As the real estate segment in India is propelled with the RERA and other significant investor-friendly guidelines by the government, NRIs are keen to invest in this sphere. With the prospects of yielding higher returns, the real estate market in India has become a lucrative avenue to invest for NRI investors. But any investment by NRI must be governed under the provisions of Foreign Exchange Management Act (FEMA).
In order to make a judicial investment, NRI must have a fair knowledge of various provisions under FEMA that significantly affect any investment made by them in Indian real estate.
Thumb Rule for Sales Proceeds taxation
- A short-term capital gain tax @30% shall be attracted to the capital gain of every immovable property that an NRI sells within the 3 years of its purchase.
- For Long-term capital gains (LTCG), a Tax Deducted at Source (TDS) @ 20% is applicable to the capital gain. However, an NRI can seek a waiver in LTCG by re-investing the capital gains in any tax-exempted bonds or in some other property in India. Within 2 years of sale, the sale proceeds are required to be re-invested into another property and in case NRI wish to reinvest in special bonds, he/she needs to invest within 6 months. For the purpose of tax-exemptions, a proof of reinvestment of capital gain, PAN card of NRI and a tax exemption certificate of Income Tax Act is required to be presented to Income Tax Authorities in India. In case, if NRI plan to but another house an allotment letter and payment receipt are also required to be submitted. Capital gain bonds require an affidavit.
- If an NRI tends to sell off any inherited property in India, the cost of purchase shall be considered as the cost to the previous owner and the sales proceeds shall be liable to LTCG after deducting the cost.
What Tax exemptions NRI can seek after selling property in India?
Reinvesting the gains occurring from the sales proceeds of one residential property into another residential property within 2 years of its sale attracts tax exemption to the extent of the cost incurred in the new property. For example, if an NRI secures a capital gain of 20 lakhs from selling a residential property in India and invests only 10 lakhs in the new residential property, and then the remaining 10 lakhs shall be liable to capital gain tax. Please note that the reinvestment shall be made for the property in India only.
Alternatively, Under Section 54EC under IT Act, if the capital gain is invested in the capital gain bonds which remain locked for 3 years; these are liable to tax exemptions.
Processing Repatriation for Sales Proceeds
For PIOs (Person of Origin) and NRIs, if a property is inherited from any Indian Resident; subject to certain conditions the sale proceeds of that property can be repatriated. In case, these conditions are not complied with, then a special approval from Reserve Bank of India (RBI) is required. If a property is inherited from NRI, then special permission is required from the Central Bank.