NRI Real Estate and Property Investment in India
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FAQs on NRI Taxation

Q) I am an NRI working in the UK for the last 4 years. I have just received my PF settlement from the Indian company I worked for in Mumbai. Can I deposit my PF earnings into the NRE account?
A) The PF funds originated in India and therefore cannot be credited to the NRE account, which receives foreign currency only. You can credit these funds to your NRO account.

Q) Is interest earned on NRE Recurring Deposit taxable?
A) No, the interest on all types of NRE accounts is tax-free.

Q) If I sell my property in India and if there is a "white" value and a "non-white" value, how do I legally repatriate the total proceeds of the sale?
A) Money which cannot be accounted for or is "non-white" cannot be repatriated.

Q) Is the capital gains tax when selling property same for both long and short term gains?
A) Short-term capital gains are taxed as normal income and long-term gains with indexation are taxed @20%.

Q) I am an NRI and now due to acquire American citizenship. What happens to my property, residential and agricultural, which I am inheriting from my parents? Is it a problem to keep an inherited agriculture property with an OCI status?
A) Obtaining OCI status gives you additional rights and privileges over and above the ones you enjoyed in your capacity as a Person of Indian Origin. You had a right to own and maintain inherited agricultural property and therefore, you continue to enjoy this right. However, if and when you decide to sell or gift away the property, note that you can do so to a Resident Indian only and not to an NRI or PIO.

Q) My son remits funds to my savings account every month - how is the tax levied on it?
A) There is no tax liability on the funds which your son is gifting to you. However, you can follow a procedure to protect your savings from tax by accepting the gift in writing, mentioning the relationship between the donor and donee.

Q) Is it mandatory as a NRI PAN Card holder to submit yearly returns with IT Department even if all my income is through my earnings from outside India?"
A) There is no legal obligation to file tax returns unless the income chargeable to tax exceeds the minimum tax threshold of Rs. 1, 00,000.

Obtaining a PAN card has nothing to do with the above requirement. In other words, if your Indian income does not exceed Rs. 100,000, regardless of whether you have a PAN card or not, you do not have to file a tax return.

Q) Do I need to declare all the money that I have in my NRE account for the last 5 years? Do I need to pay any taxes on it?
A) If you have maintained your NRI status for the last 5 years, the income in your NRE account is free from tax. Note that tax is collected only on interest, not on the capital. You can include the information on your NRE account in your annual return, even though you do not need to pay tax on it.

Q) I will be posted to the UK shortly, but I wish to continue with my savings bank account from which I can make transfers to my family in India. Is this possible, and what are my tax liabilities?
A) On becoming an NRI, you are required to inform all your banks and also all the companies where you have investments about the change in your status within a reasonable time. The banks will re-designate your accounts as NRO. You can use this account the same way as you used it before becoming an NRI.

You must also inform all the companies of whose shares you hold, about change in your status. If you have a demat account, it is not necessary to inform the companies but informing the DP is a must.

You will also start filing your tax returns in your new NRI status. If the Indian income is below the taxable threshold, there is no need to file the returns but it is practical to do so for maintaining the continuity.

Even after you become an NRI, you are free to deal with all your investments and assets you held prior to becoming an NRI. The only restriction is that the original amount is non-repatriable.

It is better to open an NRE account since the interest on it is tax-free in India as long as you are an NRI.

Q) I will be earning a rental income of around Rs. 6 lakh a year from my property in India. I don't have any deduction to claim and I haven't taken any loans from an Indian Bank. How much tax am I liable to pay? Do I fall in the 30% tax bracket and TDS from rental income 15%? Do I need to pay totally 30% + 15% tax or only 30% (out of that 15% will be TDS (like Tax withholding) and remaining 15% when I file the taxes.
A)

  • Surcharge @10% on tax computed after taking into account deductions, will be levied only if the net total income is over Rs. 10 lakh.
  • Marginal relief is available by limiting it to the income over Rs. 10 lakh.
  • Education cess @3% on total tax is applied on the tax liability thus arrived at.
  • TDS is like withholding tax and the tax deducted can be netted off against your total tax liability.
  • Note: There is a standard deduction of 30% available on rental income.
  • It is a little difficult to compute the net income chargeable to tax and you will do well by taking some professional help.
Q) I am buying a residential property for Rs. 50 lakh in Mumbai from my savings in USD. If I sell the apartment after 3 years, how do I repatriate those funds? Or do I need to hold that property for 10 years to sell it?
A) For property purchased out of foreign funds, as far as repatriation rules are concerned, you can sell it anytime. The lock in period for such property has been lifted

Q) Instead of using foreign funds to buy residential property, if I take a loan from an Indian bank (say 85% of agreement costs), do the rules of repatriation change?
A) If you buy the property on mortgage by taking housing loans, repatriation will still be possible if you pay off the loan instalments in India through your NRE account or by transferring funds from abroad.

Q) As a US citizen, can I own property in India? If I return to India, will I be taxed in India and the US? Will my US income be taxed in India?
A) Yes, as a PIO, you are eligible to buy property other than agricultural property. On your return to India, you will be a RNOR for 2 years during which your forex income will not be taxable in India. After that your global income will be taxable in India. If you are taxed in both the countries, India as well as USA, the Double Taxation Avoidance Agreement between them will protect you.

Q) I live in Indonesia and hold an account in India for purchasing mutual funds/equities from the secondary market. Am I liable to pay any Capital Gains tax when I sell/redeem these shares/funds?
A) Equity-based MF schemes (65% or more exposure to equities) are governed differently from the debt-based schemes. In both cases, dividend is tax-free in the hands of the investor. However, there is a dividend distribution tax @14.025% payable by the MF directly to the exchequer in the case of debt-based whereas the equity-based are exempt from this tax.

Equity-based schemes are also exempt from long-term capital gains tax (holding period over 12 months). The short-term capital gains are taxed @10.2% only.

In the case of debt-based schemes, short-term gains are treated as normal income of the assessee and taxed at the rates applicable to the assessee. The long-term gains will attract tax @10.2% without indexation or @20.4% with indexation, whichever is more beneficial to the assessee.

In the case of ELSS, there is an additional benefit of deduction u/s 80C.

There are following 3 tax concessions on investment in equities traded on a recognised stock exchange in India:

  • Dividend is tax-free in the hands of the investor but there is a dividend distribution tax paid directly by the company @14.025%.
  • The long-term capital gains are exempt upto Rs. 50 lakh on sale of property
  • The short-term capital gains enjoy the concessional flat rate of tax @10.2%.
Q) My wife was working in Doha for the last 2 years. After marriage she has settled in India and will be here for at least a year. She is working on internet-based online jobs from the US for which she gets paid into her NRE account. Is this the right way to be paid? Does she have to pay income tax?
A) Since she is now a Resident Indian she cannot maintain a NRE account. The NRE account will be converted to a resident account on her informing her bank about the change of her residential status.

She is liable to treat the money received as her taxable income in India. If the income is over Rs. 1, 45,000, she is liable to file a tax return.

She should apply for PAN.PAN is required not only for filing returns but also for several transactions in India

Q) How long will I be considered as Non-Resident or Not Ordinarily Resident after I return to India to settle down?
How long after my return to India will my income from investments including deposits with Banks, including Indian banks located in foreign countries, qualify for exemption from Income tax? What are tax free and safe investments in India?
A) If your stay in India during the Financial Year is 182 days or more, your residential status will be as Resident Indian.

There is a transitional status of RNOR between being an NRI and becoming a full-fledged Resident after returning to India permanently. An RNOR is not required to pay tax in India on his forex income. Anyone who returns after 9 or more years of being an NRI will become RNOR for 2 years.

Resident but not Ordinarily Resident (RNOR) is a person who satisfies one of the following conditions ---
a) he has been a non-resident in India in nine out of the ten previous years preceding that year, or
b) has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

An NRI who has returned to India permanently is allowed a reasonable time to inform all the banks (and companies) about the change in his status wherever he has his investments. On receipt of this information, the bank will re-designate the NRE/FCNR accounts as a 'Resident' account. These can be run up to their maturity but the interest on NRE becomes taxable from the date of the return whereas the FCNR interest is tax-free as long as the holder remains an NRI or becomes an RNOR. Alternatively, both the accounts can be converted into RFC without any penalty but the interest even on RFC is tax-free only for RNORs.

Whether RFC is tax-free or not, withholding tax will be applied @30.6% and if the interest is over Rs. 10 lakhs, the rate will be 33.99%.

The NRE SB and NRO SB accounts will be re-designated as Ordinary SB accounts.

It is also necessary to inform all the companies/DPs where you have investments about the change in your residential status.

PPF is the only safe and tax-free investment at present. There are other investments which yield tax-free returns but are subject to market fluctuations and consequently not risk-free. Fixed income investments other than PPF do not yield tax-free returns.

Q)
I am a NRI working in the USA. I would like to know whether withdrawal from 401K which is a contributory retirement fund in USA will be taxable in India if I bring the money here, even though this is already taxed in the US
A) Normally 401K is distributed at retirement. At that time, the person need not be an NRI. There are several NRIs who eventually come home to settle in India. However, due to their past employment, they may be getting some pension in India from abroad. Article 20 of the Indo-US Double Taxation Avoidance Agreement spells out that pensions would be taxable in the country of Residence- India, in this case. However, Social Security Benefits or other public pensions would be taxed only in America.

Q) Currently I am having an NRE account with an Indian bank. I am an Indian citizen living in the USA for the last 7 years. If I become a US citizen, would my current account be closed and do I need to open a new one, or can I continue to operate my NRE account from here?
A) The change of citizenship does not change your rights to operate the NRE account. You will be a Person of Indian Origin (PIO) which allows you to handle the NRE account the same way as a NRI.

Q) I am a NRI resident in Canada for the last 15 years and hold only an NRE savings account in Delhi., I would like to know
1) if I buy a commercial property in India (payment made through my NRE account) will I have to inform the bank before I make a payment through my NRE saving account?
2) If I get Rs.15, 000 per month as rent, how much tax will I pay on this and will I need to file in a tax return form?
3) If I buy this property for Rs.40 lakh and sell it for Rs. 60 lakh after 3 years, can I invest this 60 lakh to buy another commercial or residential property without paying any capital gains tax?
A)

  • Though there is no rule or specification as such, it is better to keep the bank informed
  • This is a complex matter. You can approach a consultant in the field of filing returns. Briefly, you are allowed deductions for property taxes on annual value (computation of which is complex) of the property and also a standard deduction of 30%.
  • You will be earning long-term capital gains. You can claim exemption u/s 54F by purchasing a residential house within 1 year before or 2 years after the date of sale of the old house. Alternatively, you may construct a residential house within 3 years after the date. It is necessary to apply net sale proceeds (after the related expenses) for purchasing a residential house (and not a commercial property.)
  • The amount which is not invested before the filing of returns for the year or the statutory last date for filing the returns, whichever is earlier, is required to be parked in 'Capital Gains Account Scheme' with a bank in India.

Q) I am working in Saudi Arabia on a work permit since August 2006. Currently I have a normal savings bank account in India and don't have an NRE account.
I am sending money home through a wire transfer service. Do I need to pay any tax on the money earned in Saudi Arabia? If not, how do I show this income in my form 16 so that it can be tax free? Also what kind of proof is required to show the source of income? How do I save tax? Do I need to open an NRI account for showing my status as NRI for saving tax on this income as I will be here for another 8 months.
A) You are likely to become an NRI for the FY 06-07, unless you come to India for a short trip rendering your stay in India for 182 days or more.

  • On becoming an NRI, legally you are required to inform all your banks and also all the companies where you have investments about the change in your status within a reasonable time. The banks will re-designate your accounts as NRO.
  • It is illegal for an NRI to continue to hold their normal Resident bank accounts.
    It is also necessary to inform all the companies of whose shares you hold, and UTI/MFs about change in your status.
  • Transfer by itself does not create any tax-liability. If the money transferred is capital in nature, the question of paying tax thereon does not arise.
  • If your status for the Financial Year 'April-March' is NRI and if the money earned abroad is an income not arisen out of some nexus with India, either by way of Indian employment or business, the question of levying tax on it does not arise.
  • Otherwise, your global income is taxable in India, whether you transfer it to India or not.
  • You may open an NRE account for earning tax-free interest and maintain the repatriability of the corpus in the account.
Q) What is the TDS deducted on NRO fixed deposit interest?
A) The interest on NRO is fully taxable at the rates applicable to Residents. But there is no income threshold under which TDS is not chargeable. However, TDS is applicable @30.6% and nothing can be done in practice to avoid it.

The only recourse open is to claim refund by filing tax returns.
In case the interest payable is over Rs. 10 lakh from the same branch of the bank, there is a surcharge of 10% taking the total tax to 33.99%. There is a marginal relief available by way of the surcharge payable being limited to the income over Rs. 10 lakh.

Q) I am contemplating the sale of a plot of land in Gurgaon for approximately 60 lakh. Can I deposit the proceeds into my NRE or NRO account? I understand that the street value of my plot of land is higher than the official value. Therefore, it appears as if the official documentation related to the sale will specify a sale value of Rs. 40 lakh instead of Rs. 60 lakh.
Please help me understand the tax implications of this land sale.
A) If you have purchased the plot by applying forex by direct remittance or through NRE account, you can credit the original forex amount of cost of acquisition to NRE. Otherwise, you will have to credit it to NRO.

If you have acquired the property over three years ago, then the profit on sale would be long-term capital gains and taxed @20%. There is a facility available for indexing the cost on account of time value of money. If the property has been acquired less than three years back, then the profit would be termed as short-term gains and taxed at slab rates applicable. The rate broadly for any amount more than Rs. 2, 50, 000 is 30.6% and for an amount more than Rs. 10 lakhs is 33.99%. There is no indexation facility available in this case.

If the sale value offered to you is less than the rate adopted for payment of stamp duty, as per Sec 50C the stamp duty rate would be taken as the sale value.

Q) Principal and interest accrued in NRE savings deposits are tax free and fully repatriable as long as I maintain NRI status, regardless of the amount -is this correct?
A) The interest from NRE account is tax-free in India as long as you are NRI and have not returned to India permanently.

Q) If I invest in Indian Mutual Funds using a cheque issued from my NRE bank account, are the gains taxable?
A) The gains are always taxable whether the original amount is repatriable or not. However, long-term capital gains from equity-based schemes (over 65% equity component) are tax exempt.

Q) Is it mandatory to have a PAN to invest in Indian Mutual Funds if you are an NRI?
A) You will require a PAN. You will also require a recently introduced 'Mutual Fund Identification Number' (MIN)

Q) Are the gains from trading in Mutual Funds fully repatriable, gross of Income Tax?
A) All capital gains from whichever source are repatriable after taxes, if due, have been paid thereon.

Q) Can gains from Mutual Funds be transferred to my NRE bank account to maintain NRE asset status to be eligible for tax credit?
A) Yes, but only after correct taxes, if due, are paid.

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