NRI Real Estate and Property Investment in India
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Tax/TDS Rates for NRIs/ FIIs

NRIs are privy to a separate concessional tax regime in respect of certain types of income under Chapter XIIA comprising section 115C to 115I of the Income Tax Act. As per section 115E, concessional tax of 20 % is available in respect of investment income and 10% in respect of long term capital gains from the specified assets which are acquired out of convertible foreign exchange.

Specified assets are defined under section 115C (f) as:
i. Shares in an Indian company.
ii. Debentures and deposits in an Indian company (which is not a private company).
iii. Any security of the Central Government.

However, if a NRI opts for concessional tax treatment, he is taxed at a flat rate and he cannot avail:

  • Any deduction in respect of any expenditure or allowance under any provisions of this Act (like interest on over draft, Bank charges for collection).
  • Benefit of cost indexation for capital gains.
Reinvestment of long term Capital Gains
Long term capital gains from sale of specified assets would be exempt if, within six months, the net consideration is reinvested in any specified asset or savings certificate notified under section 10(4B). If only a proportion is reinvested, proportionate exemption is available. The holding period for the new asset is three years and if it is transferred within three years, the capital gain which was exempted will be liable to be taxed in the year of such transfer of the new asset [section 115F(2)].

However, there is a cap of Rs. 50 lakhs on tax exemptions from the sale of property, provided investment is made in bonds issued by the National Highways Authority of India and the Rural Electrification Corporation. 20% capital gains tax is paid on the remaining amount provided the property is held for 3 years. Also, the bonds should have been held for 3 years to avail of the tax exemption. In case the property is held for less than that, gain from its sale is treated as income and taxed accordingly at 30% if the income falls in the highest bracket.

Option
Under the scheme the NRI need not file his return of income, if

  • His total income consists of investment income or long term capital gains or both, and
  • Tax has been deducted at source under Chapter XVII-B.[Sec.115G]

Continuance of benefit after return
The benefit of concessional tax treatment under chapter XIIA continues even after the NRI becomes a resident. However he has to file a declaration in writing to the assessing officer along with the return of income under section 139. The option having been once exercised is irrevocable, and the provisions of the Chapter will continue to apply till the transfer or conversion into money of the said assets. It is relevant to note that the benefits are not available for long-term capital gain after the non-resident Indian becomes a resident.

Tax rates for personal incomes for Financial Year 2006-07(Assessment Year 2007-2008) are:

Total Income Tax Rate
Up to Rs.1, 00,000 Nil
Rs. 100,000 to Rs. 150,000 10%
Rs 1, 50,001 to Rs. 2, 50,000 20%
Above Rs.2, 50,000 30%

Where, the taxable income exceeds Rs.10, 00,000/-, surcharge of 10% is imposed on the tax liability. Education Cess @ 3% is levied on the total of the income tax and surcharge.

Tax on income of Foreign Institutional Investors (FIIs) from securities or capital gains arising from their transfer

Foreign companies are permitted to invest in equity shares traded in Indian Stock markets if they are registered as a Foreign Institutional Investors (FII) or if they have a sub account in India.

Investment in Indian securities is also possible through the purchase of Global Depository Receipts (GDR), American Depository Receipts (ADR), Foreign Currency Convertible Bonds and Foreign Currency Bonds issued by Indian issuers, which are listed, traded and settled overseas and mainly denominated in US dollars.

Long-term capital gains on sale of Units would be taxed at the rate of 10% under Section 115AD of the Income Tax Act. Such gains would be calculated without indexation of cost of acquisition.

Short-term capital gains would be taxed at 30% and without conversion of cost of acquisition and full value of consideration in foreign currency, as the first proviso and second proviso to Section 48 do not apply to Foreign Institutional Investors by virtue of Section 115AD(3) of the Income Tax Act.

The said rates would be subject to applicable tax treaty relief. The above tax rates would be increased by applicable surcharge.

No tax would be deductible at source from the capital gains (whether long-term or short-term) arising to an FII on repurchase/redemption of units in view of the provisions of Section 196D (2) of the Act.

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