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2006 * * * Y E A R * * * O F * * * T H E * * * S E N I O R
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Goa Sudharop Annual Awards on November 20, 2006 @ Mandovi Hotel @ 4:30pm
Chief Guest: Dr. Asha Vishwanath Sawardekar
A series of essays as a tribute to Goan Seniors can be found at:
http://www.goanet.org/index.php?name=News&file=article&sid=524
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NRIs: Buying a home in India made easy
Gaurav Taneja and Rajesh S, Moneycontrol.com | November 17, 2006 | 13:31 IST
In recent years, India has been witnessing unprecedented growth in the
real estate sector fueled by the increased business activity.
Real estate development in India is estimated at $12 billion and
growing at 30% every year. Though all segments of real estate business
such as corporate, retail and residential have been driving this
growth, investment in residential property itself constitutes 80% of
this sector.
Non-Resident Indians (NRIs) are one of the key contributors to the
growth of the real estate industry and considering the immense
potential in India, they are likely to step-up the investment in
future.
In this article, senior tax professionals with Ernst & Young -- Gaurav
Taneja and Rajesh S -- provide an overview of the key exchange control
and tax implications that should be considered by NRIs while investing
in house property in India.
Exchange control regulations
The Indian government has considerably eased the restrictions relating
to investments by NRIs in house property. There is virtually no
restriction or approval required for an NRI to invest in properties in
India from funds received in India through normal banking channels or
held in Non-Resident External (NRE) account/ Foreign Currency
Non-Resident (FCNR) account (B)/ Non-Resident Ordinary (NRO) rupee
account.
However, investment in agricultural land / plantation property / farm
house is currently prohibited. The recurring rental income earned on
letting out of property is also freely repatriable.
Sale/ Repatriation
An NRI can freely sell or gift his/ her property to another Indian
resident or NRI or person of Indian origin. However, there are certain
restrictions imposed on repatriation of sale proceeds.
In case of investments made from inward remittances or out of NRE
account or FCNR account (B), the repatriation of sale proceeds is
permitted only up to the amount of initial investment.
In case the repatriation is made out of balances held in NRO rupee
account (balances include sale proceeds of house property), then an
amount of $1 million per calendar year can be repatriated subject to
the condition that the property is held for 10 years prior to the date
of sale. If the property is not held for 10 years, then the proceeds
should be kept in the NRO account/ eligible investments for the
balance period.
One of the significant restrictions placed on repatriation is that the
NRI can repatriate the sale proceeds only up to two residential
properties. This could dampen the interest of NRIs in residential
property, as investors would like to have free flow of capital while
making such investments.
Income tax
The income tax implications on house property income in India would be
dependent on whether the property is kept vacant or let out. In case
an NRI has only one property in India and if it is kept vacant, then
it would be possible to say that there should not be any rental value
for such property as the NRI was not able to occupy the same owing to
his employment, business or professional carried out at any other
place.
However, if he owns two properties and both of them are kept vacant,
then he is required to pay income tax on one of the properties as if
the property had been let out. The tax laws do not provide clear
guidance on how the rental value is to be determined for such
property.
It simply states that the annual rent should be the sum which the
property might reasonably be expected to let from year to year. Though
there are judicial precedents that are available which suggest
adoption of municipal value/ fair rent, there could be some practical
difficulties in ascertaining such value in the ever increasing rental
market.
In case of let out properties, the actual rental income (after
reducing the municipal taxes) would be subject to tax. The tax law
allows a general deduction of 30% on the rental income and also allows
for deduction towards interest subject to certain conditions.
Tax payments
Under Indian tax law, the payer is required to withhold tax on rental
income paid to a non-resident @ 30.6% where the income of the
non-resident does not exceed Rs 10,00,000, otherwise at 33.66%.
In case an NRI wishes to have a lower rate, then he has to apply to
the tax authorities in a specified format for obtaining a certificate
for deduction of tax at lower rate. The NRI would be required to file
a return of income at the end of the year if the taxable income
exceeds Rs 100,000.
In case the NRI is taxed in the home country on the rental income
derived from India, then he could consider claiming exemption or tax
credit in the home country based on the double tax treaty agreement
entered into India with such country, if any.
Other aspects
It is common practice to have joint ownership of properties by a
husband and wife. However in case an individual intends to split the
income between himself and his wife for tax purposes, then it is
important to establish that both of them contributed for the
investment in property and the share of ownership is clearly outlined.
In case the entire investment is made by one person, then in all
likelihood, the entire income would be taxable in that individual's
hands on account of the clubbing provisions that exist in India though
the property may be jointly held.
Wealth tax
Tax implications are not restricted only to income tax and NRIs have
to keep in mind the wealth tax implications as well.
Wealth tax is levied on the value of specified assets in excess of Rs
15,00,000. Specified assets include house property. However, the
Wealth Tax Act provides an exemption in respect of one house property.
In case of more than one property, the NRI would have to pay wealth
tax @ 1% on the value (value determined based on the prescribed
valuation rules) in excess of Rs 15,00,000 and file the required
return.
There is a specific exemption available for returning Indians in
respect of investment made in house property out of money brought from
outside India or from balances held in NRE accounts as on date of
return to India.
The value of such house properties would be exempt from wealth tax for
a period of seven consecutive years starting from the year when he/
she returned to India. This exemption is available only if the NRI has
come to India with the intention of 'permanently residing in India.'
As may be discerned from the above, the liberalised exchange control
regulations provide unrestricted access to NRIs to invest in house
property in India, thereby helping them to capture the great potential
available on such investment.
There are, however, some restrictions imposed on the repatriation of
sale proceeds. NRIs also need to understand the tax implications in
India on their proposed investment both from an income tax and wealth
tax perspective, to ensure full compliance with the statutory
requirements.
The authors, Gaurav Taneja and Rajesh S, are senior tax professionals
with Ernst & Young.
For more on financial planning, log on to click here.
URL for this article:
http://www.rediff.com///money/2006/nov/17nri.htm
--
DEV BOREM KORUM.
Gabe Menezes.
London, England
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