NRIs: Buying or selling a property in India? Know your taxes!

However, the loan amount, according to the regulations, cannot be credited directly to the bank account of an NRI and has to be disbursed to either the seller’s or the developer’s account. The loan can be repaid using funds in an NRI’s NRO, NRE account or FCNR deposits.

In other words, when an NRI sells property, the buyer is liable to deduct TDS at 20 per cent, and in case the property has been sold before 2 years, which is reduced from the date of purchase, a TDS of 30 per cent shall be applicable. The final taxation rate is similar for NRIs and resident Indians.

If an NRI has a lower tax slab applicable to him, he or she can apply for a refund of the TDS by filing their income tax return.

• Exemption under Section 54, Indian Income-tax Act

It is available when there is a long term capital gain on the sale of house property of the NRI. The house property may be self-occupied or let out. Please note – you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains. However, your exemption shall be limited to the total capital gain on sale.

Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale.

The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase.

If you have not been able to invest your capital gains until the date of filing of return (usually July 31) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it.

• Exemption under Section 54F, Indian Income-tax Act

It is available when there is a long term capital gain on the sale of any capital asset other than a residential house property.

To claim this exemption, the NRI has to purchase one house property, within one year before the date of transfer or 2 years after the date of transfer or construct one house property within 3 years after the date of transfer of the capital asset. This new house property must be situated in India and should not be sold within 3 years of its purchase or construction.

Also, the NRI should not own more than one house property (besides the new house) and nor should the NRI purchase within a period of 2 years or construct within a period of 3 years any other residential house.

Here the entire sale receipt is required to be invested. If the entire sale receipt is invested then the capital gains are fully exempt otherwise the exemption is allowed proportionately.

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 house ‘notional’ (explained below) rents are taxable.

Further, a deduction of up to INR200,000 (Dh9,884) 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, like explained above.

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 Indian Income-tax Act.

A property held for commercial purpose would likely 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.

In case of short term capital gain to the seller, tax at the rate of applicable slab rate to NRI 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 INR50,000 or Dh2,472) 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.

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 per cent of the overall property value via loans from financial institutions.

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.

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.