting out a residential property (i.e. the annual value) is taxable under the head ‘income from house property’. But a standard deduction of 30 percent towards repairs and maintenance along with other deduction of municipal tax is permitted from the rental income. Further, a deduction of up to Rs 2 lakh is allowed towards interest payable on any loan taken with respect to the said property.

If a property is held for investment purpose only then capital gain shall arise on transfer of house property and taxable in the hands of the NRI. Such capital gains is characterised as a short-term capital gain or long-term capital gain based on period of holding of such property.

A property held for 24 months or less is treated as a short-term capital asset and the resultant short-term capital gain is taxable at the NRI's tax slabs. Further, gains from a property held for more than 24 months is taxable as a long-term capital gain at a rate of 20 percent (plus applicable surcharge and cess).

Further, a deduction can be claimed if such capital gain is reinvested into a new residential house property or in specified funds as per the provisions of the Income-tax Act, 1961.

Return on investment different for real estate asset classes 
Residential
Property SegmentExpected ROI
Affordable8-10%
Mid-segment6-8%
Luxury3-5%
Ultra-luxury2-3%
 
Commercial
Property typeProjected Rental YieldProjected Capital Appreciation
Grade A office8-10%10-12%
Garde B office5-7%6-8%
 
Retail
Property typeProjected Rental YieldProjected Capital Appreciation
High-Grade Mall Space9-11%10-12%
Regular Shopping Centre5-7%5-7%
High-street shops9-12%10-13%
 
Warehousing
Property typeProjected Rental YieldProjected Capital Appreciation
Warehousing4-6%5-7%

Source: ANAROCK Research

Impact of RERA, demonetisation and GST on NRIs

RERA has given the Indian real estate industry its first regulator. This shall boost the confidence of NRIs for investing in real-estate sector. Further, the investment in the Indian realty sector is likely to reap regular rental returns along with the appreciation of the property for NRIs. In addition, benefits under GST for the affordable housing segment has further catalysed the situation for NRIs.

"In the long run, GST is likely to provide much needed impetus to the real estate sector by encouraging formalization of the sector through transparency in supply transactions, reduction in tax cost and certainty in tax positions," said Harpreet Singh, Partner in KPMG.

Tax liability on commercial or residential property be the same

Will the tax liability be different if an NRI were to invest in a co-working space, co-living space or student housing versus a conventional office space?

A property held for commercial purpose would likely to have more income-tax consequences compare to the residential house property. This is due to the beneficial provision available under the Income-tax Act, wherein notional rent of one self-occupied house property is considered as Nil.

The property for co-working space, co-living space or student housing likely to have a commercial usage resulting into rental income in the hands of a NRI. The taxability of rental income in this scenario would be same as discussed above.

Things domestic buyers should keep in mind before buying property from an NRI

An NRI buyer would require to comply with the tax provisions. The buyer is required to withhold tax at the rate of 20 percent (plus applicable cess and surcharge) of the capital gains if the gain to the seller is a long term capital gain.

In case of short term capital gain to the seller, tax at the rate of applicable slab rate to NRI (plus applicable cess and surcharge) on the gain amount is to be withheld. However, an NRI (i.e. seller) may evaluate to claim a credit in his country of residence with respect to taxes paid in India as per the provisions of relevant Double Taxation Avoidance Agreement (DTAA).

To safeguard from any future tax litigation, the buyer can file an application to the tax officer for computing tax liability arising from sale of property for the purpose of withholding of tax.

The buyer should ensure that the sale consideration of house property is not less than stamp duty value of the property, else the deficit (between sale consideration and stamp duty value, if it exceeds Rs 50,000) shall be taxable in the hands of buyer.

The buyer would also require to obtain Tax Deduction and Collection Account Number (‘TAN’) for withholding of taxes.

Tax implications following Budget 2019

The Interim Budget 2019 has provided relief to middle-class taxpayers. There is a one time exemption on capital gains up to Rs 2 crore on sale of residential house property if investment made for purchase/construction of two residential houses (as against one residential house earlier)

There is no notional rent required to be offered on second self-occupied house property.

NRIs don’t need special permission to invest in Indian real estate

All monetary transactions must be done in Indian currency and through normal banking channels via an NRI account. NRIs can use either their own funds or avail of home loans from banks or other financial institutions in India. RBI mandates that all buyers, including NRIs, can avail of a maximum 80 percent of the overall property value via loans from financial institutions, explains Jacob.

NRIs must use inward remittances via NRO/NRE accounts in India. They can also issue post-dated cheques or opt for Electronic Clearance Service (ECS) from their NRO, NRE or Foreign Currency Non-Resident (FCNR) account, he says.

While the loan process and benefits remain same as for resident Indians, the documents that an NRI must submit must meet certain eligibility criteria and also issue a Power of Attorney (PoA) – a key document required during NRI home loan processing.

vandana.ramnani@nw18.com

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First Published on Mar 5, 2019 01:22 pm
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