Indians staying abroad have deep-rooted connections with India. Non-resident Indians or persons of Indian origin staying abroad are given various kinds of facilities in India for investment in property in India. Income from such investment, i.e. the Capital Gains is taxable under the Income Tax Act.
Before getting on to understanding the rule of Investment for NRIs in real estate in India, let us be clear about the definition of NRI:
Who is an NRI?
The term NRI refers to Non-resident Indian. It is legally defined under the Income Tax Act, 1961 and FEMA, 1999.
A person who is a citizen of India or a person of Indian origin is a resident of India:
Under IT Act –
- If during the previous year, he is in India for 182 days or more
- If during the previous year he is in India for 60 days or more AND during the four year period immediately preceding the previous year, his stay in India is for 365 days or more.
- If he is residing in India for more than 182 days in the Preceding Financial Year
- It excludes a person who has gone out of India or who stays outside India for purposes of carrying on business or vocation in circumstances as would indicate an intention to stay outside India for an indefinite period.
A person if not covered under these Acts as a resident of India, is a NON-resident Indian.
Rules for Investment by Non-Resident Indians in Real Estate in India
Real Estate transactions fall under the purview of FEMA. Investment in property in India is permissible as follows:
NRIs can invest in
NRIs cannot invest in
- Plantation and Farmhouse
(can only be inherited or gifted to NRI)
Mode of Payment
The payment can be made from funds received in India through normal banking channels or funds held in NRO/NRE/FCNR (B) accounts maintained in India.
Earnings of NRI from investment in real estate can be in the form of:
- Rental Income – it is income from rent of property in India
- Capital Gains – it is income from profits earned by the sale of a property in India
2 a. Short-term Capital Gains: profit from the sale of property within 2 years of its purchase.
2 b. Long-term Capital Gains: profit earned from the sale of property held for more than two years.
Income from rent or Capital Gains is taxable in India under the Income Tax Act. In case of purchase of property, deduction of income tax is made and paid to Income Tax Authorities. When selling a property, taxes are paid on Capital Gains.
Under DTAA (Double Taxation Avoidance Agreements), an NRI can claim a tax credit in his country of residence, for taxes paid in India.
Tax Payable and Tax Exemptions
- In case of purchase of property, deduction of Rs 1 lac allowed
- In case of purchasing a house on loan, deduction on home interest is available
- Other deductions like stamp duty, registration charges and municipal taxes paid are also available.
- No wealth tax payment if the property is vacant, but tax is payable on subsequent property purchase even if vacant.
- Capital Gains are also taxable, but an exemption is allowed:
- If invested in another property
- If invested in certain Bonds are also exempted. (NHA I, REC)
Thus India provides Investment opportunities to Non-Resident Indians to invest in property in India to earn Capital Gains. The income is taxable under the Income Tax Act.