Buying property in India can be a meaningful decision for many Non-Resident Indians. Whether it is for investment, rental income, or a future return to the country, understanding the tax responsibilities is important before finalizing a purchase. Many NRIs are aware of the buying process, but the taxation linked to owning and selling property can raise several questions. So, what should you know before taking the next step? This article discusses the major tax factors every NRI must understand before choosing to buy real estate in India.
Can an NRI Buy Property in India?
Under current regulations, an NRI is allowed to purchase residential and commercial properties in India. There are no restrictions on the number of properties. However, agricultural land, plantation land, and farmhouses cannot be purchased and are permitted only through inheritance or gift. Since the buying process is straightforward, the main focus shifts to the taxes involved during and after the purchase.
Tax on Rental Income
If you plan to rent out the property, the income earned from rent is taxable in India. The rental amount will be added under “Income from House Property.” A standard deduction of 30% is available on the rental income, and you can also deduct municipal taxes that are paid during the financial year.
The tenant must deduct TDS at 30% before sending the rent amount to the NRI’s account. This is a mandatory requirement, and skipping the deduction may lead to penalties for the tenant. If the NRI’s actual tax liability is lower, they can file an income tax return in India and claim a refund for the excess TDS deducted.
Capital Gains Tax on Selling the Property
Capital gains tax depends on how long you hold the property. If the property is sold within two years of purchase, the profit falls under short-term capital gains. In this case, the profit amount will be taxed according to the income slab applicable in India.
If the property is sold after two years, it becomes a long-term capital asset. The gains from such a sale are taxed at 20% with indexation benefits. Indexation helps in adjusting the purchase price according to inflation, which reduces the taxable profit.
TDS is also deducted at the time of sale. For long-term gains, the buyer must deduct 20% TDS, while for short-term gains, the deduction depends on the income slab. If the tax payable is lower than what is deducted, the NRI can file a return and receive the excess amount back.
Reinvesting Capital Gains
NRIs can reduce their tax burden by reinvesting the capital gains. One option is to buy another residential property within the given timelines. Another option is to invest the gains in specified bonds under Section 54EC. These bonds have a lock-in period and a maximum investment limit for each financial year.
These reinvestment methods can help in reducing or eliminating long-term capital gains tax. However, if the reinvested property is sold within three years, the exemption can be withdrawn and taxed later.
Wealth Tax and Inheritance
Wealth tax is no longer applicable in India, so NRIs do not have to worry about additional charges based on the value of owned property. Inherited property does not attract tax during transfer. However, if the inherited property is later sold, capital gains tax will apply based on the original owner’s purchase cost and holding period.
Repatriation of Sale Proceeds
Many NRIs want to transfer the sale proceeds back to their resident country. Repatriation is allowed within permitted limits if the property was purchased using funds from an NRE or FCNR account. If the property was purchased using funds from an NRO account or through income earned in India, repatriation rules differ.
Up to USD 1 million per financial year can be repatriated after fulfilling documentation requirements and paying applicable taxes. Keeping proper records of purchase details, payment mode, and tax receipts can help in smooth processing.
Double Taxation Avoidance Agreement (DTAA)
India has DTAA agreements with several countries. If an NRI pays tax on income earned in India, they may receive tax relief in their resident country based on the agreement. This avoids paying tax twice on the same income. For example, rental income taxed in India can be adjusted while filing taxes abroad, depending on the treaty terms.
Checking the DTAA provisions of the specific country can help in understanding how tax credits work. It is useful for NRIs earning regular income from property in India.
Conclusion
Buying property in India can be beneficial, but understanding the tax responsibilities will help in avoiding unexpected financial concerns in the future. Rental income, capital gains tax, reinvestment options, and repatriation rules are some of the major aspects an NRI must know before proceeding with a purchase. Although the process is direct, learning about the tax factors can help in making informed decisions and protecting financial benefits in the long run. For many buyers, NRI Real Estate can offer reliable growth, but having clarity about taxation will make the experience more secure and straightforward.