Tax NRI FAQs - Frequently Asked Question - Part-2

With Continuation to Legal NRI FAQ's, lets find below Tax NRI FAQ's.

Q1. Does Capital Gains Tax (CGT) apply for NRI/PIO/OCI?

Ans: Yes. Long-term and short-term capital gains are taxable in the hands of non-residents.

Q2. Do NRI/PIO have to file returns in India for their property rental income and Capital Gains Tax?

Ans: The Government of India has granted general permission for NRI/PIO/OCI to buy property in India and they do not have to pay any taxes even while acquiring property in India. However, taxes have to be paid if they are selling this property. Rental income earned is taxable in India and they will have to obtain a PAN and file return of income if they have rented this property. On sale of the property, the profit on sale shall be subject to 9 capital gains. If they have held the  property for less than or equal to 3 years after taking actual possession, then the gains would be short term capital gains, which are to be included in their total income as tax as per the normal slab rates shall be payable and if the property has been held for more then 3 years then the resultant gain would be long term capital gains subject to 20% tax plus applicable cess.

Rate of tax deduction at source (TDS):

Long term: 20.6%

Short term: 30.9%

Q3. Is there a way for exempting the tax upon income generated by the property located in India? How does the Double Taxation Avoidance Agreement work in the context of tax on income and Capital Gains tax paid in India by NRI?

Ans: Exemption available (only for long term capital gains)

The long term capital gains arising on sale of a residential house can be invested in buying/constructing another residential house, within the prescribed time. The exemption is restricted to the amount of capital gains or the amount invested in new residential house, whichever is lower.

If the amount of capital gains is invested in bonds of National Highways Authority of India (NHAI) or Rural Electrification Corporation, then the entire capital gain is exempted, else only the proportionate gain is exempted. As per the financial budget 2007-08, a cap of Rs. 50 Lakhs has been imposed on investment that can be made in capital tax saving bonds.

India has DTAA’s with several countries which give a favorable tax treatment in respect of certain heads of income. However, in case of sale of immovable property, the DTAA with most countries provide that the capital gains will be taxed in the country where the immovable property is situated. Hence, the non-resident will be subject to tax in India on the capital gains which arise on the sale of immovable property in India. Letting of immovable property in India would be taxed under most tax treaties in view of the fact that the property is situated in India.

Q4. How does Double Taxation Avoidance Agreement works in the context of CGT paid in India for the foreign tax treatment?

Ans: In case the non-resident pays any tax on capital gains arising in India, he would normally be able to obtain a tax credit in respect of the taxes paid in India in the home country, because the income in India would also be included in the country of tax residence. The amount of the tax credit as also the basis of computing the tax credit that can be claimed are specified in the respective country’s DTAA and is also dependent on the laws of the home country where the tax payer is a tax resident.

Q5. What’s the best way to file tax returns?

Ans: Traditionally, you could file your return either by giving a power of attorney to someone in

India or by sending your form and documents to a tax expert in India who would then file returns

on your behalf.

However nowadays, the easiest option for NRIs to file their Indian tax returns is by using the online platform. There are several options to file online.

Q6. What are the rules governing the repatriation of the proceeds of sale of immovable properties by NRI/PIO as prescribed by the Reserve Bank of India?

Ans: (a) If the property was acquired out of foreign exchange sources, i.e. remitted through normal banking channels/by debit to NRE/FCNR(B) account, the amount to be repatriated should not exceed the amount paid for the property:

(i) In foreign exchange received through normal banking channel or

(ii) By debit to NRE account (foreign currency equivalent, as on the date of payment) or debit to FCNR (B) account.

Repatriation of sale proceeds of residential property purchased by NRI’s/PIO’s out of foreign exchange is restricted to not more than two such properties. Capital gains, if any, may be credited to the NRO account from where the NRI’s/PIO’s may repatriate an account up to USD one million, per financial year, as discussed below.

(b) If the property was acquired out of Rupee sources, NRI/PIO may remit an amount up to USD one million, per financial year, out of the balances held in the NRO account (inclusive of sale proceeds of assets acquired by way of inheritance or settlement), for all the bonafide purposes to the satisfaction of the Authorized Dealer bank and subject to tax compliance. The NRI/PIO may use this facility to remit capital gains, where the acquisition of the subject property was made by funds sourced by remittance through normal banking channels/by debit to NRE/FCNR(B) account.

Q7. Is the rental income from property repatriable and what are the RBI rules?

Ans: The rental income, being a current account transaction, is repatriable, subject to the appropriate deduction of tax and the certification thereof by a Chartered Accountant in practice. Repatriation of sale proceeds is subject to certain conditions. The amount of repatriation cannot exceed the amount paid for acquisition of the immovable property in foreign exchange.

Read Other FAQ's:  Legal NRI FAQ's, Home Loan FAQ's


About the Author: Naveen Kr. Jain, VP, Head of Operations & Customer Services, IndiaHomes Property Group, is an MBA & LLB with 16 years of experience in operations and customer services. At IndiaHomes.com, he is responsible to ensure that all processes, policies and practices followed by the organisation are customer centric and should result in an optimal solution for the end user. Naveen has held senior leadership roles in ING Vysya Bank, HDFC Bank & Stock Holding Corporation of India. Being a certified six sigma black belt & ISO 9001: 2008 lead auditor, the implementation of quality management systems and standards for operational excellence have been Naveen’s key strengths and areas of focus.