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Tax Planning

Usually when Indians settle abroad, they turn to India for investments such as real estate and other funds investments for assured returns. And this is a trend that has increased steadily in the last 5 years. The major reasons that India has emerged as the top destination for NRI investment is that the money multiplies on conversion from Dollars and Euros to Indian rupees and tax saving options are many here. Though it is not difficult to invest in India, it is best to have comprehensive knowledge about the taxation and financial laws that are applicable to your investments, as an NRI.

As per Indian taxation laws, there are separate laws for resident Indians and Non-Resident Indians (NRI). There are certain specific tax rebates and exemptions that are given to NRI individuals.


Qualifications of NRI

There are no specific guidelines that spell out the NRI status but an individual will be treated as a resident of India if The individual stays in India for 182 days in a year or in the past 4 years, has spent cumulative of 365 days or been in India for 60 days or more for which tax is being filed.

Thus, if you do not conform to any of these two applicable clauses, you are deemed an NRI status.


Taxable income for NRI

Most NRI individuals are keen to know whether the income they have earned abroad in that particular year will be taxable on Indian shores. However, as per the law, the tax will be calculated on the residential status. Income that is taxable for NRI in India is categorised as Income accrued in India, Income received in India and Income deemed to accrue or to be received in India.


Basics of NRI Tax Planning

You are not bound to file income tax when there is no income that is arising in India. But if there is any income in respect to rent, capital gains, accrued interest and dividends beyond the prescribed limit then you need to file taxes but can also avail of certain tax deductions applicable only to NRI\'s. NRI income that is exempted from taxation includes:

  • Interest accrued in FCNR (Foreign Currency Non Resident) account and NRE account (Non–Resident External rupee)
  • Interest received on securities, saving certificates and bonds including Nonresident non-repatriable NRNR deposits.
  • Interest received on bonds, stocks and premium on redemption on any of these.
  • Interest received on NSC that are bought with foreign exchange by NRI
  • Income generated on UTI bough in foreign exchange
  • Interest received on RBI approved foreign currency deposits by scheduled banks
  • No tax on inherited property but any income generated due to rent or profit generated due to sale will be liable for taxation in India

Additionally, if you are abroad but have income generated in India, you will be required to declare it in your overseas tax filing. In case, the specific country has a Double Tax Avoidance Agreement with India, you will benefit and get some tax credit for the taxes already filed in India.


Mutual funds and equities taxation liabilities and exemptions

Most NRI\'s prefer to invest in real estate, but mutual funds and stocks are another popular option for investments. For NRI investors, all dividends that are declared by debt-oriented mutual funds and other mutual funds with 65% assets in equity are tax free. However the mutual funds are liable to tax on the declared dividends.

As an NRI investor, if you are dealing in equities, short term capital gains will be applicable on all stocks that have been bought and sold within 365 days. All stocks owned for over 365 days come under the purview of long term capital gains. On short term capital gains, if the Securities Transaction Tax has been paid, it will be taxed at 15% otherwise, the normal tax laws are applicable. Long-term capital gains are taxed at 20% if the Securities Transaction Tax has not been paid. Otherwise they are tax free.


Wealth Tax for NRI

If you are an NRI, planning to return to India with all the wealth that you acquired abroad you will be exempt from Wealth Tax. Additionally, NRI\'s are exempt from wealth tax on all assets acquired within 1 year of their return with the money brought from abroad. These assets are further exempt for a period of 7 years after you come back to India.


This is especially true if the NRIs in question do not visit India frequently and are not open to renting out their properties. They prefer not to burden relatives and friends with the task of paying property tax, maintenance and society dues and see more sense in encashing the capital value of their inherited properties

Selling such real estate is usually not the biggest challenge. What can create confusion is the viability - and ways and means - of remitting the resulting funds back into the country of residence. There is, in fact, a fairly straight-forward process.

The aspects that come into play are:


As in the case of resident Indians, NRIs who sell purchased property after three years from the date of purchase will incur long term capital gains tax of 20 percent. The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is nothing but the cost of purchase adjusted to inflation. Calculation of indexed cost of purchase is easy - many websites provide a calculator; else a chartered accountant can assist. 

In case of inherited property, the date and cost of purchase for purposes of computing the period of holding as well as cost of purchase is taken to be the date and cost to the original owner.

To be more precise, the amount of long term capital gains together with the cost to the previous owner (i.e. the person from whom the property is inherited) would be considered as the cost of purchase. NRIs are subject to a Tax Deducted at Source (TDS) of 20 percent on the long term capital gains. But there are certain instances when NRI can get a waiver of the TDS.

One such case would be if the NRI is planning to re-invest the capital gains of the property in another property or in tax exempt bonds. In such cases, the NRI will be exempt from tax in India, and no TDS will be deducted either.

If the NRI sells the property before three years have elapsed since the date of purchase, short term capital gains tax at his or her tax slab is incurred. Short term capital gain is calculated as the difference between the sale value and the cost of purchase (without the indexation benefit). The NRI will be subject to a TDS of 30 percent irrespective of his or her tax slab.

NRI selling their properties can apply to the income tax authorities for a tax exemption certificate under section 195 of the Income Tax Act. They must make this application in the same jurisdiction that their PAN belongs to and will be required to show proof of reinvestment of capital gains.

If the NRI is planning to buy another house, the allotment letter or payment receipt will need to be produced; if capital gains bonds are chosen instead, an affidavit to this effect will have to be prepared. Usually, buyers withhold the last installment of payment until the NRI produces a certificate of exemption. A NRI has up to two years from the date of sale to invest in another property, or up to six months to invest in bonds.

Tax Exemptions

Section 54 - This section stipulates that if NRI sells a residential property after three years from the date of purchase and reinvest the proceeds into another residential property within two years from the date of sale, the profit generated is exempt to the extent of the cost of new property.

To illustrate - if the capital gains is Rs. 10 lakh and the new property costs Rs. 8 lakh, the remaining Rs. 2 lakh are treated as long term capital gains. The sold residential property may be either have been self-occupied property or given on rent. The new property must be held for at least three years.

NRIs cannot invest the proceeds on the sale of a property in India in a foreign property and still avail the benefit of Section 54. However, some recent hearings with the appellate authorities have held that exemption can be claimed under Section 54 even if the new house is purchased outside India.

However, this is not explicitly specified clearly under the law, and it is advisable for an NRI to consult a tax expert before making any investment decisions outside India to avail of tax benefits under Section 54.

Section 54EC - This section of the Income Tax Act states that if an NRI sells a long term asset (in this case, a residential property) after three years from the date of purchase and invests the amount of capital gains in bonds of NHAI and REC within six months of the date of sale, he or she will be exempt from capital gains tax. The bonds will remain locked in for a period of three years.  


General permission is available to NRIs and PIOs to repatriate the sale proceeds of property inherited from an Indian resident, subject to certain conditions. If those conditions are fulfilled, the NRI need not seek the RBI\'s permission. However, if the NRI has inherited the property from a person residing outside India, he or she must seek specific permission from the RBI.

The conditions for repatriation of such funds are not really complicated - the amount per financial year (April-March) should not exceed USD 1 million, and should be done through authorized dealers. NRIs must provide documentary evidence with regard to their inheritance of the property, and a certificate from a chartered accountant in the specified format.

What NRIs must pay attention to is the income tax implications in their country of residence. Many countries tax their residents on their income regardless of where it originates from, while others provide partial or total exemption on capital gains arising on sale of a residential house if certain conditions are met.

The most important point to ponder is the income tax liability in the country of residence on the amount of gain, and whether claiming exemption under Sections 54/54F/54EC is really worth it. The NRI may, in fact, be better off claiming only partial or no tax exemption on the capital gains in India.



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