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Residential / Commercial Property for a Non Resident Indian (NRI)

Many NRIs and Persons of Indian Origin (PIO) want to invest in India – in both commercial and residential properties. NRIs and PIOs also plan to buy such properties as an investment, and rent them out to earn a steady income stream.

This article discusses various rules and restrictions related to such purchases. It also explains the issues regarding taxation (capital gains and income tax), repatriation, etc.

[Article inspired by a query from a reader]

The rules regarding purchase, rent and sale of immovable property by Non Resident Indians (NRIs) have been thoroughly simplified and liberalized in recent years.

Let’s have a look at the current regulations for NRIs regarding purchase, renting out and sale of residential / commercial property.

 

Purchase of Property

A Non Resident Indian (NRI) can buy a residential (apartment, house, etc) or a commercial (shop, office, godown, etc) property (but not farm land or a farm house or a plantation) without seeking any permission from the Reserve Bank of India (RBI).

But the NRI can not participate in any business activity in real estate.

How many properties: There is no restriction on the number (or value) of properties that can be bought by NRIs.

Payment for purchases: The payment can be made using money remitted through banking channels, or using the funds from the NRE / FCNR / NRO accounts.

(To know about NRE and NRO accounts in detail, please read “Non-Resident External (NRE) & Non-Resident Ordinary (NRO) Accounts for NRIs”).

Permission from the Reserve Bank of India (RBI): No permission is needed by NRIs to buy a property in India.

Mortgage property to a bank / financial institution: An NRI can mortgage the property to a bank / financial institution to take a loan for funding the purchase.

Stamp duty / registration fee exemption: No stamp duty / registration fee exemption is available to NRIs.

Permanent Account Number (PAN): A PAN number is not required for NRIs buying residential or commercial property.

Inheritance of property in India: NRIs can inherit a property in India.

Purchase going wrong: If the payment is made from an NRE / FCNR account, and the deal is canceled or there is no allotment of property, the refund amount can be repatriated by NRIs.

 

Renting Out the Property

Residential or commercial property in India can be freely rented out by NRIs.

Income Tax: The income earned from renting out the residential / commercial property is subject to income tax. Such rental income is fully taxable. There is no exemption of rental income for NRIs.

The income from rent is clubbed with the NRI’s income from India for that year, and is taxed as per the applicable income tax slab rates.

(Please read “Budget 2008 – Impact of Income Tax Slab Changes on You” to know the tax slabs for AY08-09 and AY09-10)

Deductions / Exemptions: The following can be deducted from the rental income before calculating income tax on it:

  • Repairs and collection charges (25% of the rent less municipal taxes – also called the Net Annual Value)
  • Any interest paid on amount borrowed to fund the property purchase
  • Any insurance premiums paid to insure the property
  • Any tax paid to the state government in respect to the property

Repatriation of rental income: The income earned from renting out the residential / commercial property can credited to the NRO account of the NRI. It can also be repatriated through banks or authorized dealers, if the NRI obtains a certificate from a chartered accountant (CA) that applicable taxes have been paid on the amount being remitted.

Joint NRO Account: If two NRIs (say, spouses) hold a joint NRO account in India, and they also have properties in individual names, the rental income arising from these properties can be deposited in the same NRO account.

TDS deducted by licensee on rent: At times, the licensee / tenant deducts TDS (Tax Deducted at Source) on the rent, and pays you rent post-TDS. In such cases, you can show this TDS amount as tax already paid in the income tax return. Thus, your tax payable would reduce by that amount.

 

Sale of Property

Minimum holding / lock-in period: There is no lock in period before the sale of the property. Earlier, a holding period of 3 years existed, but is has been done away with.

Income tax on the sale of property: A capital gains tax is applicable on capital gains arising from the sale of property by NRIs.

If the residential / commercial property is held for less than 3 years (36 months), a short term capital gains tax has to be paid. The capital gain is clubbed with the income of the NRI for that year, and is taxed as per the applicable income tax slab rates.

(Please read “Budget 2008 – Impact of Income Tax Slab Changes on You” to know the tax slabs for AY08-09 and AY09-10)

If the residential / commercial property is held for more than 3 years (36 months), a long term capital gains tax has to be paid. In this case, the capital gain is taxed at the rate of 20% (plus surcharge and cess, making it around 22.5%).

Repatriation of sale proceeds: If the original purchase was made using money from an NRO account, the money can be repatriated only if the property has been held for at least 10 years.

If the original purchase was made using money from an NRE / FCNR account, the money can be repatriated.

Amount of the sale proceeds that can be repatriated: In a year, repatriation can not be done from sale proceeds of more than 2 residential properties. There is no such limit in the case of commercial property.

An amount equal to the original investment (in terms of the foreign currency) can only be repatriated. Thus, if the original investment was $50,000, only $50,000 from the sale proceeds can be repatriated even if the actual sale value is more than that.

Thus, the profit earned from such sale can not be repatriated.

Please remember that in terms if rupees, the NRI would end up repatriating more or less than the original investment, depending on the movement of exchange rates.

Thus, if the exchange rate at the time of purchase was Rs. 40 to a dollar, and the rate at the time of sale is Rs. 45 to a dollar, the NRI would have invested Rs. 20 Lakhs (Rs. 40 * $50,000 = Rs. 20 Lakhs), but can repatriate Rs. 22.5 Lakhs (Rs. 45 * $50,000 = Rs. 22.5 Lakhs).

Profit earned from sale of property: The profit earned from sale of property can be deposited in an NRO account after paying the applicable capital gains tax.

 

Note

Please note that although there are some minor differences, the rules for a Person of Indian Origin (PIO) are more or less the same as the rules for NRIs.

 

The original user query

We are NRI. Myself and my wife own commercial properties in India in individual names. We have rented these properties from 1 June 08. The rent is Rs. Xx,xxx/- for each property per month. We have joint NRO account in which we plan to deposit the rent amount. My questions are:

(1) What would be our Income tax liabilities?

(2) In case of TDS done by licensee, what is to be done?

(3) Is it OK to deposit the rent income in our joint account or do we need separate NRO accounts?

(4) What are tax exemptions available to us as NRI?

(5) Are we eligible for maintenance charges/depreciation charges of property/ municipality taxes?

We would appreciate your response on the matter.

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