Tax Implications on NRI Investment in India – Explained
October 12, 2019
The time is right for Non-Resident Indians (NRI) to invest in India by following a simple guide to property buying, with the government and tax reforms significantly opening up for them. The Indian diaspora has made significant contributions to the Indian economy through their investments, primarily in the real estate sector. By investing in India, they maintain an emotional bond with their motherland and often utilise these investments when they come back to the country, either for retirement or otherwise. While they have access to investment in India like local Indians, tax rules and perks are a lot different for them. For one, when an NRI has made certain investments in India, they are asked to pay a 20% tax. However, there are a number of home financing options NRI investors can choose.
According to the Income Tax Act, 1961 (under the Indian tax law), there are certain provisions for taxing an NRI based on two streams of income in the real estate sector – income from transfer of property and income from renting out property.
Here are the following tax implications on NRI investment in India:
- According to the Foreign Exchange Management Act (FEMA), there are different tax rules for Indian residents and non-resident Indians. In terms of tax purposes, an Indian resident is anybody who has lived in India for at least 182 days during the financial season. Additionally, Indian residents are those who have lived in India for 60 days in the previous years and at least 365 days in the preceding four years.
- NRIs are taxed based on the income they earn/accrue from India. Typically, they are taxed for the salary they earn, rental income from their property in India, the revenue they have earned from their fixed deposits in India, the interests from banks based on their savings account in India and any gains earned from transfer of assets in India.
- To understand tax implications on NRI investment in India, one must also understand that there are certain tax deductions available for NRIs. Under Section 80C, you can claim tax deductions of Rs 1.5 lakhs from your total income. These deductions include life insurance premium payment (provided the premium is less than 10% of the sum), children’s tuition payment, investments in Equity Linked Savings Scheme (ELSS) and repayment of an EMI for purchase of a property.
- Under Section 80D, the government of India allows a citizen to avail tax deductions on medical insurance. NRIs can claim this deduction for self, spouse or children.
- Double Tax Avoidance Agreement (DTAA): DTAA refers to an agreement between two or more countries to benefit people to avoid paying double taxes from the same income. In other words, DTAA applies to those people who are residents of one country but earning income from another. Countries such as Canada, UAE, Singapore, Germany, Australia, UK, USA and Mauritius allow this agreement.
Regulations for NRIs investing in Indian real estate:
Amidst tax deductions, it should be noted that there are certain tax withholding obligations imposed by the income tax laws, especially when it includes the purchase of property from Indian residents and non-resident Indians. No wonder they say that for NRI investments, real estate is a better option.
- In terms of property buying, NRIs can utilise Section 80C of the Income Tax Act of 1961. It is always assumed that whenever a property is purchased, it is for self-use, especially if it is the only property an NRI owns. If this purchase is through a home loan, then the interest is deducted from the total taxes using Section 80C, allowing a maximum of Rs 1.5 lakhs for a tax deduction. In the event of an NRI owning more than a single residential property, then one of the houses will be looked at as self-occupied while the others have been let out.
- At the same time, the property purchased can be used as a form of secondary income when it is given on rent. From the rent earned, NRIs can have the interest deductible from the taxable amount. Around 30% of the income can be open for deduction bearing repair and maintenance of the home in mind.
As an NRI, keep an eye on your taxes and see if you have been inadvertently paying double taxes or not. While NRIs should understand tax implications, they must also be aware of foreign exchange regulations applied to residential property buying in India. These regulations include the type of bank account the individual has, the limit on remittances from India, etc. Only after understanding and utilising tax implications and foreign regulations from being owners of Indian property can the individual truly benefit from the investments they make in India and avoid making any mistakes in their investments.
From adhering to the right Do’s and Don’ts for NRIs investing to keeping all the mandatory documents ready, check out our detailed blogs on all things related to NRI investments in Indian real estate. Head out to Casagrand and find your dream home.