NRIs can repatriate funds from sale of two houses, say experts

For property bought as resident or inherited, up to $1 mn can be sent each year

Non-resident Indians (NRIs) who rent or sell real estate in India should understand the rules that govern taxation of rental income and capital gains. In most cases, the rules are similar to those that apply to resident Indians, but there are a few differences.

Tax on rental income

When a taxpayer (resident or NRI) owns more than two houses, any two chosen by her will be deemed to be self-occupied, assuming they are not rented out. No income tax is payable on those two self-occupied properties.

If the taxpayer has more than two houses that are not rented out, the rest will be deemed to be rented out. Suresh Surana, founder of RSM India, says, “Income from deemed to be let-out property is computed in a similar manner as in the case of let-out property.”

Explaining the rules on the remaining houses if they’re rented out, Maneet Pal Singh, partner at IP Pasricha & Co, says, “If actual rent is received, it will be taxable on accrual basis subject to the calculation of gross annual value prescribed in the income tax law.”

Taxation of capital gains

Both resident Indians and NRIs are taxed similarly on capital gains from the sale of residential property. The rate depends on the holding period. The gains are treated as long term if the NRI held the property for more than two years. If not, the gain is treated as short term. Surana says, “Under Section 112, long-term capital gains are taxed at the rate of 20 per cent after indexation. Short-term capital gains are taxed at the slab rate applicable to the NRI taxpayer.”

Tax Deducted at Source (TDS)

When an NRI sells a property after two years, the buyer must deduct TDS at the rate of 20 per cent. If it is sold before two years, a TDS rate of 30 per cent becomes applicable.

Archit Gupta, chief executive officer, Clear says, “In case the NRI’s total income is below the taxable limit, and he is claiming exemption on capital gain, he may submit a low or nil TDS deduction certificate to the buyer so that no TDS is deducted and he is saved from the hassle of claiming a refund.”

An NRI can avail of tax exemption on capital gains by investing this amount.

Tax relief on borrowed funds

If an NRI borrows money to acquire or construct a house, he must complete the acquisition or construction within five years from the end of the financial year in which the loan was taken to get the benefit of tax deduction.

Singh says, “The interest portion of the loan is eligible for deduction under Section 24 subject to a maximum of Rs 2 lakh in the case of a self-occupied property. The principal portion is eligible for deduction under Section 80C.”

According to Surana, Section 24(b) does not restrict interest deduction in case of loan taken from foreign banks. But Section 80C benefit is available only on loans taken from Indian banks and housing finance companies.

Rules for remitting money 

Gupta warns that NRIs must comply with FEMA (Foreign Exchange Management Act) regulations while remitting money from India.

NRIs can repatriate the proceeds from the sale of a residential property in India, provided they meet a few conditions. Surana says, “The immovable property should have been acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition. The payment should have been made in foreign exchange received through banking channels or out of funds held in FCNR(B) account or NRE (non-resident external) account. And not more than two such properties qualify.”

Surana adds, “If the property was acquired by the non-resident when he was resident in India, or was inherited from a resident Indian, then the sale proceeds can be repatriated up to $1 million per financial year.”