Who Is An NRI?
The Foreign Exchange Management Act (FEMA) defines a Non-Resident Indian (NRI) as an individual who is currently living outside India and is either an Indian citizen or a person of Indian origin. To qualify as an NRI, an Indian citizen must spend at least 183 days outside India during a financial year. A Person of Indian Origin is a citizen of another nation whose father or grandfather was an Indian Citizen, but not of Pakistan, China, Afghanistan, Bangladesh, Sri Lanka, Iran, Nepal, or Bhutan, and who is not considered a PIO or who has ever carried an Indian passport.
Despite residing outside of India, NRIs are still entitled to vote and participate in the democratic process of their motherland. They must also fulfil their tax obligations by paying and filing their income tax returns on all their Indian income, similar to resident Indians.
Overall, being an NRI does not mean losing one’s Indian identity or rights. The Indian government now recognizes the importance of its diaspora and provides them with the necessary support to maintain their connection to their homeland.
The Rule Relating To Selling And Buying Of Properties By NRIs
Non-residential Indians (NRIs) can purchase any immovable property in India except agricultural land, plantation property, or farmhouses. He can transfer any immovable property other than above stated to:
- A person residing outside India who is a citizen of India OR
- A person of Indian Origin resident outside India OR
- A person resident in India.
There are broadly two types of properties which can be purchased by the NRIs in India:
- Residential Properties- These are generally purchased from builders or can be a resale transaction.
- Commercial properties- These are non-residential properties with the end use either being self-consumption or investment purposes.
Payment Options Available For The Acquisition Of This Property
- Payment can be made using funds received in India through standard banking channels.
- Alternatively, payment can be made using funds held in a non-resident account that complies with the Foreign Exchange Management Act, 1999 and regulations set by the Reserve Bank of India.
Citizens of Pakistan, Bangladesh Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan and Pakistan, without prior authorisation from the Reserve Bank of India, may acquire and transfer immovable property, other than lease property, in India for a period not exceeding 5 years.
An NRI can sell property in India to:
- A person resident in India or
- An NRI
- A PIO i.e. Person of Indian Origin.
A NRI may gift a residential or commercial property to
- A person resident in India OR
- An NRI OR
- PIO
- Foreign National of non-Indian origin needs prior approval of the Reserve Bank.
Guideline Of The Reserve Bank Of India (RBI)
The RBI controls the purchase of the property by NRI in India. According to the rules, NRI can acquire immovable property in India through inheritance, gift, or purchase as a result of a lease agreement. However, the NRIs are not allowed to acquire the properties through trading or speculation.
Power Of Attorney (POA)
When non-resident Indians (NRIs) want to purchase property in India, they may choose to appoint a trusted representative through a power of attorney (POA). A POA grants the representative complete authority to carry out all property-related transactions on behalf of the NRI. This is especially useful when the NRI is unable to be physically present during the property purchase process.
The Process Of Selling A Property Owned By An NRI In India
- Do a comprehensive evaluation of the property to find its market value
- If one isn’t physically available, a trustworthy person can be granted the power of attorney to carry out the sale, provided all the necessary paperwork is there.
- Understand the tax liabilities.
- TDS is deducted at the time of making the payment to the NRI. All the information regarding the TDs and their rationale
- The amount can be received only in an FCNR or NRE/NRO account
- The NRI would be exempt from the tax if he or she reinvests the capital gains of the property in another property.
Some Major Documents Required While Filing Of The NRI
- Property title deeds in the seller’s name
- No objection certificate showing there are no debts to pay on the property
- One’s proof of identity, proof of address and PAN Card
- Details of NRO Bank account to receive the funds from the sale.
- Occupancy certificate
- Building permit
- Encumbrance certificate
- Transfer of the PAN- The Permanent Account Number (PAN) has to be transferred from the jurisdiction to the International Jurisdiction. International Jurisdiction PAN lowers the TDS Certificate.
- Gathering important topics- As an NRI, while selling the property there is a TDS Tax of approximately 23%. The income tax department requires capital documentation such as purchase of property documents, capital calculations, PAN, TAN etc.
- Filing form 13- This is an online form that helps in a lower TDS on a property. It also helps in determining the exact amount of TDS that one needs to pay.
- Capital Gains Tax: This tax is calculated on the difference between the purchase price and the selling price of the property.
- Passport
Tax Implications Of Selling Property In India As An NRI
When selling a property in India, Non-Resident Indians (NRIs) should bear in mind the tax implications associated with such transactions. Following the law, buyers are required to retain a certain amount of tax at source. In most instances, this amount is equivalent to 20% of the capital gain. However, if the property has been held for less than two years, the NRI must pay a higher capital gains tax of 30%.
Therefore, NRIs must be aware of these tax rates when selling their property. Failure to do so may result in unexpected financial burdens. By adhering to these regulations, NRIs can ensure that their property transactions proceed smoothly and with minimal complications.
Double Taxation Of Property Sale By NRI In 2 Countries
Various Countries levied a tax on the property dale by their residents no matter where the property is located. For instance, For example, if an NRI were to sell a property in India, both the US and India would tax the same transaction. The US would impose tax as the NRI lives in the US and India would impose the tax due to the reason that the seller’s property is in India which renders for double taxation.
To avoid double taxation, India has decided to enter into double taxation agreements with several countries. These agreements mentioned that if an individual furnishes the tax on property sale in India, then he would obtain the tax credit of the furnished taxes would diminish the tax liability in the country.
Tax Savings On Capital Gains For NRIs
According to Section 54 of the Income Tax Act, 1961, NRIs are eligible for an exemption when selling a house property or incurring long-term capital gains. As a non-resident Indian (NRI), one has the option of either purchasing a new property up to one year before or within two years after selling the existing property. Alternatively, one can invest the capital gains from the sale of the property in constructing a new property, which must be completed within three years of the sale date.
As per the 2014-2015 budget, it is permissible to purchase or construct only one house property using the capital gains for this exemption. However, properties located outside India are not eligible for this exemption. Additionally, if the newly acquired property is sold within three years of purchase or construction, the exemption may be revoked.
NRIs can claim an exemption under Section 54F of the Income Tax Act for long-term capital gains on any capital assets, except residential property. If an NRI has made long-term capital gains by selling any capital assets other than a residential property, then one may be eligible to claim an exemption under Section 54F of the Income Tax Act. This section of the act allows an NRI to avoid paying taxes on the gains made from the sale of such assets. However, it’s important to note that the exemption is only applicable to non-residential properties and not to residential house properties.
Certain conditions must be fulfilled for this exemption:
- The Non-Resident Indian (NRI) must purchase a house property within one year before the transfer date or two years after the transfer date. Alternatively, they can construct a house property within three years of the transfer.
- The new property in India cannot be sold for 3 years after purchase and construction.
- The rule states that NRIs cannot own more than one residential property apart from their new house, and they cannot purchase or construct any other residential property within 2 or 3 years, respectively.
Conclusion
As an NRI who wishes to purchase a property in India, there are no specific regulations that apply exclusively regarding property transactions. One does not require any separate authorization from the RBI to purchase or sell any form of immovable property, whether it is residential or commercial. Moreover, an NRI is legally allowed to inherit or be gifted agricultural land from a Resident Indian, simplifying the process of investing in the Indian real estate market.
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