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    Tax laws and benefits for NRIs

    By Harshvardhan Sharan·June 4th, 2022

    India is home to foreign investors. The Indian real estate sector has always been on a hotlist of foreign investments and has constantly been a popular topic around the world with consistent developments and progress! Non-Resident Indians (NRIs) have taken a keen interest in the property sector of India despite the coronavirus outbreak.


    But above all this, the tax had always been a topic of concern for the NRIs trying to buy, sell, and rent properties in India. So if you too are an NRI, looking out for some basic guidelines, rules, and laws to invest in the Indian land, this article is for you!


    In this article, we will be talking about-


    • Tax laws before buying, selling, and renting a property.

    • Preliminary things every NRI should know.

    • Documentation required as an NRI.

    • Qualifications for loans and mortgages as an NRI.

    • How RERA and FEMA can save you from risk factors while investing.

    • Why should NRIs invest in Indian real estate?


    Tax laws for buying, selling, and renting a property :


    Every NRI has certain tax regulations and sometimes might be jargon to understand. We have tried to simplify it for better understanding. First things first, tax liabilities for buying, selling, and renting a property are different.


    - Tax laws while buying a property -


    If an NRI owns only one self-occupied property, there are no tax implications. Here self occupied property means the property occupied for own residence. In cases where the NRI owns more than one property. The only single property will be treated as self-occupied and the rest will be taxable as let deemed out under head income.


    - Tax laws while renting a residential property -


    While renting a residential property, a 30% tax amount will be deducted from the annual rental income. The owner is allowed to deduct the maintenance charges, repair charges etc from the rent.


    - Tax laws while selling a property -


    If the property is held just for investment purposes, then it is considered a capital gain. There are two types of capital gains. Short-term capital gain and Long term capital gain.


    -SHORT TERM CAPITAL GAIN - PROPERTY HELD FOR LESS THAN 2 YEARS

    -LONG TERM CAPITAL GAIN - PROPERTY HELD FOR MORE THAN 2 YEARS


    Whenever a property is to be sold, an amount called TDS needs to be deducted. Usually, a buyer cuts the TDS amount and pays the balance amount of the property to the seller. The deduction amount is then deposited in the income tax department by the buyer.


    In the case of resident Indians, 1% of the TDS amount from the surplus amount of the property is deducted. But in the case of NRIs, the amount deducted depends upon the residential value of the seller and not the buyer.


    So let’s take the example of Raj, who has a taxable income of 75 lakhs in India during FY 2021-22. He plans to sell his property to Suresh in Delhi. The original price of the property when bought in 2005, was Rs. 1.2 crores. The sale consideration agreed with Suresh is Rs. 3.4 crores. Assuming the capital gain is rs. 40 lakhs, he will have to pay a tax of 22.88%. (i.e 20% tax rate plus 10% surcharge plus 4% cess) on the said capital of 40 lakh.


    Tax according to income…


    As per the Union Budget 2022, the high net worth non-residents Indians can enjoy a lot of benefits while selling their property in India. On the transfer of any long-term capital assets, the finance minister proposed capping the surcharge rate for Long-Term Capital Gains (LTCGs) at 15% from 1st April 2022 onwards.


    Previously if the income of an NRI exceeded Rs 5 crores, the surcharge rate (i.e the tax levied on capital gain), was 37%. But now according to the new norms, the finance minister of the Indian Government has capped the surcharge rate at 15% on Long term capital gains. This has proved to be a relief for the NRI community So now, according to the new norms, if an NRI earns 10 crores annually, (which exceeds the income limit of 5 crores) will also be levied a surcharge rate of 15% instead of the previous 37%. That means, where he could have been charged a TDS of 28.496%, with the new reduced surcharge rate(i.e 15%) his TDS rate will be 23.92%. So, he saves 4.5% due to the equalization of the LTCGs (Long term capital gains).


    TAX implications to keep in mind under section 195 :


    • The buyer has to deduct the TDS at the time of paying the property amount to the seller (NRI).

    • The amount and the date of the TDS deduction should be mentioned in the sales document between the buyer and the NRI.

    • Before the 7th of the month under challan no.ITNS 281. This challan is used for the payment of gift tax, wealth tax, expenditure tax, TDS, etc.

    • When the property is purchased, TDS should be deposited to a government-authorized bank or income tax department.


    Some preliminary things every NRI should follow :


    Every transaction should be done in Indian currency via an NRI account.


    NRI can issue home loans or use their own funds while buying a property in India. All buyers including Indian citizens and NRIs can avail 80% loan from the banks to buy a property.


    NRIs must use NRO/NRE accounts in India for remittances. Furthermore, they can use their Foreign Currency Non-Resident (FCNR) or NRO/NRE accounts to issue post-dated checks or use Electronic Clearance Service (ECS).


    Documentation required as an NRI :


    Here is the rundown of docs required for making property buy in India.


    Identification -


    When an NRI wants to invest resources in India he needs a legitimate ID; in the event that he holds an international ID, he should get a PIO card at the consulate. The travel permit should contain both the visa stamp and the date of arrival.


    PAN card (Permanent record number) -


    PAN cards are required for NRIs to present their expenses in India. Property 'under development can be bought with a substantial PAN card right away.


    Address Proof -


    NRIs must provide address proofs both in India and abroad when buying. Proof of address in India may include phone charges, proportion cards, power charges, LIC approaches, mobile phone charges, or any other service charges. The following proofs can be presented to prove your private addresses overseas - driving license, identity card, work permit papers, social security card, as well as statements of all your NRE/NRO accounts in India for the most recent six months.


    Qualification for Loans/Mortgages as an NRI:



    NRI property interests in India's property market are governed by a few rules set by the Reserve Bank of India. NRI’s can benefit a most extreme heap of 80% of the aggregate buy amount. The NRI needs to store 20% of the sum and the rest can be financed by pre-endorsed money-related foundations. The store sum must be transmitted through ordinary saving money channels like NRO/NRE accounts in India. The NRI will have the capacity to reimburse the interest along with the principal amount through an authorized banking system.


    Power of Attorney…


    In cases where you can’t visit India frequently, it is best to have a lawyer in the city where your property exists, to take care of small customs, documentation, and procedures. If not a lawyer, then you can also approach NRI organizations to handle all your property-related matters effectively in your absence. This is called power of attorney and plays a key role in NRI investments.


    How RERA and FEMA can save you from risk factors while investing -


    As the majority of priorities prevail overseas, it becomes quite difficult to monitor your real estate investment in India. Also, keeping a track of constantly changing Indian laws, is not possible. Let’s check out some risk factors and how RERA and FEMA are useful in such cases.


    Lack of awareness of legal rights -


    Lack of awareness of legal rights gets NRIs tricked by many fraud brokers and create unwanted problems. For example, according to the FEMA act, NRIs are not allowed to buy agricultural land or a farmhouse. They can only invest in commercial and residential properties. But many scams have come out wherein the brokers have literally misguided the NRIs and have made them buy agricultural property getting them into huge trouble later.


    Illegal possession and gatecrashers -


    Illegal possession and gatecrashers are a threat to the NRI properties in India. As these investors can’t constantly keep an eye on their property, many cases of illegal occupants taking over their property have been revealed.


    Fraudulent developers -


    Fraudulent developers do not give timely deliverables/possessions, do not deliver the project as it was originally planned and shown, and also have taken money in advance and have not completed the project become a cause to worry.


    RERA and FEMA, to protect NRI rights and encourage investments in Indian lands :


    The FEMA act 1999 and RERA act 2016 have considerably lowered all the risks related to foreign investments and safeguarded the trust of NRIs in the real estate sector. What’s more important is that these acts have been opportunistic and have created a scope for the boost in NRI’s investments in the real estate sector.


    These acts have helped with the following :


    1) RERA (Real Estate Regulatory Authority) -


    This act has ensured transparency eradicating malpractices and scams. Under this act, every project/development should be RERA registered. Builders are bound to deliver the projects on time and have to make every change in the infrastructure, taking the consent of the consumer. The investor’s money remains secured in a separate account and some part of it (70%) is given to the developer for construction costs. The developer should also rectify any issue faced by the consumer within 5 years of construction.


    2) FEMA (Foreign Exchange Management Act) -


    This act helped facilitate payments in India and gave full freedom to foreign investors to hold, rent, and sell a property from outside India. This has helped a lot to the Indian economy and to date, the act is taken into consideration while trading, investing, and transacting around the real estate sector.


    NRIs’ investments in India really worth it?

    The post-pandemic period is resurging the realty sector. This includes sustainable projects, co-working spaces, warehousing, etc. These present an excellent opportunity for high-value NRIs. Also, with the rupee value being an all-time less than the dollar, the investments become very affordable for non-residents.


    Traditional forms of investments like FDs, gold, etc. can’t beat the inflation rates in the long run. But real estate is probably the only asset class that can give you maximum returns both from rental yield and capital appreciation over the long run.


    Conclusively, Indian real estate is a sector that’s rapidly flourishing and can prove to be immensely beneficial to the NRIs in the long run.


    Disclaimer:


    This article is solely informational in nature and we do not intend to give you any tax advice or related suggestions. We recommend you do your personal research and consult a certified tax advisor/consultant/legal authority before taking any further important decisions.

    Author avatar
    Harshvardhan SharanInvestment Associate

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