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Real Estate Investment
Tax Benefits for NRIs Over Real Estate Investment in India

Tax Benefits for NRIs Over Real Estate Investment in India

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The homesickness tends to attract non-residents in their native country. Their nostalgia compels them to plan for shifting here again after retirement. At that point, they often sweat out.

Reason?

Many factors are responsible for it. So far, there are a few massive obstacles that can trap you (if you’re the NRI) up. Let’s share a few vital points that are significant from your aspect if you’re planning to invest in the real estate in India.

I’ll begin with what FEMA states.

What FEMA says?

The Foreign Exchange Management Act (FEMA) is the licit regulation that states the rules & guidelines for the expats. The real estate investment of the NRIs comes within its index.  This regulatory act is governed by the Reserve Bank of India (RBI). It’s basically drafted to pat the foreign investment in this sector.

This Act subtly reads that the PIOs/OCIs/NRIs own right to purchase a piece of land or any property here. This is permissible provided that the land or property must not be an agricultural land or a farm house. Moreover, they can invest in any commercial land.

However, if anyone is a blue blood, the property can be any immovable or movable one.

What about the loan availability for NRIs?

The expat with an Indian passport, mostly, have foreign currency. So, they intend to transact in that currency. But, the regulatory Act denies such kind of permission. Only Indian currency is valid for making this kind of deal. Also, the conduit must be an Indian bank, like PNB or SBI. They must have their account in any of these banks.

As far as the loan is concerned, you as the NRI/PIO/OCI can owe it if you get a green signal in paperwork. Many real-estate companies attract foreign clients to transact in the residential or commercial land/property. The investor must make sure that all your payments towards inward remittance should be through NRE/NRO account.

Moreover, they offer loan availability as well. So, if you’re on a shoestring, you can dream of a house of your own. To enjoy this loan facility, you should have at least 20% of the total value of the property. It means that you can get around 80% of the loan from any reliable source.

What if you’ll not be physically present to deal?

The physical unavailability can be answered through Power of Attorney (PoA).  It defines that it’s ok if you can’t be present at the deal. You can go a round of discussion with your lawyer. Thereafter, it won’t be a big deal to empower the third party (like your lawyer or relative or builder or a trusted associate) with the PoA.

Drill in your head that it’s an extremely sensitive issue. You can lose your hard-earned money into the hands of any fraud. So, make sure that the chosen attorney would be reliable and trustworthy.

What are the tax benefits for the non-residents? 

The Section 80C of the Income Tax Act, 1961 clearly defines that the foreign resident with Indian passport can claim for the tax deduction. It’s available upto 1 Lakh. But the Act has two provisions:

  1. The property sold within 3 years of its purchase
  2. The property sold after 3 years of its purchase

The first case would be termed as a short term capital gain. If you’ve earned any rental income in this case, it would be taxable. The second case would define as a long term capital gain. In this case, the expat can utilize his money by investing in another property.

Tax on Property Sale
How to Save Capital Gain Tax on Property Sale?

How to Save Capital Gain Tax on Property Sale?

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Tax is like a phobia for its payers. They have to pay a big share of their hard-earned money as the tax. Out of multiple taxes, capital gain tax is the most surprising one. Let’s catch on what it means.

What is Capital Gain Tax?

The tax levied on capital gain is determined as the capital gain tax. When we earn profit on the sale of capital asset, it is termed as capital gain. The capital assets include any stock, consumables, raw materials for business, personal goods, agricultural land in rural India, 6.5% gold bond or national defence gold bond, special bearer bond & gold deposit bond. The gain earned on these assets’ sale is taxable.

Capital gain is further divided into:

  1. Long term capital gain: The capital asset held for more than 36 months is classified as long term capital gain.
  2. Short term capital gain: The capital asset held for 36 months or less than this period is termed as short term gain. In case of immovable property, the duration is shrunk to 2 months.

There is an exception as well in the case of property. The inherited property by an NRI or emigrant or any native is not considered as the capital gain.

How much capital gain is taxable?

  1. In case of long term capital gain, 20% of it is charged as the tax.
  2. In case of short term capital gain, the capital gain tax is added to the taxable income.

Do you know that income from the sale of property is taxable? It implies that you have to pay tax if you sell the property. The money earned through that sale is considered as the income. You can get off that tax by investing in Indian share market because no tax is levied after one year of investment.

It’s just one trick to save tax on the sale of property. We have some more tax-saving tricks. Keep on reading to unearth what more strategies we have for saving tax, especially for providing best services to NRIs. These suggestions would be worth million dollars if implemented:

  1. Compute ‘cost Inflation Index’ to get capital gains: Cost inflation index evaluates the inflation rate. It is used to compute long-term capital gains on the sale of capital assets. When inflation goes up, the cost inflation index also goes up in parallel.

For example, an NRI invested in a property worth INR 30 lakh. After 2 years, he desired to sell it. During meanwhile years, the inflation was evaluated 20%. After computing, the cost inflation index is evaluated as INR 6,000,00, i.e. 20% of INR 30,00,000.

With increase in prices, the real cost of property rolls up in the same ratio as in inflation during that period. Therefore, the capital gain would be contracted and so does the tax. The profit margin would be less.

The property owner should increment the real cost in correspondence to the cost inflation index. Thereby, the profit on sale of that property would reflect less.

How to know the cost inflation index?

The income tax department releases its table annually. 1980-81 is set as its base year wherein general prices are indexed as 100. As the price inflates, the index rises up gradually.

You should observe cost inflation index table to cut on taxes.

How to calculate Capital Gains using Cost Inflation Index?

  • Computation of capital gain:

Computing capital gain is not a big deal. Put the cost in this formula:

Capital gains=Sale price of the property-cost of the property

  • Computation of indexed cost of property

But if you want to derive actual capital gain after putting cost inflation index, compute this way:

Indexed cost of the property= Cost of the property X (Property’s cost inflation index in which it is sold/ Property’s cost inflation index in which it was bought)

For example, I bought a property in the year 2012, @ INR 10 lakh. After 3 years, I sold it @ INR 18,00,000. This is how I calculated the real cost of my property:

If I would simply determine the capital gain, it would be like this:

Capital gain of my property= INR 18,00,000-INR 10,00,000=INR 8,00,000

The cost inflation index of 2012= 785

The cost inflation index of 2015=1024

Indexed cost of my property=INR 10,00,000 X (1024/785)

Indexed cost of my property =INR 1304458.5987

Capital gain= INR 10,00000- INR 1304458.5987=INR 304458.5987

You can see that the real capital gain is just INR 304458.5987 which is far less than INR 8,00,000. Now, the calculation of capital gains tax on INR 304458.5987@20% would return INR 60891.71974 as payable.

  1. Invest in a residential house: How is it if you are taxed for the sale of a residential property to buy another one for same purpose? Your motive here is to buy another place to live. In such cases, the income tax department provides relief under Section 54.

Even if you sell a non-residential property for purchasing a residential place, this Section heaves a sigh of relief.  You need not pay capital gain tax in such case.

What does Section 54 (& 54F) state?

  • No capital gain tax on the capital gains from the sale of property that are invested in the purchase of new residential place.
  • No capital gain tax if the wholesome capital gain is absorbed in the purchase of new property.
  • Buying a new house is permissible one year prior to the sale of old house.
  • Constructing or purchasing a new house within 3 years & 2 years respectively from the sale of the old house is permissible.
  • The exemption on capital gains tax is limited to purchase of residential house.
  • The new residential house can’t be sold for 3 years. If so happens, the tax would be applicable from the date of acquisition or construction of the new house.
  • Section 54 states that the amount of exemption, in the foretold case, would be lower of capital gain or cost of the new house.
  • Section 54F states that the amount of exemption would be proportionate to the selling price and purchase price of the new residential house.
  1. Invest in capital gain bond under Section 54 EC: It’s another capital gain tax saving trick which is really popular. You can invest in these AAA rated secure bonds and enjoy exemption.

Benefits of Capital Gain Bond:

  • No need to pay capital gain tax after investing in it.
  • The pan capital gain can be invested in it. No tax would be levied.
  • The investor would get interest @6% annually. But it’s slightly lower than the fixed deposits.
  • The interest you earn on capital gain is taxable but the TDS will not be deducted.
  • Invest in these bonds within 6 months of capital gain.
  • These bonds are valid for 3 years. No withdrawal is allowed meanwhile.
  • You can redeem capital gain bonds automatically after 3 years or maturity. Afterwards, no interest would be earned.
  • These bonds are not for sale or transfer.
  • If capital gain exceeds the value of these bonds, the difference would be taxable.
  • Its face value is INR 10,000.
  • You can start investing with minimum INR 20,000. It can be maximized to INR 50 lakhs in a financial year.
  • These bonds can be deposited in Demat account or in physical form.
  • NHAI and REC or their designated branches are government approved agencies for investing in capital gains bond.
  1. Invest in Capital Gain Account Scheme: Unfortunately, some people find it an uphill battle to buy a new residential house post selling of the old one due to filing tax. They should not be anxious as they can invest in ‘Capital Gain Account Scheme’. You can keep your money safe in this scheme for 3 years. Even, you can withdraw it for constructing or purchasing a new residential property if you want meanwhile. It form can be downloaded from income tax website.

What does this scheme offer?

  • Invest before filing for income tax returns. State it in the income tax return form also.
  • Except ineligible corporate and regional banks, you can open capital gain account in the scheduled bank.
  • The options to deposit money in lumpsum & installment are available. But the gains must strictly be deposited before filing the income tax return.
  • If the deposited gains are locked down, you should open CGAS account and deposit gains in it.
  • Gains can be deposited in cash, cheque or draft.
  • This account is of two types, i.e. Account A & Account B, wherein Account A is similar to saving account. The interest rate is identical, i.e. 4%, as in ordinary saving account.

Account B is like fixed deposit. The money gets locked up for a specified time. The interest rate is equal to any ordinary fixed deposit account.

  • For lumpsum withdrawal of money to invest in residential property, choose Account B. But if you invest in construction, go for the Account A as you can withdraw periodically.
  • Expenditure of withdrawn gain from the account within 2 months is mandatory.
  • Reserve Bank of India fixes its interest rate.
  • These are transferable from Account A to Account B or vice versa.
  • The account is not for mortgage or loan.
  • Interest earned on deposition of capital gains is taxable. TDS is deductible.
  1. Capital Loss: It’s an opposite of capital gain. When the amount of sale of property is computed less than the cost of its purchase, it is termed as capital loss. Like capital gains, it is also categorized as long term capital loss and short term capital loss.

Capital loss can help you escape capital gain tax provided that:

  • It has been born before capital gains.
  • Short term capital gains are adjustable to short term capital loss.
  • Likewise, the long term capital gains would be used to get relief from the long term capital loss.
  • Capital loss can be adjustable in the 8 subsequent years. Bu the carried forward loss must be mentioned in the income tax return form.
  • Long term capital loss of securities would not be adjustable in to the long term capital gains. For example, you can’t carry forward the long term capital loss to your long term capital gains in equity mutual funds.
  • Capital loss would be carried forward only if the income tax return is filed on or prior to the last date of income tax return filing.

tax
Is Agricultural Income from Abroad is Taxable in India?

Is Agricultural Income from Abroad is Taxable in India?

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India is an agro-based country since approximately 70% of its population earns bread and butter through farming. But farming is not the only composition of agricultural income. There are many associated works that generate income, like renting out the agro-land. This facility is available for the natives of India. But an NRI can’t invest in the purchase of agriculture land or farm house in India.

Let’s catch on details about the agricultural income sourced from India and abroad.

What is agricultural income in India? 

The revenue generated through farming or agricultural land, buildings or commercial produce from such land is considered as the agricultural income in India. Its details are mentioned in Section 2(1A) of the Income Tax Act.  Ownership, here, does not matter. Suppose a non-resident takes farming land on lease for earning through farming, it would be considered as income from agriculture.

If the revenue is by any means connected with agro-land, it would be counted as the revenue from cultivation. This revenue can be generated through sale of the processed crop. The sale of timber drawn from the trees of such land will also be a part of this income.

There is another situation when the same land or building, like storeroom, outhouse or residential place on/around it is rented out. That rent will be a source of agriculture income.

Taxability of agricultural income from India:

A clause under Section 10(1) of Income Tax Act declares that the income from cultivation shall be exempted from tax. It means that the central government can’t levy any tax on such kind of income.

Please underline that state government can levy tax on the same. But this possibility will arise when the income would exceed INR 5,000 in a financial year. The form ITR 1 or ITR 2 should be filled for income tax return. Conversely, the lesser money earned than the said income shall be exempted from the tax.

Taxability of agricultural income from abroad in India:

Although agricultural income is free from the payable tax under prescribed conditions, but if the same is sourced through the foreign agricultural land, the revenue would be ‘taxable in India’. On consulting this matter with any trustworthy outsourcer who deals in NRI services, the concept of tax will be clearer. This condition will be underlined as the ‘Income from Profits and Gains of Business or Profession’ or ‘Income from Other Sources’.     

How to calculate income tax over the foreign agricultural income?    

Be it the revenue from house property, business, salary or any other source, such income will be taxable. For the NRIs, the revenue generated from the cultivation abroad will fall under the head ‘Income from Other Sources’. Therefore, it would be taxable. The NRIs can consult any reliable entity deals in NRI investment services to dispel confusion over it.

Let’s check how tax is calculated in such condition.

  • When the income is derived from the agriculture land: Take an example. An NRI invested in farming in Canada and earns INR 200,000. Alongside, he is a salaried employee whose monthly income is, let’s say, INR 1 lakh. He generates revenue from dual sources. His salary will be known as base income whereas the former income will be agricultural income.

Now, the tax shall be computed by adding base salary with the agricultural revenue. Then, the output will be multiplied by the fixed tax, let’s say 20%, as per slab. The computation will be like this: 20% (INR 100,000 + INR 200,000) = 20%X INR 300,000 = INR 60,000.

  • When the tax slab changes: The tax slab undergoes revision every financial year. Therefore, it impacts the computation of tax. To cope up that amendment, the computation would be like this: Tax (Basic Tax Slab + Agriculture Income).
  • How much tax is payable?

When the foretold cases are computed carefully, the final computation of tax is to be done. It should be like this: T (Base Income + Agriculture Income) – T (Basic Tax Slab + Agriculture Income).

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PAN Card Not Mandatory to Pay Tax by NRIs, OCIs & PIOs

PAN Card Not Mandatory to Pay Tax by NRIs, OCIs & PIOs

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NRIs, PIOs and OCIs are battling to swap junked currency after demonetization. Now, Reserve Bank of India (RBI) has given a new lease to them. The date to swap outdated currency has been extended upto 30th June, 2017. By showing their valid identity & source proofs along with the letter/form of authority, they can easily exchange the defunct notes at any branch of RBI.

Amid such stringent campaigning against black money, the possibility of fraud has also become prominent. Particularly with the PAN card, it’s a walkover to extract someone’s banking details. Let’s comprehend when NRIs or other emigrants from India require this card first.

When does an NRI, PIO or OCI require PAN card?

PAN card is recommended for tax payers. Banking bodies also ask for it while opening an account, applying for credit card, investing money in Indian stock exchange and spending cash on stocks worth or more INR 50,000.

However, it’s a licence that allows tax payment but it’s not at all mandatory. Check below the guidelines under which the emigrants’ income is counted as taxable:

  • The income, like rental income, salary, income from the sale of securities (Mutual funds) or assets (property) owned in India originating from India and hence, is received from India is taxable for emigrants.
  • Income earned abroad but received in India is taxable.

PAN card is not mandatory for tax payment in India:

Many emigrants, who can’t be physically present to exchange, can authorize any known one for doing so in India. Here arises the possibility of default. Yes, it’s the hacking of personal information! Out of all proofs, PAN card is what can be its source. I want to inform here clearly that this card is not essentially required.

Since the Indian government has provided Form 60 as an alternative of PAN card, the tax payers can enclose the same while filing for tax or tax returns.

Where do NRIs get Form 60- An alternative to PAN card?

Many outsourcers, like S2NRI, are available 24X7 to outsource this facility. The applicant can contact them for consultancy regarding the same instead of applying for PAN card. They happily offer their advice for:

  • Where they can discover the form in person.
  • Spotting the official online place of Indian government (the website of Income Tax Department) where it is available.

NRIs should avoid PAN card as an identity proof for demonetization-Why?

However, this card is essential for hassle free tax payment. But, as said above, it is not compulsory.  And don’t flow with the crowd or fall prey to the rumours that showcases this card is mandatory. There are some official online businesses that do charge for the issuance of this card. But they are not official government website.

This card can let the hacker access sensitive personal information. If so happens, the authentic card holder can be plundered. In order to stay away from such hacking or stealing, go to the shelter of the form 60. It’s the best & secure alternative.

 

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