NRI Investment in residential house in India – FEMA and Income tax implications

October 16, 2019

Almost all NRIs wish to have atleast one house in India either as part of their investment planning or out of attachment to the motherland and a hope that they may settle back in India after retirement.  On the other hand, some of them may also inherit from their parents and may plan to sell it off. In all these cases, the two major economic laws that need to be taken care of are –  FEMA, 1999 and Income tax Act, 1961.

We have summarised the provisions of these two laws to give a brief overview to our readers:

Part A – Acquisition of property

 Broad provisions of FEMA:

•  A person resident outside India can hold, own, transfer or invest in any immovable property situated in India if such property was acquired, held or owned by him/ her when he/ she was resident in India or inherited from a person resident in India.

 Income tax implications:

Some important compliances to be carried out at the time of purchase:

• In case property is purchased from a resident Indian, TDS @ 1% of the purchase price of the property needs to done.
• In case the property is purchased from non-resident, TDS @ 20% (plus applicable surcharge and cess) needs to be done.
• Where purchase value of the property is lesser than the value as per the relevant Stamp duty law, the difference (if it exceeds Rs. 50,000) will taxed in the hands of purchaser. This is not applicable to transaction between relatives.

Part B – Transfer of immovable property:

FEMA:

• NRI / OCI can transfer the property in India to any Indian resident
• NRI / OCI can also transfer the property in India (other than agricultural land or plantation property or farm house) to any other NRI / OCI
• NRI / OCI can gift the property only to relative as defined under section 2(77) of Companies Act, 2013

Repatriation of sale proceeds outside India:

• In case monies were originally paid from NRO account, it will be termed as investment on non-repatriation basis. The sale proceeds will have to be credited to NRO account only.
• Where the property is inherited from a person resident in India or was acquired when the NRI was himself resident in India, the sale proceeds can be credited to NRO account only.
• If the monies were originally paid from NRE account / foreign bank account / FCNR account, the whole sale consideration can be repatriated outside India. In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.

  Income tax implications in India – broad provisions of Income tax Act, 1961:

• Gains arising on sale of immovable property held for investment purpose will be taxed under the head ‘capital gains’.
• The capital gains are further bifurcated into two categories – Long term capital gains and short term capital gains. The rate of tax will depend on whether the gain is a long term or short term.
• If a property is held for more than 24 months, it will be termed as Long term capital asset and the subsequent gain would be treated as long term capital gain. Similarly, if the holding period is equal to or lesser than 24 months, the gains would be treated as short term capital gains.
• Long term capital gains are taxed at the rate of 20% plus applicable surcharge and education cess. Short term capital gains are taxed at normal slab rate.
• While computing capital gains in case of long term capital assets, one also gets the benefit of indexed cost of acquisition. It is the amount arrived at after inflating the original cost of asset with the inflation in the economy. The Central Board of Direct Taxes (‘CBDT’) notifies cost inflation index for every financial year.
• The computation of long term capital gains will thus be as follows:

Frequently asked questions:

1. A, spouse of Mr. A is also a non-resident of foreign origin. Can she be joint holder of the property acquired by Mr. A in India?

Yes. Subject to following conditions:

• Payment for acquisition should be out of funds received in India through banking channels by way of inward remittance from any place outside India or by debit to non-resident account of the person concerned. Payments cannot be made either by traveller’s cheque or by foreign currency notes.
• 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.
• The non-resident spouse should not otherwise be prohibited from such acquisition.

2. I am an NRI and need a loan for purchase of house in India. Can I get loan?

NRIs / PIOs can  avail home loan from authorised or a housing finance institution in India approved by the National Housing Bank (NHB) for acquisition of residential house in India. Some important conditions to kept in mind are:

• The loan amount shall not be credited to NRE/FCNR(B)/NRNR account of the borrower;
• The loan shall be fully secured by equitable mortgage of the property proposed to be acquired, and if necessary, also by lien on the borrower’s other assets in India;

3. I have purchased a house in India for investment purpose and have given it on rent. Do I need to file return of income in India? I have rental income and interest income on my NRO account. Apart from this, I have no other income in India.

Whether a person is required to file return of income in India or not depends on his total income during the year. For the Financial years 2019-20, any individual, irrespective of his residential status, is required to file his return of income if his total income for FY 2019-20 is more than Rs. 250,000.

Hence, if the total of all the incomes after applicable deductions is more than this limit, you will have to file return of income.

Secondly, if there is a tax deduction of source done by the payer, then even if the total income is less the above mentioned Rs. 250,000 you may have to file return of income to claim refund of the tax so deducted.

4. What are the TDS implications on sale of house property by an NRI?

Under the Income tax Act, any person paying any sum to a non-resident which is chargeable to tax in India shall be liable to deduct tax at applicable rates.

In case of long term capital gains, the withholding tax rate is 20% plus applicable surcharge and education cess. Practically, the buyer would deduct 20% on the entire sale consideration as withholding tax.

In case, the non-resident wishes that the deduction should be at a lower rate or on a lower amount, he needs to obtain a certificate from the income tax officer to this effect.

5. How can I save tax on capital gains?

In case of sale of residential house, an individual, whether resident or non-resident gets exemption under section 54 from long term capital gains if he –

• purchases a new house either one year before or two years after the date of sale of existing house
• constructs a new house either one year before or three years after the date of sale of existing house.
• In cases where total capital gain is not more than Rs. 2 crores, exemption upto purchase of two new house properties can be availed. Such exemption is available to the individual only once in his lifetime.

Section 54EC investments:

• It may not be possible to purchase or construct a new house in all the cases. In that case, there is one more option – i.e. investment in certain Government notified Bonds.
• Investment in these Government notified Bonds has to be done within six months from the date of sale. The maximum cap on investment that can be done in a financial year and for a particular sale of asset is Rs. 50,00,000.
• The lock-in period for these Bonds is five years. Interest arising from these Bonds will chargeable to tax.

6. Can an NRI invest in plot of land to for the purpose of starting a real estate business in India?

No. An NRI is not permitted to do real estate business in India.