Thursday, November 29, 2007

NRIs/PIOs can savour Indian realty, too

This is normally the time of the year when the diaspora, as it were, makes its annual pilgrimage to the motherland. And during the course of my discussions with some of these visitors, one point that comes across very strongly is that a vast majority of them is keenly interested in the real estate space — either they are looking to buy property in India or sell property that they owned before becoming non-resident Indians or inherited during the time that they were abroad.

This article is meant for NRIs and their relatives in India who manage their financial affairs. In fact, the article stems from discussions with a NRI client, though the key points would be of interest to NRIs at large.

No limit

There is a perception amongst some NRIs that they can buy a maximum of two houses in India. Well, this is not true — NRIs can freely purchase real estate in India.

There is absolutely no restriction whatsoever on the number of houses that an NRI or even a person of Indian origin (PIO) can buy or sell — only agricultural land remains out of bounds.

Moreover, since the RBI has given a general permission in this regard, there is no requirement of notifying any authority or filing any paperwork for your real estate transactions.

Just the one restriction applies — a PIO, i.e. an NRI who is a foreign citizen, cannot sell his house to another NRI or PIO — he has to necessarily sell the property back to a resident.

When property is sold, depending upon the holding period, you will either earn short-term or long-term capital gains. If you sell the property after 3 years of purchase, the gain will be long-term, else it will be short-term.


In either case, once the tax is paid, the money is freely repatriable. A certificate from a chartered accountant (CA) needs to be submitted to the bank. There is a specific format for such certificate, which the bank can provide. Once the CA certifies that the tax has been provided for, the net sale proceeds can be repatriated.

Here, it must be noted that repatriation is restricted to a maximum of two properties in a life time. To put it differently, NRIs can buy or sell any number of properties, but repatriation is restricted to just two. This is a major issue that has to be considered carefully before you buy property in India.

If you intend to purchase more than two properties, then to maintain repatriation rights, the third property onwards must be bought in the names of your other family members. This way, husband and wife can buy four properties — husband, wife and two kids can potentially buy eight properties and still maintain 100 per cent repatriation rights.

Capital gains tax

As mentioned before, when you sell property after 3 years, you earn long-term capital gains. Tax on this can be saved if you so desire — by doing either of the following two things:

Invest in specific capital gains tax saving bonds. These bonds are currently being issued by the National Highway Authority of India and the Rural Electrification Corporation. If the capital gains are invested in these bonds, the tax is fully exempted. There is a lock-in period of 3 years for the bonds after which the money (invested in the bonds) can be remitted abroad, too.

The other way is to invest the capital gain amount in another property. You have two years from the date of sale to identify the property and invest in it. Till such time, the money has to be deposited in a special account known as the CGAS — any withdrawal from CGAS should only be for payments to be made in relation to the new property.

Income tax

The first property that you buy is exempt from income tax. However, the second property onwards, even if you keep it locked, a notional rent value based on the market rental value will be taken as your notional income from the second property

To put it differently, even if you earn no income whatsoever from the second property, it will be taxable as if you have put it out on rent. Therefore, it would be advisable to actually rent the second property since anyway you will have to pay tax on an assumed rental value.

Also, it makes sense to buy property using mortgage finance. Tax breaks are available on the interest payment. For the first property, interest payable is tax deductible up to Rs 1,50,000. However from the second property onwards, the entire interest without any limit, is tax deductible Now, one may think the tax break is meaningless since one doesn’t have any Indian income.

That may be so now, however, this tax break can be carried forward for all of eight long years. So, assuming you return to India in the interim or do start earning Indian income, cumulative interest paid for the past few years would be sitting pretty for you to knock off against your Indian income. Therefore, even if you do not have any immediate use for the tax break — it makes sense to avail of it anyway.

Remember, however, to file your tax return in time — the aforementioned tax break cannot be carried forward if the tax return hasn’t been filed in time.


1 comment:

Anonymous said...

In the end paragraph, you say "file tax return". Does it refer to tax returns in the US or India?

I have taken a mortgage from an Indian bank for real estate there.
Can/Should I file it in my US tax returns for deduction?