Investing in real estate in India is an attractive option for Non-Resident Indians (NRIs) and foreign nationals. However, it comes with a variety of tax implications and compliance obligations that can impact the investment’s profitability. Being aware of the relevant tax rules and regulations is essential for NRIs and foreign investors looking to maximize returns while remaining compliant with Indian tax laws. This blog will discuss the key tax aspects and provide practical insights for NRIs and foreign nationals interested in investing in Indian real estate.

1. Criteria for Investing in Indian Real Estate

Before diving into the tax-related implications, it’s important to clarify who is allowed to invest in Indian real estate:

* NRIs: NRIs can invest in both residential and commercial properties in India without any specific approval. They are prohibited from purchasing agricultural land, farmhouses, or plantation properties, except in cases where these are acquired through inheritance or as a gift.

* Foreign Nationals: Foreign nationals residing outside India have stricter regulations. They can only purchase property in India if they are residents for more than 182 days during the preceding financial year. In contrast, foreign entities and companies, unless they have a branch or other forms of presence in India, are typically prohibited from purchasing property.

Understanding these eligibility conditions is crucial, as non-compliance with the property acquisition laws can lead to complications, including the possibility of penalties or forced sales.

2. Taxation on Property Purchase

When NRIs or foreign nationals purchase property in India, certain taxes come into play:

a. Stamp Duty and Registration Charges

One of the primary expenses when purchasing property in India is stamp duty, which varies from state to state but generally ranges between 5% and 7% of the property’s value. Additionally, buyers must pay registration fees, which typically amount to around 1% to 2% of the property value.

b. Tax Deducted at Source (TDS)

If an NRI purchases a property from another NRI, TDS (Tax Deducted at Source) must be deducted at a rate of 20% for long-term capital gains or 30% for short-term capital gains. This is in accordance with Section 195 of the Indian Income Tax Act, which governs the taxation of non-residents. It is the obligation on the buyer to deduct TDS before making payment to the seller and deposit the same with the government within due dates.

Practical Advice: Both the buyer and the seller should be aware of TDS obligations to avoid penalties. Failure to comply with TDS rules can result in legal complications for the buyer.

3. Taxation on Rental Income

For NRIs and foreign nationals who lease out their property in India, rental income is taxed under the head “Income from House Property”.The amount of tax to be paid is influenced by multiple factors:

a. Determination of Rental Income

Rental income is based on the Gross Annual Value (GAV), which is the higher of actual rent received or the market rate for similar properties in the area. In cases where the property remains vacant for part of the year, the rent for the occupied months will be considered for taxation.

b. Deductions on Rental Income

NRIs are entitled to certain deductions on their rental income, including:

* Standard Deduction: A flat 30% deduction on the Gross Annual Value is allowed to account for repairs, maintenance, and other expenses.

* Home Loan Interest Deduction: If the property was purchased using a home loan, interest payments can be deducted from the rental income. For rented-out properties, the entire interest amount is deductible, whereas for self-occupied properties, the deduction is capped at INR 2 lakhs annually.

c. Applicable Tax Rates

Rental income is added to the NRI’s or foreign national’s total taxable income in India. It is taxed according to the applicable income tax slabs, which can range from 5% to 30%, depending on the individual’s total income.

Practical Advice: Property owners should ensure that they claim all applicable deductions to lower their tax liability. Proper documentation of expenses, rental agreements, and loan repayments is necessary to substantiate claims in case of audits.

4. Capital Gains Tax on Property Sale

Selling property in India generates capital gains, which are subject to taxation. The tax treatment of profits depends on how long the property has been held:

a. Short-Term Capital Gains (STCG)

The gains from selling a property within 24 months of purchase are considered short-term capital gains. Such gains are taxed according to the standard income tax rates applicable to the individual's income bracket.

b. Long-Term Capital Gains (LTCG)

If the property is held for over 24 months, the resulting profits qualify as long-term capital gains, which are taxed at a concessional rate of 20%. Sellers can also benefit from indexation, which adjusts the purchase price for inflation, effectively reducing the taxable gains.

c. TDS on Property Sale

When an NRI or foreign national sells a property, the buyer must deduct TDS at 20% for long-term gains and 30% for short-term gains. It is the buyer's responsibility to ensure that the TDS is accurately deducted and submitted to the government.

Practical Advice: Property sellers should plan their sales strategy carefully, taking advantage of indexation and exploring tax-saving options, such as reinvesting capital gains in eligible properties under Section 54 or Investors can use government bonds under Section 54EC to minimize their tax liabilities.

Additionally, NRIs can significantly reduce their tax burden by obtaining a Lower Deduction Certificate (LDC) from the Income Tax Department. This certificate allows the buyer to deduct TDS at a reduced rate based on the seller’s actual tax liability rather than the standard rates.

To learn more about how to avail of the benefits of an LDC and ensure a seamless property sale process, check out our blog related to Lower Tax Deduction Certificate India.

Suggested Reading: Lower Deduction Certificate for NRI Property Sale in India: Avoid Unnecessary TDS with Expert Assistance

5. Repatriation of Funds

One of the key concerns for NRIs and foreign nationals is the repatriation of funds—that is, sending the proceeds of property sales or rental income back to their home country. The rules for repatriation of funds India are governed by the Foreign Exchange Management Act (FEMA):

* NRIs can repatriate sale proceeds of up to two residential properties without special approval from the Reserve Bank of India (RBI). However, the repatriated amount must not exceed the original investment or sale price, whichever is lower.

* To repatriate funds, NRIs must submit Form 15CA and obtain a certificate from a Chartered Accountant using Form 15CB, which confirms that all applicable taxes have been paid.

Practical Advice: Keep meticulous records of the original investment amount and all related documents, as this information will be needed for repatriation and compliance with FEMA regulations.

6. Double Taxation Avoidance Agreement (DTAA)

NRIs and foreign nationals often grapple with concerns about the risk of double taxation—once in India and again in their country of residence.Fortunately, India has Double Taxation Avoidance Agreements (DTAAs) with many countries to prevent this from happening. DTAAs provide relief by allowing:

* Tax Exemptions: Income taxed in one country may be exempt from taxation in the other.

* Tax Credits: Tax credits allow individuals to offset taxes paid in India against their tax liabilities in their home country, subject to the provisions of the applicable DTAA.

Practical Advice: To claim DTAA benefits, NRIs must submit a Tax Residency Certificate (TRC) from their country of residence along with Form 10F when filing their Indian tax returns.

Suggested Reading: ClaimingForeign Tax Credit in India: Form 67 and Beyond

7. Filing Income Tax Returns

NRIs and foreign nationals earning rental income, capital gains, or any other income from Indian property must file income tax returns (ITR) in India. Even if the income falls below the taxable threshold, filing a return is mandatory if TDS has been deducted.

* NRIs usually file their taxes using the ITR-2 form, which is designed to report income from salary, house property, and capital gains.

* The due date for filing tax returns is July 31 of the assessment year.

Practical Advice: Ensure timely filing of returns to avoid penalties and complications. Filing is also necessary for repatriating sale proceeds and claiming refunds on TDS deducted in excess.

Conclusion:

For NRIs and foreign nationals, investing in Indian real estate offers significant financial opportunities, but it also comes with a range of tax obligations. By understanding the various taxes applicable on property purchases, rental income, capital gains, and repatriation, investors can make informed decisions and avoid common pitfalls. Consulting a tax expert familiar with cross-border taxation is advisable to ensure compliance and optimize returns. If you are looking for expert guidance, consider reaching out to RPC at rahul@rpareva.com, a trusted CA firm in West Delhi, for professional advice tailored to your investment needs.