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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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Comments

  1. kodur sathya says:

    in a nutshell,
    Incidence of tax.
    The tax liabilities arise based on the incidence of your taxable income . When the assests are jointly owned and if each is not identified, You may consider 50 : 50 as a basis.

    Assessment of your income
    1) Compute the taxable rental income.
    Gross rental income
    Less: Municipal taxes
    Net annual value
    Less: 30 % of the NAV for repairs and mainteance
    Less: Interest on the borrowed capital.
    ( Housing loan interest – No celing for let out property)
    Taxable rental income

    Less: Chapter VIA Deductions
    Housing loan repayment.
    And other eligible deduction.
    (subject to maximum of Rs. 100000)
    Final result = Taxable income
    If it is less than 1.50 lacs it is exempt from tax. If it exceeds 1.5 lacs you have to pay tax on the income. Check the the rates.

    Other additonal questions
    1) You could operate from one joint account / two individual accounts. The option is open. Youmay be required to produce accounts during any assessment proceedings. (Only when a notice is issued)
    2) in case TDS is not done, You may calculate the tax and pay advance tax. This will help in reducing your interest.

    sathya

  2. Anonymous says:

    Hi Sathya,

    Thanks for your valuable inputs!

    I’m sure all the readers would benefit from this step-by-step income tax computation instructions.

  3. riathareja says:

    Home sales in India might have turned slow but sales to NRIs are on boom continuously. According to Jones Lang LaSalle Meghraj (JLLM), residential sales to NRIs have tripled over the last half year, from 3% to 10% of the total business. For more view- realtydigest.blogspot.com

  4. GANESH KUMAR says:

    I am resident of Hyderabad, purchased house in 2003. It is two storeyed and in prime location. The house purchased through exchange remittence from Qatar

    Due to some circumstances, could not rent it since one and half year.

    Till now i have not paid any tax except the muncipal tax. Is any income tax is applicable? The expected rent is aprox 10K per month. Please advise.

  5. Anonymous says:

    Hi Ganesh,

    If this house in Hyderanad is the only house you own, then there is no income tax liability.

    However, if you own multiple houses, then the tax liability needs to be calculated as described by Sathya in the first comment.

    We would take the notional rent as Rs. 10,000 as that is the expected rent from your house.

    Gross rental income would be Rs. 1,20,000 for the year.

    Net Annual Value = Rs. 1,20,000 – Municipal taxes paid.

    The taxable income from this house property would be 70% of this net annual value in your case, as there is no interest paid on a housing loan.

  6. Anonymous says:

    [Question through email as a continuation of the original query]

    I would appreciate if you can reply me the following.

    1. Will the income from our office rent be treated as individual income or will be clubbed together?

    2. Will we not get any basic exemption (Rs.150,000) from the income?

    3. Are we supposed to pay advance tax for the year FY2008/09?

    4. When is the last date for our IT return to be filed?

    5. Do we need to file separate IT returns?

  7. Anonymous says:

    Hi,

    Here are the answers:

    1. The income from office rent would be treated as individual income, and would not be clubbed together.

    The assumption here is that both of you have bought these properties from your own money – if the property bought by your wife is out of the money gifted by you to her, the rent received for that property would be clubbed with your income.

    2. The income tax would be calculated individually, with applicable tax slabs. For FY 08-09, there would be no tax for you for an income upto Rs. 1,50,000 and for your wife, this limit would be Rs. 1,85,000.

    (To know the details of the income tax for FY 07-08 and 08-09, please read the article “Budget 2008 – Impact of Income Tax Slab / Bracket Changes on You”)

    3. If your anticipated income tax liability in India is more than Rs. 5,000, then you would need to pay advance tax.

    4. The last date for FY 07-08 is 31 July 2008. The date for FY 08-09 would be notified later, but in all likelihood, it should be 31 July, 2009.

    5. Yes, you need to file separate returns.

  8. Aswin Chalupadi says:

    Hello Raagvamd,

    I am an NRI and planning to buy a property and I have read the article on “Residential / Commerical Property for a NRI”. In that you mentioned the there is not RBI permission required and also mentioned that there is “No stamp duty and registration fee exemption”. Can you please give me a GO (government order) number for this info about “no stamp duty” and “registration fee exemption” so that I can site this to the registrar to take this benefit. Or do you have another other Indian Government recognizeble document to support this benefit for NRIs.

    Thanks
    Aswin
    aswin.chalupadi@gmail.com

  9. Anonymous says:

    Dear Ashwin,

    Looks like there has been a misunderstanding. Let me clarify:

    When I said “No stamp duty / registration fee exemption is available to NRIs”, I meant that there is no exemption available to NRIs with respect to stamp duty & registration – they have to pay it just like resident Indians.

    I’m sorry if you understood it as “no stamp duty to be paid / registration exemption available to NRIs”.

  10. Hi Rishi,

    1 & 2. The fact that you have given the property on rent has no impact on the date of payment of tax.

    As usual, you are supposed to pay:

    - 30% of your expected tax payments of the year by 15th September of the financial year

    - Next 30% of your expected tax payments of the year by the 15th December of the financial year

    - The balance 40% of your expected tax payments of the year by the 15th March of the financial year.

    3. The Income Tax (IT) Act doesn’t put any restriction about NRIs or foreign branches for deduction of interest u/s 24.

    Therefore, you should be able to claim this deduction.

  11. If i have rented the property in the month of November 2008, then.
    1.when I have to pay my Income tax on the rent.
    2.By which month is due to pay.

    3. I have taken loan from Standard Chartered Bank from Bahrain Branch ( with referance to the Responce of )kodur sathya
    Jul 08, 2008 .

    Less: Interest on the borrowed capital.
    will this be applicable to my case as an NRI and the loan is from Bahrain I can produce the Bank documents of interest paid on the loan amount.
    Thanks and awaiting for a valuable reply

  12. My friend has purchase a flat and want to give it to an NRI
    on rent.
    Is their any legal formalities that he has to complete
    regarding renting flat.

    If yes can u provide details of it.

    Regards,
    Sagar

  13. Hi Sagar,

    I do not believe that there are any extra legan formalities for giving the flat on rent to an NRI apart from the regular rental agreement.

  14. Karunanidhi says:

    Dear Sir,

    I would like to know under which section Rent income from Commercial Proerity will be tax.

    In case of NRI have taken a loan for purchase of this properity, whether interest will be allowed as deduction.

    And what in case of servie Tax, If my receipt is above 10 lac. and i am NRI.

    your expert comment are valuable form me.

    Thanks
    Regards,

    Karunanidhi agrawal

  15. Hello Mr. Bedi,

    In my opinion, the rates for TDS are no different for NRIs. However, it would make sense to get it confirmed from a practising CA, as the amount involved is significant.

    Please do let me know if you find out that the TDS rate is indeed different for NRIs.

  16. Hi,

    Thanks for the compliments… I am glad that I wrote something that is proving to be useful.

    The rate of TDS for rent on commercial property is 10% for individuals, and 20% for corporates. TDS is applicable only if the rent is more than Rs. 12,000 per month.

    Thus, for your brother, it would be 10% – and it should be deducted only if the rent is more than Rs. 12,000 per month.

  17. Hello Karunanidhi,

    Frankly speaking, my knowledge is very limited when it comes to commercial property. Since most investors do not have exposure to commercial property as an investment, I haven’t studies that area much.

    I would really appreciate it if you can share your knowledge about this with all the readers through your comments here…

  18. Thank you for a prompt reply…. Is there a section/article in the tax act that you can refer me to for this?? I have gone back to the company with your response and they are adamant that for NRI’s, individual or otherwise they are supposed to deduct TDS@30% only as per what thir CA is telling them….

    The rental amount is in the region of Rs. 35000/-

    Thank you again for a quick response……

  19. Just to add, the rental of Rs. 35000/- is on a monthly basis…

    Thanks

  20. Dear Sir,

    Firstly my compliments on a very detailed article on the NRI income and the tax implicaitons etc…

    My one question is that what is the %age TDS that the lessee will deduct from the rental??

    My brother is an NIR, holds commercial property on rent in delhi and the lessee is is deducting between 25%-30% as TDS from every month’s rent, which i think is too high…

    Please help…

  21. Dhirendra Singh says:

    Sir,

    I had given my plot on lease is Rs.10,000/- MY ANNUAL INCOME FROM PROERTY(PLOT) IS Rs.1,20,000/- during 08-09.

    Please advise income tax to be charged on my rental income.

  22. Anonymous says:

    Hi Dhirendra,

    Since this is rent from a plot (and not a house or land surrounding a house), the income would not be a part of “income from house property”.

    This income would be added to your “Income from other sources”, and would be added to your total income and taxed as per applicable tax slab.

  23. Anonymous says:

    Hi Prita,

    The rent received from commercial property should be mentioned under “Income from other sources”.

    The notional rent for a non-self occupied house is the prevailing market rate of rent. The rent received for the property next door would be a good indicator of the market rate, and can be used by you.

    Note: Since both properties are not let out, please show the notional rent for the property for which the market rent is lower.

  24. Thanks for the details mentioned regarding the NRIs. I am an NRI for AY 2009-2010.

    Please advise whether the rent from commercial property would have to be disclosed under income from house property or under income from other sources.

    Also with respect to income from 2nd house property (where both the properties are not let out) how is the notional rent calculated. Can I just take the amount of rent at which the property next door is rented at and disclose it as notional rent in my income tax returns.

    Regards,

  25. can u explain me tax implications if i sold property before taking possession or OC for property issued.if after doing agreemnet with builder and holding property for more han 3 yrs for completing construction ,will it be eligible for LTCG.
    which is date of aquirring assett. is it aggremet date with builder or when propery is ready to stay.pls clarify

  26. A colleague had purchased a residential flat in India in 1990 while he was a resident. He has since become an NRI and is planning to sell the flat now. What are the repatriation rules in this case? Thanks in anticipation!

  27. Anonymous says:

    Hi Dev,

    Since he is an NRI now, rules applicable to NRIs apply to this property sale.

    Since the property was acquired more than 10 years back, an amount upto US$100,000 (per year) can be repatriated, provided applicable taxes are paid on the sale amount.

  28. Anonymous says:

    Hi Ashwin,

    The date of possession is something that is always debated upon, and doesn’t have one clear answer. It depends on the case at hand. In fact, this is a matter of numerous court cases!

    But as a general rule, the date of agreement is taken as date of possession.

  29. can u clarify more on section 54 for LTCG tax exemption.
    is it required to have only one house on your name to avail exemption and also i cant buy any property for 3 yrs after aquiring new property from capital gains.also tell me can i include
    interest paid on loan during construction period and add into aquiring cost of property. is their anyway i can include interest paid on loan for same property consider for deduction from LTCG.
    THIS IS VERY GOOD SITE AND I AM ALREADY REFFERING TO MY FRIENDS.

  30. Im an NRI in US. I recently sold a property in india and plan to invest the LTCG in 54EC Bonds. What I am confused about is,
    I have to report the sale on my tax returns in US and will also be taxed on the capital gains here. If i pay LTCG taxes in india , then I can claim that as a foreign tax credit in US which will nullify my capital gain tax burden in US. If I Invest in 54EC bonds, will I get some kind of statement saying I saved X amount by investing in these bonds?

    I am afraid if invest in 54EC bonds I may end up paying capital gain taxes in US ( because I have no proof of payment of LTCG in india) negating any benifit from the 54EC bonds.

  31. On sale of property held by NRI Jointly with his wife who is also NRI.
    Is there any need of PAN at the time of Sale !

    Thanks

    Sarin

  32. ASHOK B AGRAWAL says:

    MY FATHER SOLD PROPERTY WHICH IS OWNED BY HIM 15 YEARS BACK THERE IS CAPITAL GAIN, HE WISHES TO BUY FLAT FOR MY BROTHER IN LONDON, CAN HE GET EXEMPTION IN CAPITAL GAIN TAX PLEASE GUIDE

  33. I have booked new flat by selling my old flat LTCG amount of Rs.4.90 lakhs.Can I deduct the stamp duty and registration charges from LTCG amount.

  34. Kazi Nuruzzaman says:

    I am an NRI Staying at Saudi Arabia. I have booked a residential apartment in Kolkata. Building in currently under construction and will be ready for posssition by end of 2012. My builder told me that I have to Pay 2.25 % service tax while paying each installment. One of my friend tole me that as an NRI , we are exempted from service tax while purchasing residential apartment.

    Would you let me know whether NRI’s are exempted from service Tax while purchasing residential apartment ?

    if yes, would you let me know if there is any site which explains this case so that I can forward it to the builder.

  35. I have the same query as “UNS” asked here. I’m currently resident of US.
    In my case, I re-invested the capital gain in another property to get india capital gain tax. However, do I still have to pay tax in US for the profit I earned from the same of property?

    Rag, Can you please respond on this?

    If anyone has any experiences, please comment.

  36. Our company is registered in India. we have hire the apartment in Poland Rs 45000/Month so in India is TDS rent is applicable or not ???? our company hasn’t any branches outside of India . Please guide us.

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