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Post liberalisation, the Indian economy has grown at a rapid pace. India’s regulatory system has helped to restore faith among foreign Investors and NRIs. In this articles we will discuss about 6 points that should be considered while purchase and sale of Immovable Property by NRIs from FEMA and Income Tax Act perspective.
#1 Kinds of Immovable Property that NRIs can Purchase
Clause 24 Foreign Exchange Management (Non-Debt Instrument) Rules 2019, restricts NRIs from Transferring and Purchasing following kinds of Immovable properties
a. Agricultural Land.
b. Farm House
c. Plantation property
Apart from above Immovable properties NRIs / OCIs can purchase any other property in India.
#2 Consideration for funding of Immovable Property
In case property is sold for a consideration than the funds should be arranged in following way
a. If funds are paid in India than, from normal banking channel in India.
b. Funds available in FCNR and NRO/NRE accounts
NRI can also acquire Immovable property as a gift from relative. Definition of relative is as per the Companies Act 2013 and includes gift from following:-
- Father
- Mother
- Husband / Wife
- Son/Daughter (Including legally adopted)
- Grand Father/Grand Mother
- Grand Son/Daugher
- Son’s/Daugher’s Spouses.
- Brother/Sister (Including Step Brother and Step Sister)
- Gift between Members of HUF
#3 Transfer of Immovable Property by NRIs and Repatriation of Funds
NRI can transfer Immovable in India by way of sale to any person resident in India
NRIs can transfer Immovable property to another to NRI or OCI. However, this transfer shouldn’t involve Agriculture land, Farm House or Plantation property. Such Immovable properties can be transferred only to resident Indians
FEMA provisions allows NRIs to repatriate sale proceeds outside in India if, following conditions are satisfied.
i. The immovable property was acquired by NRI as per the provisions of law in force.
ii. The amount of acquisition of the immovable property was paid in foreign exchange received through normal banking channels or out of funds held in foreign currency account Non Resident Account or out of funds held in Non Residential External Account.
iii. In the case of residential property, the repatriation of sale proceeds is restricted to two properties.
In case NRI has acquired property, during his residency in India or has inherited from resident. Then, sale proceeds should be credited to his NRO account. NRO account has a restriction of $ 1 mln for repatriation during a financial year.
While repatriating the fund outside India, NRIs will need to submit Form 15CA and 15CB as per the Income Tax Act to the Bank
#4 Capital Gain on Purchase and Sale of Immovable residential property by NRIs
Capital Gain Tax is applicable on purchase and sale of immovable property by NRIs.
Period of holding the property shall determine the applicability of Long Term (LTCG) or Short Term (STCG) capital gain tax.
If period of holding is less than, 3 years Short term capital tax is applicable else, Long term capital gain tax is applicable.
NRIs are also eligible for exemptions from LTCG for sale of residential house property. As per the provisions u/s 54 and u/54EC of Income tax act, exemption can be availed by investing sale proceeds as follows:-
a. No LTCG will be applicable if NRI has purchased another house residential property within one year before the sale of property to which LTCG is applicable.
b. NRI can claim exemption by investing in new house property within 2 years from the date of sale of the house property to which LTCG is applicable.
c. NRIs can invest in Specified Government Bonds to claim exemption of Long Term capital gain upto Rs 50 lakhs.
# 5 Withholding tax (WHT) consideration for sale of property by NRIs
The buyer of the NRI property is liable to deduct WHT u/s 195 of the Income Tax Act. The rate of WHT is 20% in case of LTCG and 30% in case of STCG. Further, surcharge and cess is also applicable to this amount.
NRIs can apply for lower WHT certificate from Income tax authority in India. Certificate will be granted if, his/her income is less than the threshold applicable for tax under the Income tax Act.
If India has a Double Taxation Agreement with the country in which NRI is a resident then, he/her will be eligible for Tax credit in that country.
# 6 Power of Attorney
If the NRI is not able to travel to India for the purpose of executing the Sale deed or negotiation. He/she can appoint an attorney to deal on such matters.
Conclusion
Investment in India has increased this has also increased the regulatory requirement. From FEMA perspective, it is important that NRIs considers restriction in type of property and arrangement and repatriation of funds for purchase/sale of Immovable property. From Income tax point of view NRIs should take into account capital gain tax implication on sale of his property and also WHT applicability in case of purchase of property