- Checked out Builder’s reputation and clear title of the land with the office of the Registrar and Sub Registrar.
- When buying from builders, get everything in writing. Read the contract carefully and delete what you don’t like. Several builders publish great brochures but many times they don’t provide all those amenities that they mentioned initially. Some time they even increase prices once you buy the property as they may have clauses in the contract signed by you that allows them to do so. Check the sale agreement before signing and buying the property.
- Get the Agreement of Sale registered as per Registration Act 1908.
- Checked on a completion certificate, and map with the sale deed along with plans provided by the builder which has been granted by the local government authorities before possession. See the documentation for the lands on which flats are to be built. There should be a proper certificate issued by a lawyer with a standing of at least three years. Documents usually name the parties from whom the land has been acquired etc.
- Don’t buy property from sellers who have a power of attorney status to sell the property. If incase planning to buy property than to be ensure that title is clear and the owner is the one actually selling the property and there are no legal disputes for ownership of the property.
- Get clarification in writing regarding hand over the property after construction is completed. Such as cooperative society etc.
- When buying re-sale properties, ensure that the property is built legally and abides by all building codes and laws of the municipality and state.
- When owner resell the flats, they need no objection certificate (NOC) from the society. If there is no society then the builder himself will provide NOC and he will usually charge a hefty fee for giving an NOC.
- Don’t pay cash on purchase of any property. Make payments only through legal banking channels. This will help you avoid problems and even repatriate your money when you decide to sell your property in India.
- A person resident outside India (NRI, PIO or foreign national of non-Indian origin) cannot acquire agricultural land/plantation/farm house in India by way of purchase.
- NRIs & PIOs may acquire residential/commercial property by way of gift from Indian resident.
- A foreign citizen of non-Indian origin cannot acquire agriculture land/farm house/plantation property in India without the prior approval of the RBI, whereas a foreign citizen of Indian origin can acquire such properties without the prior approval of the RBI but only by way of inheritance. Leasing of immovable property for a period of five years or less is freely permitted.
- NRIs & PIOs may sell their agricultural land/plantation/ farmhouse in India to an Indian citizen resident in India. However, a foreign national of non-Indian origin, resident outside India, required prior approval from RBI to sell agricultural land/plantation/farm house already acquired in India.
- Gift of immovable property in India– NRIs and PIOs may gift residential/commercial property in India to NRIs, PIOs, and a person resident in India,. They cannot gift agricultural land/plantation/farm house to NRIs, and PIOs but may gift agricultural land/plantation/farm house to an Indian citizen resident in India. However, a foreign national of non-Indian origin resident outside India would require prior approval of the RBI to gift agricultural land/plantation/ farmhouse acquired by him in India.
- Acquisition by way of purchase- NRIs & PIOs can purchase only residential and commercial property in India. There is no restriction on the number of residential and commercial properties that an NRI or a PIO can buy. A foreign national of non-Indian origin, resident outside India, cannot acquire any immovable property in India by way of purchase without the RBI’s permission. A person resident outside India (that is, an NRI, a PIO or a foreign national of non-Indian origin) cannot acquire agricultural land/plantation/farm house in India by way of purchase.
- Acquisition by way of gift- An NRI or a PIO may acquire residential/commercial property by way of gift from a resident of India, an NRI or a PIO. However, a foreign national of non-Indian origin resident outside India cannot acquire residential/commercial property in India by way of gift. A person resident outside India cannot acquire agricultural land/plantation/farm house in India by way of gift.
- Acquisition by way of inheritance- A person resident outside India can hold immovable property in India acquired by way of inheritance from a person resident in India. Further, with the approval of the RBI, he may hold immovable property in India acquired through inheritance from a person resident outside India, provided the bequeath or had acquired the property in accordance with FEMA or the foreign exchange law in force at the time of acquisition.
Precautions need to be taken care
- Each state has own rules for reconverting the agricultural land. It is to be reconfirmed and rechecked by local authorities when the agriculture land was reconverted into residential or commercial land.
- Normally reconverted land is time barred and can be used only for the purpose for which it has been bought.
Under Indian Registration Act 1908,
Documents of which registration is compulsory,
- Instruments of gift of immovable property.
- Other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees, and upwards, to or in immovable property;
- Non-testamentary instruments which acknowledge the receipt or payment of any consideration on account of the creation, declaration, assignment, limitation or extinction of any such right, title or interest; and
- Leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent.
- Non-testamentary instruments transferring or assigning any decree or order of a court or any award when such decree or order or award purports or operates to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property:]
- Any composition-deed; or
- Any instrument relating to shares in a joint Stock Company, notwithstanding that the assets of such company consist in whole or in part of immovable property; or
- Any debenture issued by any such company and not creating, declaring, assigning, limiting or extinguishing any right, title or interest, to or in immovable property except insofar as it entitles the holder to the security afforded by a registered instrument whereby the company has mortgaged, conveyed or otherwise transferred the whole or part of its immovable property or any interest therein to trustees upon trust for the benefit of the holders of such debentures; or
- Any endorsement upon or transfer of any debenture issued by any such company; or
- Any document not itself creating, declaring, assigning, limiting or extinguishing any right, title or interest of the value of one hundred rupees and upwards to or in immovable property, but merely creating a right to obtain another document which will, when executed, create, declare, assign, limit or extinguish any such right, title or interest; or
- Any decree or order of a court 13[except a decree or order expressed to be made on a compromise and comprising immovable property other than that which is the subject-matter of the suit or proceeding;] or
- Any grant of immovable property by government; or
- Any instrument of partition made by a revenue-officer; or
- Any order granting a loan or instrument of collateral security granted under the Land Improvement Act, 1871, or the Land Improvement Loans Act, 1883; or
- Any order granting a loan under the Agriculturists Loans Act, 1884, or instrument for securing the repayment of a loan made under that Act; or
- Any endorsement on a mortgage-deed acknowledging the payment of the whole or any part of the mortgage-money, and any other receipt for payment of money due under a mortgage when the receipt does not purport to extinguish the mortgage; or
- Any certificate of sale granted to the purchaser of any property sold by public auction by a civil or revenue-officer.
Documents of which registration is optional,
- Instruments (other than instruments of gift and wills) which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of a value less than one hundred rupees, to or in immovable property.
- Instruments acknowledging the receipt or payment of any consideration on account of the creation, declaration, assignment, limitation or extinction of any such right, title or interest.
- Leases of immovable property for any term not exceeding one year, and leases exempted under section 17.
- Instruments (other than wills) which purport or operate to create, declare, assign, limit or extinguish any right, title or interest to or in movable property.
- Wills; and
- All other documents not required by section 17 to be registered.
Time for presenting documents-
Subject to the provisions contained in sections 24, 25 and 26, no document other than a will shall be accepted for registration unless presented for that purpose to the proper officer within four months from the date of its execution (a copy of a decree or order may be presented within four months from the date on which the decree or order was made or, where it is appealable, within four months from the day on which it becomes final).
Re-registration of certain documents- if in any case a document requiring registration has been accepted for registration by a Registrar or Sub-Registrar from a person not duly empowered to present the same, and has been registered, any person claiming under such document may, within four months from his first becoming aware that the registration of such document is invalid, present such document or cause the same to be presented, in accordance with the provisions of Part VI for re-registration in the office of the Registrar of the district in which the document was originally registered; and upon the Registrar being satisfied that the document was so accepted for registration from a person not duly empowered to present the same, he shall proceed to the re-registration of the document as if it has not been previously registered, and as if such presentation for re-registration was a presentation for registration made within the time allowed therefor under Part IV, and all the provisions of this Act, as to registration of documents, shall apply to such re-registration; and such document, if duly re-registered in accordance with the provisions of this section, shall be deemed to have been duly registered for all purposes from the date of its original registration:
Documents executed out of India,
When a document purporting to have been executed by all or any of the parties out of India is not presented for registration till after the expiration of the time herein before prescribed in that behalf, the registering officer, if satisfied-
- That the instrument was so executed, and
- That it has been presented for registration within four months after its arrival in India may, on payment of the proper registration-fee, accept such document for registration.
Particulars to be endorsed on documents admitted to registration,
1. The signature and addition of every person admitting the execution of the document, and, if such execution has been admitted by the representative, assignee or agent of any person, the signature and addition of such representative, assignee or agent;
2. The signature and addition of every person examined in reference to such document under any of the provisions of this Act; and
3 Any payment of money or delivery of goods made in the presence of the registering officer in reference to the execution of the document, and any admission of receipt of consideration, in whole or in part, made in his presence in reference to such execution.
Procedure after registration of documents relating to land
1. On registering any non-testamentary document relating to immovable property the Registrar shall forward a memorandum of such document to each Sub-Registrar subordinate to himself in whose sub-district any part of the property is situate.
2. The registered shall also forward a copy of such document together with copy of the plan to every other Registrar in whose district any part of such property is situate.
3. Such Registrar on receiving any such copy shall file it in his Book No.1, and shall also send a memorandum of the copy to each of the Sub-Registrars subordinate to him within whose sub-district any part of the property is situate.
4. Every Sub-Registrar receiving any memorandum under this section shall file it in this Book No.1
- To facilitate NRI Investment in India, RBI has also ease the norms for NRI Investment in India and Investment can be made via the automatic route (Approval from Reserve Bank of India is not required).
- As per the said Foreign Exchange Management Act an Indian citizen who resides outside India is permitted to acquire any immovable property in India other then agricultural/plantation property or a farmhouse. Thus, it is very clear that Non-Resident Indians enjoy almost all the privileges which are enjoyed by a resident Indian with reference to purchase of immovable property in India.
- This is buying time in India because of post Demonetization effect, the movement of black money is almost relinquished. The deals are transparent and clean. Therefore, for many-many reasons the property prizes have come down and also because builders in Delhi-NCR and all metro cities made huge residential and commercial complexes and consequently because of all these factors the prizes has slashed down considerably therefore this is a buying time of property in India.
An NRIs & PIOs Built up the properties in India for keeping as alternative houses or guesthouses.
There is not much sense to keep this property vacant hence better to let it out. But they have got apprehensions about vacations of these properties.
Therefore, they should be enlightened enough to know the related laws and safe guards.
There are two types of Agreements,
- Rental Agreement: Rental agreements that are over 12 months have to abide by strict rent control laws that are mostly favorable to the tenants. The Rental control laws currently prevent the landlords from overcharging the tenants and protect the tenants from sudden or unfair eviction. Also, the right to ownership of the property gets transferred from the landlords to the tenants in case of a lease agreement, making it harder for the landlord to vacate a tenant. Hence, Landlords do not prefer to enter into rental agreements that are over 12 months.
- Leave & License Agreement: Leave and license agreements on the other hand are entered into for a period of 11 months, with an option to renew the agreement at the expiration of the agreement. As a rental agreement that is 11 months long is just a license for the tenant to occupy the premises for a short duration, rent control laws do not apply. Further, rental agreements that are 11 months long allow the landlord more measures to take in case of eviction of tenant from the property. Hence, most landlords prefer to enter into a rental agreement that is 11 months long, with an option to renew at the end of the agreement period.
Guidelines to Reduce Landlord Tenant Litigation according to Supreme Court Judgment,
The Supreme Court in Mohammad Ahmad v. Atma Ram Chauhan & Ors. has laid down illustrative guidelines which aim to reduce landlord – tenant disputes and to avoid unnecessary litigation arising therefrom. Justice Deepak Varma, speaking for the bench has observed as under;
- The tenant must enhance the rent according to the terms of the agreement or at least by ten percent, after every three years and enhanced rent should then be made payable to the landlord. If the rent is too low (in comparison to market rent), having been fixed almost 20 to 25 years back then the present market rate should be worked out either on the basis of valuation report or reliable estimates of building rentals in the surrounding areas, let out on rent recently.
- Apart from the rental, property tax, water tax, maintenance charges, electricity charges for the actual consumption of the tenanted premises and for common area shall be payable by the tenant only so that the landlord gets the actual rent out of which nothing would be deductible. In case there is enhancement in property tax, water tax or maintenance charges, electricity charges then the same shall also be borne by the tenant only.
- The tenant would carry out the usual maintenance of the premises, except major repairs only and the same would not be reimbursable by the landlord.
- But if any major repairs were required to be carried out then in that case only after obtaining permission from the landlord in writing, the same shall be carried out and modalities with regard to adjustment of the amount spent thereon, would have to be worked out between the parties.
- If present and prevalent market rent assessed and fixed between the parties is paid by the tenant then landlord shall not be entitled to bring any action for his eviction against such a tenant at least for a period of 5 years. Thus for a period of 5 years the tenant shall enjoy immunity from being evicted from the premises.
- The parties shall be at liberty to get the rental fixed by the official value or by any other agency, having expertise in the matter.
- The rent so fixed should be just, proper and adequate, keeping in mind, location, type of construction, accessibility with the main road, parking space facilities available therein etc. Care ought to be taken that it does not end up being a bonanza for the landlord.
Sale proceeds of immovable property-
- Sale proceeds can be repatriated through the dealers authorized by RBI.
- If property purchased in India from inward remittance or from the NRE/NRO/FCNR account, then the principal amount can be remitted back or can be repatriated outside India.
- The balance amount will be deposited in NRO account.
- There is no locking period of 3 years as used to be before.
- USD 1million dollars per financial years can be repatriated from NRO account (Subject to tax compliance).
- Repatriation of money from the sale of the property- if any NRI/PIO sold his property in India, money has to be transferred through the legal banking channels only. It is mandatory for NRIs to have sufficient proof to show the source of money and the time of repatriation of money abroad. This money should be deposited in NRO account.
- Necessary formalities need to be done- CA certificates must be obtained from CA professional to authenticate the legal source, place and amount of repatriated money for security, other dues, legal formalities and tax point of view. Prior to repatriation of money to residing country, the bank will look for the CA certificate to verify the legality.
As per RBI, Can a non-resident repatriate the sale proceeds of immovable property in India?
A person who has acquired the property U/s 6(5) of FEMA or his successor cannot repatriate the sale proceeds of such property without RBI approval. However, repatriation up to USD I million per financial year is allowed, along with other assets under (Foreign Exchange Management (Remittance of Assets) Regulations, 2016) for NRIs/ PIOs and a foreign citizen (except Nepal/ Bhutan/ PIO) who has (a) inherited from a person referred to in section 6(5) of FEMA, or (b) retired from employment in India or(c) is a non-resident widow/ widower and has inherited assets from her/ his deceased spouse who was an Indian national resident in India.
NRIs/ PIOs can remit the sale proceeds of immovable property (other than agricultural land/ farm house/ plantation property) in India subject to the following conditions:
- The immovable property was acquired in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations 2000;
- The amount to be repatriated does not exceed the amount paid for acquisition of the immovable property received through normal banking channels or out of funds held in FCNR (B) account or NRE account;
- In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties
- There are some instances, where Indian residents tell their non-resident relatives that they cannot inherit property in India, as they are foreigners. However, this is certainly not true.
- Anyone can inherit property in India, whether they are persons of Indian origin or not.
- Even foreign nationals, who may have not even visited India, can inherit Indian property.
- NRIs can inherit not only residential and commercial property, but also Farm House, plantation, and agricultural lands.
- Even though agricultural land and plantation property cannot be acquired by NRIs by way of gift, they can legally inherit it.
- The only exceptions here are:
- Foreigner of most countries can inherit property in India without any RBI permission. However, citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan must seek prior approval from the Reserve Bank of India.
- In cases where the property is being inherited by a person who is resident outside India, there is a condition that the property must have been acquired, in accordance with the foreign exchange (FEMA) applicable laws that were in effect when the property was purchased.
A person who bought property in contravention of the foreign exchange law in force or FEMA regulations, applicable at the time of acquisition of the property would not have owned the property legally and hence cannot pass it on by way of inheritance to anyone.
NRIs can buy any number of residential or commercial properties (other than agricultural land/farmhouse plantation property). NRIs have to pay tax on the capital Gains that depends on a short term or a long-term capital gains.
Capital Gains Tax- Capital gains tax is a tax that is charged on the profits that he has made by selling his capital asset. Capital Gain Taxation is same for both Resident Indians and NRI’s but only difference is in calculation and deduction of TDS.
Under section195, income tax act 1961,
- Long-term capital gain- when a house property is sold, after a period of 2 years (Reduced from 3 years to 2 years in Budget 2017) from the date it was owned. Long-term capital gains are taxed at 22.66%.
- Short term capital gain- when a house property is sold, for 2 years or less. Short-term gains shall be taxed at 33.99% irrespective of the applicable income tax slab rates for the NRI based on the total income, which is taxable in India for the NRI.
Case of Tax implications- in case the property has been inherited, only date of purchase of the original owner is need to be remembered. In such a case the cost of the property shall be the cost to the previous owner.
Applicability of TDS
When an NRI sells property, the buyer is liable to deduct TDS @ 20%. In case the property has been sold before 2 years (reduced from the date of purchase) a TDS of 30% shall be applicable.
WAYS TO REFUND TDS
- Double Taxation Avoidance Agreements (DTAA) with Indian government i.e. lower rate of TDS is allowed. NRI need to submit a tax residency certification from the country of his residence.
- If total income in India is less than basic exemption limit of 2.5 Lac: In this case, can apply for TDS waiver with Income Tax officer under whose jurisdiction case will fall.
- To show proof of reinvestment of capital gains in India, either buy another house in India or invest in capital gains bonds under exemption section 54EC. NRI need to submit an affidavit stating that he will invest the capital gain amount in capital gain bonds.
Exemption to tax on capital gains-
- Exemption under Section 54
- Exemption under section 54F
- Exemption is also available under Section 54 EC
The NRI must make these investments and show relevant proofs to the Buyer – to make sure TDS is not deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.
Save Taxes on Rental Income,
- 1/3rd of rent can be deducted as maintenance
- Saving Taxes on Rental Income
- 30% of rental income can be claimed as maintenance
- Any property taxes paid can be claimed as deduction
- Interest paid on property loan can be claimed
- The Gift Tax Act, 1958 was repealed with effect from 1st October 1998. NRIs and PIOs can receive property as gifts from a person resident in India, from another NRI or from a PIO. However, the property can be only a commercial property or a residential property (Agricultural land, plantation property and farm house in India cannot be acquired by way of gift). A foreign national of non-Indian origin cannot acquire property in India by way of gift.
- Gifts received from ‘relatives’ are not liable to tax. Relatives include:
- Spouse of the individual
- Brother or sister of the individual
- Brother or sister of the spouse of the individual
- Brother or sister of either of the parents of the individual
- Any lineal ascendant or descendant of the individual
- Any lineal ascendant or descendant of the spouse of the individual.
- The definition of a relative is provided in section 56 clause (vi) of sub-section (2) of the I-T Act.
- As per the Income Tax Act, 1961 if the value of gifts received is more than Rs. 50,000 a year, who are not relatives then such amount is taxed as income in the hands of the receiver. These gifts may be in any form – cash, jewelry, movable and immovable property, shares etc.
- The property may also be subject to wealth tax. According to the Wealth Tax Act, tax is payable if the net value (market value minus any loans taken to finance the assets) of the assets of an individual exceeds Rs 30 lakh.
- An NRI can sell property received as a gift. The sale proceeds of such property should be credited to NRO account only. From the balance in the NRO account, NRI/PIO may remit up to USD 1 million per financial year, subject to the satisfaction of authorized dealer and payment of applicable taxes.
- An NRI can rent such property. The implications are the same as those applicable for renting out purchased property.
- There are certain exceptions,
In case of only one house- If an NRI own only one residential house, do not have to pay wealth tax and even after receiving the property as gift, if this is the only property that NRI own, do not have to pay wealth tax on it.
- Gift Deed format,
During gift to someone, it is essential to back it up using gift deed. A gift deed is a legal document which is used to describe the transfer of gift from donor to donee without any exchange of money.
- A Gift Deed include the followings-
- Date and place where Gift Deed is made
- Details of the donor (name, father’s name, date of birth, address)
- Details of the donee (name, father’s name, date of birth, address, relationship with donor)
- Relationship of donee with the donor
- Details of the property that is being gifted
- Signatures of donor and donee
- Details of two witnesses in whose presence the deed was executed
- Signatures of the witnesses
- For an OCI living and working for a long time (at least > 2 years) in India, he should qualify as a “Resident and Ordinarily Resident” (ROR) as per ITA.
- If OCI is an ROR as per ITA, then his worldwide income is taxable in India. In case of income outside India, the person may avail benefit of DTAA or claim a tax credit of tax paid in foreign country.
- If the OCI qualifies as a RNOR, then only his Indian income is taxable in India. Income from outside India is not taxable in India, unless it is received directly in a bank account in India.
- As per the permission granted by Government of India regarding OCIs to buy property in India, they do not have to pay any taxes even while acquiring property in India. However, taxes have to be paid if they are selling this property.
- Rental income earned is taxable in India, and they will have to obtain a PAN and file return of income if they have rented this property.
- On sale of the property, the profit on sale shall be subject to capital gains. If they have held the property for less than or equal to 3 years after taking actual possession then the gains would be short term capital gains, which are to be included in their total income as tax as per the normal slab rates shall be payable and if the property has been held for more then 3 years then the resultant gain would be long term capital gains subject to 20% tax plus applicable cess.
- The income tax Act, 1961, is the governing authority for taxation in India.
- NRIs and PIO are liable to pay taxes in India, depending on their residency status and the source of income.
- For a period of 3 years, any income that is ‘earned’ in India is taxable in India and income outside of India is not taxable in India. This status can be continued. However, once have attained the status of a Resident, all of income within and outside India will be taxable in India, barring any concessions that may be available under the Double Taxation Avoidance Agreement between India and the country from where overseas income has arisen.
- PIOs, who return to India for permanent settlement, should be aware that at some point of time, their foreign income may also become taxable in India.
- An individual qualifying as ROR is taxable on his global income and required to report his global assets in his India tax return. However, an individual qualifying as NR or RNOR is taxable only on his India source income (i.e. income earned in India or received in India).
- NR (Non Resident)- liable to pay tax “only” on the income earned in India and “not taxed” on any income earned outside India “nor” on the income earned outside India out of a business controlled from India or a profession set-up in India
- RNOR (resident but not ordinarily resident)- liable to pay tax on the income earned in India + on the income earned outside India out of a business controlled from India or a profession set-up in India and “not taxed” on any income earned outside India
- ROR (resident and ordinarily resident)- liable to pay tax on all types of incomes i.e. earn in India, earnings outside India out of a business controlled from India or a profession set-up in India and also on all other incomes earned outside India
- Salary income is taxable when received in India. Therefore, if an NRI receives salary directly to an Indian account it will be subject to Indian tax laws. This income is taxed at the slab rate it belongs to. Income from salary will be considered to arise in India if services are rendered in India. It shall be taxed in India.
- Income from a property that is situated in India is taxable for an NRI. An NRI is allowed to claim a standard deduction of 30%, deduct property taxes, and take benefit of an interest deduction if there is a home loan. The NRI is also allowed a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid on the purchase of a property can also be claimed under Section 80C. Income from house property is taxed at slab rates as applicable.
- Interest income from fixed deposits and savings accounts held in Indian bank accounts is taxable in India. Interest on NRE and FCNR account is tax-free. Interest on NRO account is fully taxable.
- Any income earned by an NRI from a business controlled or set up in India is taxable in India
- A tenant who pays rent to an NRI owner must remember to deduct TDS at 30%. The income can be received to an account in India or the NRI’s account in the country he is currently residing. (A person making a remittance (a payment) to a Non-Resident Indian has to submit Form 15CA).
- Any capital gain on transfer of capital asset, which is situated in India shall be taxable in India. Capital gains on investments in India in shares, securities shall also be taxable in India.
- The expatriate is a citizen of a foreign country any income that is earned by them in India shall be taxable in India. This income may have been earned by working in India or by providing services in India.
- An income, which is earned by an expatriate in India, is taxable in India irrespective of the foreign national’s citizenship or residential status. This payment may also be subjected to TDS (Tax Deducted at Source) in India. But incase if total income is less than the minimum exempt income (Rs 2,50,000 for FY 2014-15), can get a refund of this TDS by filing an Income Tax Return in India.
- When an NRI invests in certain Indian assets, he is taxed at 20%. If the special investment income is the only income the NRI has during the financial year, and TDS has been deducted on that, then such an NRI is not required to file an income tax return.
- The IT Department allows RNORs to continue to enjoy exemptions available to NRIs for a period of 2 years after their return. Therefore, deposits held in foreign currency, which are exempt for an NRI, shall be exempt to returning NRIs for 2 years. After these 2 years, returning NRIs are treated as resident individuals.
Tax Deducted at Source (TDS) from Sale of Property
NRIs who wish to sell their property in India are often confused regarding the concepts of Tax Deducted at Source, the sections applicable, the percentage for the same, and any exemptions if any. We have tried to answer them in detail and will be providing more information regarding this as well as other topics concerning NRIs in our next post.
1. What is TDS?
The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.
2. How does it affect NRIs?
NRIs are subject to a Tax Deducted at Source (TDS). The Income Tax department requires that if there is capital gain arising out of sale of property in India, then the corresponding income tax should be paid in India.
Since NRIs stay outside India, it is fairly difficult to ensure Capital Tax Gain compliance after the property transaction is completed. Therefore, the Income Tax Department has set forth rules whereby it is mandatory for the buyer to deduct tax at source. This is done at the time of making payment to NRI seller. The procedure of TDS deduction is followed under section 195 of the Income Tax Act.
NRIs who sell purchased property after two years (Reduced from 3 years to 2 years in Budget 2017) from the date of purchase will incur long term capital gains tax 20%. (The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is nothing but the cost of purchase adjusted to inflation.)
If the NRI sells the property before two years have elapsed since the date of purchase of the said property, short term capital gains tax at his or her tax slab is incurred. (Short term capital gain is calculated as the difference between the sale value and the cost of purchase – without the indexation benefit). The NRI will be subject to a TDS of 30 % irrespective of his or her tax slab.
Note- Tax implications for NRIs are also applicable in the case of inheritance. In case the property has been inherited, remember to consider the date of purchase of the original owner for calculating whether it’s a long term or a short term capital gain. In such a case the cost of the property shall be the cost to the previous owner.
3. Can NRI get waiver on sale proceeds?
There are certain instances when NRI can get a waiver of TDS. One such case would be if the NRI is planning to re-invest the capital gains of the property in another property or in tax exempt bonds. In such cases, the NRI will be exempt from tax in India, and no TDS will be deducted either.
Exemptions under Section 54 and Section 54EC:
NRIs are allowed to claim exemptions under section 54 and Section 54EC on long term capital gains from sale of house property in India.
Section 54 – This section stipulates that if NRI sells a residential property after three years from the date of purchase and reinvest the proceeds into another residential property (situated in India) within two years from the date of sale, the profit generated is exempt to the extent of the cost of new property.
Example- If the capital gains is Rs 10 lakh and the new property costs Rs 8 lakh, the remaining Rs.2 lakh are treated as long term capital gains. (The sold residential property may be either have been self-occupied property or given on rent. The new property must be held for at least three years.)
(NRIs cannot invest the proceeds on the sale of a property in India in a foreign property and still avail the benefit of Section 54. However, some recent hearings with the appellate authorities have held that exemption can be claimed under Section 54 even if the new house is purchased outside India. This has not been explicitly specified under the law, and it is advisable for an NRI to consult a lawyer/tax expert before making any investment decisions outside India to avail of tax benefits under Section 54.
Also, do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase.)
Section 54EC – This section of the Income Tax Act states that if an NRI sells a long term asset (in this case, a residential property) after three years from the date of purchase and invests the amount of capital gains in bonds of NHAI and REC within six months of the date of sale, he or she will be exempt from capital gains tax. The bonds will remain locked in for a period of three years.
Others methods of getting TDS refund:
1. If the country of residence has Double Taxation Agreement (DTAA) with Indian government i.e. lower rate of TDS is allowed. NRI need to submit a tax residency certification from the country of his residence. it will certify that you are a tax paying resident in that country and that tax on this income is paid in that country, it ensure no tax leakage for either countries.
For example, In US, the tax residency certificate is called Form 6166. You can make application to the Internal Revenue Service (IRS) in Form 8802. In UK you need to get the tax residency certificate from the HM Revenue and Customs.
2. If your total income in India is less than basic exemption limit of 2.5 Lac: In this case, you can apply for TDS waiver with Income Tax officer under whose jurisdiction your case will fall.
However, claiming refund is more tedious process and it is always advisable to apply for NIL Tax Deduction / Tax Exemption / Lower Tax Deduction Certificate. It requires some intelligent planning before sale of property and proactive approach.
4. The onus of collecting the TDS and depositing with the Government lies with the buyer. Because since the buyer does not know how much capital gains NRI are making on such transaction, he deducts TDS on the entire sale consideration which is wrong. What should be done?
There is way to avoid this deduction of TDS on entire sale proceeds. The buyer can get a certificate from Assessing Officer (under Section 195(2)) stating the portion of sale consideration which shall be liable to TDS. Alternatively, it is better that the NRI seller can arrange a certificate from Assessing Officer under Section 195(3) or Section 197 of the Income Tax Act specifying a lower rate of TDS. The buyer on receiving such certificate can deduct income tax at the rate specified in that certificate.
Unless such certificate is obtained, the buyer must deduct TDS on the entire sale consideration. If the buyer doesn’t deduct TDS, he stands in violation of Income Tax Act and the implications are serious. (Refer case: Syed Aslam Hashmi v. ITO)
The buyer must get a Tax Deduction Account Number (TAN) and issue TDS certificate to the seller (NRI) so that income tax return can be filed and refund claimed.
(Tax Deduction and Collection Account Number (TAN) is a 10 digit  number issued to persons who are required to deduct or collect tax on payments (the buyer) made by them under the Indian Income tax Act, 1961. The TDS on payments made by assessees is deposited under the TAN to enable the assessees who have received the payments (i.e NRI seller) to claim the tax deducted in their income tax return.)
5. How do NRIs get hold of a tax exemption certificate?
NRI selling their properties can apply to the income tax authorities for a tax exemption certificate under section 195 of the Income Tax Act. They must make this application in the same jurisdiction that their PAN belongs to and will be required to show proof of reinvestment of capital gains.
If the NRI is planning to buy another house, the allotment letter or payment receipt will need to be produced; if capital gains bonds are chosen instead, an affidavit to this effect will have to be prepared.
Usually, buyers withhold the last installment of payment until the NRI produces a certificate of exemption. (A NRI has up to two years from the date of sale to invest in another property, or up to six months to invest in bonds.)
- Non Resident External (NRE)
- Ordinary Non-Resident account (NRO)
- Foreign currency non Repatriable account (FCNR)
- Tax benefits: Interest earned not taxable in India.
- Easy movement of funds: Funds in NRE account are fully & freely repatriable.
- Low balance required: Minimum monthly account balance as low as 10,000 only
- Anytime, anywhere account access: With international ATM-cum-Debit card, convenient access at over 11,000 ATMs and over 3,000 branches all over India.
- Beneficial interest rates: Interest rate calculated on daily closing balances at 4% per annum.
- Low cost and Hassle-free money transfers: Available through various online and offline modes at competitive exchange rates
- Money to India: Safe and simple online money transfer tracking service with online transfer to over 100 banks in India.
- Joint holding: With another NRI.
- Higher yield post tax: By availing DTAA benefit facility. (Interest earned on NRO accounts is taxable in India and may also be taxable in the foreign reside country.)
- Low cost and Hassle-free money transfers: Available through various online and offline modes at competitive exchange rates
- Low balance required: Minimum monthly account balance as low as 10,000 only
- Anytime, anywhere account access: With domestic ATM-cum-Debit card, convenient access at over 11,000 ATMs and over 3,000 branches all over India, and phone and 24×7 internet banking.
- Beneficial interest rates: Interest rate calculated on daily closing balances at 4% per annum. Interest paid half-yearly in June and December.
- Easy movement: Interest earned in current financial year is fully repatriable(after deducting tax). Funds in NRO account can be repatriated upto USD one million per financial year# for all bonafide purposes.
- Money to India: Safe and simple online money transfer tracking service with online transfer to over 100 banks in India.
- Joint holding: With an Indian resident or NRI.
- Easy re designation: Of your resident account to NRO Account when you become a NRI. Your account number remains the same.
- Flexibility in opening account in multiple currencies: USD, GBP, EUR, JPY, CAD, AUD, SGD, HKD and CHF.
- Low Deposit amount : USD 1000, GBP 1000, EUR 1000, CHF 1000, JPY 200,000, HKD 10000, SGD 2000, CAD 2000 and AUD 2000*
- Multiple tenure options: Ranging from 1 to 5 years.
- Hassle-free renewal: Automatic renewal of your principal and interest on maturity.
- Easy movement: Principal amount and interest earned are fully repatriable.
- Tax benefits: Interest earned is not taxable in India.
- Attractive loan options: Loans up to 85% of your deposit at attractive interest rates (maximum 500 lacs).
“The government of India now allows Non Residents to repatriate up to one million US$ per calendar year from their NRO accounts subject to the payment of all applicable taxes. The one million US dollar limit includes any money received by NRI/PIO from the sale of their properties in India provided the property has been held for a period of ten years or more”
What is TDS?
Tax Deducted at Source (TDS) is a system introduced by Income Tax Department, where person responsible for making specified payments such as salary, commission, professional fees, interest, rent, etc. is liable to deduct a certain percentage of tax before making payment in full to the receiver of the payment. As the name suggests, the concept of TDS is to deduct tax at its source. Let us take an example of TDS assuming the nature of payment is professional fees on which specified rate is 10%.
It applies on,
- NRIs who continue to earn income in India are subject to tax in India.
- Normally, in many instances, such tax is deducted in the form of TDS.
- Interest earned on NRE accounts as well as other foreign currency accounts such as FCNR accounts are tax free. Hence no tax is deducted as TDS from these accounts.
- Indian residents who earn interest on their Indian bank accounts are liable to pay TDS on amounts over and above Rupees 10,000. However when it comes to NRIs they are not allowed this benefit on their NRO accounts.
- All interest earned in NRO accounts is subject to a TDS rate of a whopping 30% Interest earned by NRIs on other types of deposits, such as bonds are subject to a TDS @ 20%. However dividends from equity shares, equity mutual funds and debt mutual funds are exempt in the hands of the share or unit holder.
- As for capital gains, profits made on sale after 1 year from date of purchase, on equity shares and equity mutual funds are exempt from tax. Hence no TDS applies.
- However for Short-term capital gains, which are said to be profits on sale within one year of date of purchase, a TDS of 15% applies.
- Long-term capital gains from debt mutual funds and corporate debentures that are sold in the secondary market attract TDS at 10 per cent.
- Short-term capital gains will be subject to a TDS of 30 per cent.
- Capital gains on assets such as, real estate or gold, for long term capital gains TDS rate is 20%. For short term capital gain the TDS rate is 30%
Ways to deduct TDS
- Banks and other Financial institutions deduct TDS automatically and submit it to the tax authorities.
- In the cases when there is no sale of a house, the buyer is responsible for ensuring that TDS is taken and sent to the authorities. Here buyer will have to apply for and get a Tax Deduction Account number (TAN) and issue a TDS certificate to the seller after deducting the TDS.
- TDS on rental income, the tenant is responsible to deduct the TDS and issue a TDS certificate.
- In cases of income exceeds Rupees 10 lakh, a surcharge of 10 per cent would be applicable on the TDS.
Different forms prescribed for TDS Return,
- Form 24 Q, Deductions made in a salaried case
- Form 26 Q, Deductions made in the non-salaried case
- Form 27 Q, Deductions made in the case of NRIs
Liberalized Remittance Scheme (LRS) allows all resident individuals to freely remit up to US$ 250,000 per financial year for any permissible transactions. LRS is for Indian residents and not for NRIs. Permissible transaction examples are:
- Gifts or donations
- Purchase of shares
- Purchase of property – The LRS limit increased from US$ 125,000 to US$ 250,000 makes it easier for Indian residents to buy property abroad. The increased LRS limit makes properties within buying range, the previous limit was too low considering foreign property prices.
- Foreign currency accounts at overseas banks
- Help relatives living abroad
- Education – Travel – Medical treatment etc.
There are some restrictions under LRS whereby such remittances are not allowed.
For example you cannot remit funds abroad under the LRS scheme for:
- To be used for trading on foreign exchange markets, margin, or margin calls to overseas exchanges.
- The purchase of foreign currency convertible bonds issued by Indian companies abroad is also not permissible under LRS scheme.
- Purchase of lottery tickets
- Remittances to Bhutan, Nepal, Mauritius, and Pakistan are not allowed.
Remittances mentioned below are additional repatriation allowances and do not affect the US$ 250,000 limit allowed under LRS scheme.
- International Tourism: Allowed US$ 10,000 per financial year
- Business visit abroad: Allowed US$ 25,000 per trip
- Medical treatment abroad: US$ 100,000 on self-declaration or more on production of valid estimates from hospital or doctor abroad. Further US4 25,000 is allowed as maintenance expense.
- Education: When going abroad for higher studies US$ 100,000 or higher when estimate provided by the educational institute the person is going to attend.
- Going abroad on employment- A person going abroad for employment can draw foreign exchange up to USD 2,50,000 per FY from any Authorized Dealer in India.
VISAs and other related information regarding OCIs
- The constitution of India does not allow Indian citizenship and citizenship of a foreign country at the same time.
- India offers a life long visa called Overseas Citizen of India (OCI) Instead of Dual citizenship.
- OCI receive a life long multiple entry visa stamp on their foreign passports and a registration booklet. it can not be used as a travel document.
- The passport type of document issued to OCI is not an Indian passport.
- Have no right to vote in India.
- It cannot be used for travel.
- Can not be appointed as a high court/supreme court judge.
- Can not run a political office.
- The Overseas Citizen of India application is in two parts, Part ‘A’ and Part ‘B’.
- Part ‘A’ MUST be filled on-line by the applicant
- Proof of present citizenship
- Evidence of self or parents or grandparents
- Being eligible to become a citizen of India at the time of Commencement of the Constitution; or
- Belonging to a territory that became a part of India after 15th August, 1947; or
- Being a citizen of India on or after 26th January, 1950
- Copy of the passport: or
- Copy of the domicile certificate issued by the Competent Authority; or
- Evidence of relationship as parent/grandparent, if their Indian Origin is claimed as basis for grant of OCI.
- Any other proof that is acceptable to the authorities as proof of them being of Indian origin.
- OCI fee for applications filed in India is Rupees15,000 and has to be paid by demand draft in favor of ‘Pay and Accounts Officer (Secretariat), Ministry of Home Affairs’ payable in New Delhi.
- Those applicants who already hold a valid PIO Card can now until March 31, 2016 apply for and get OCI in lieu of PIO free of charge. They only have to pay any postage charges involved.