NRI’S GUIDE TO INVESTMENT IN IMMOVABLE PROPERTY AND TAX PLANNING
The last few years have seen tremendous growth in the real estate sector of
India. Adding impetus to the growth is the liberal policy adopted by the
Government of India towards foreign investment in this sector. It appears as if
this is the right time for the NRIs to invest in immovable property in India. A
time to make their money work at home, while they work abroad.
WHO IS A NRI?
The Foreign Exchange Management Act, 1999 (FEMA) deals with various
definitions. It defines a person resident in India and a person resident outside
India. The non-resident Indians are classified into three categories
(1) Non-resident Indian Nationals
(2) Non-resident Indians of Indian Origin/Persons of Indian Origin And
(3) Overseas Corporate Bodies (OCB)
Non-Resident Indian National (NRI)
An Indian Citizen who stays abroad for employment/carrying on business, to
pursue a vocation outside India or under circumstances indicating an
intention for an uncertain duration of stay abroad is a non-resident.
Person of Indian Origin (PIO)
For the purposes of availing of the facilities of opening and maintenance of
bank accounts and investments in shares/securities in India, Person of Indian
Origin means a citizen of any country other than Pakistan or Bangladesh
A person who is a non-resident can belong to the following categories:
Foreign Citizen of Indian Origin Foreign Citizen of Non-Indian Origin
Residing in India
Residing Outside India
Residing in India
OVERSEAS CORPORATE BODIES (OCB)
Overseas Corporate Bodies (OCBs) are bodies predominantly owned by
individuals of Indian nationality or origin resident outside India and include
overseas companies, partnership firms, societies and other corporate
bodies which are owned, directly or indirectly, to the extent of at least 60%
by individuals of Indian nationality or origin resident outside India, as also
overseas trusts in which at least 60% of the beneficial interest is irrevocably
held by such persons. Such ownership interest should be actually held by
them and not in the capacity as nominees. The various facilities granted to
NRIs are also available with certain exceptions to OCBs as long as the
ownership/beneficial interest held in them by NRIs continue to be at least
INCOME TAX IMPLICATIONS
For the purposes of levy of tax, the Income-tax Act in India has classified the
status of an individual assessee into three viz,
1. Resident and ordinarily resident (ROR)
2. Resident but not ordinarily resident (RNOR)
3. Non-resident (NR)
India has contracted Double Tax Avoidance Agreements (DTAAs) with
various countries. Taxability of the NRI’s Indian income would be decided as
per the provisions of these DTAAs. Most of these DTAAs contain provisions for
lower rates of tax in case of incomes like dividend, royalties, fees for
technical services etc. Provisions of some DTAAs provide interesting
opportunities for efficient tax planning.
(Acquisition and Transfer of Immovable Property in India) Regulations,
1. It deals with acquisition and transfer of immovable property in India by an
Indian citizen resident outside India (NRI).
2. It grants general permission to him to acquire and transfer an immovable
property in India other than agricultural or plantation property or a farm
1. It deals with acquisition and transfer of immovable property in India by a
Person of Indian Origin (PIO).
2. It grants general permission to him to acquire and transfer (in certain
situations) an immovable property in India other than agricultural or
plantation property or a farmhouse.
It grants general permission to a person resident outside India who has
secured RBI permission to establish a branch, office or other place of
business in India (excluding a liaison office) to acquire an immovable
property in India which is necessary for or incidental to carrying on the
It deals with the repatriation of the sale proceeds by an NRI or a PIO, of an
immovable property (other than agricultural land or plantation property or a
farm house) in India subject to the satisfaction of certain stipulated
It prohibits the acquisition or transfer of immovable property in India by
citizens of certain neighboring countries, whether such individual is a resident
of India or not.
It prohibits the transfer of an immovable property in India by a person
resident outside India (other than an NRI or a PIO); i.e., a foreigner, without
prior permission of RBI.
1. A non-resident who is a citizen of India.
2. A non-resident who is a Person of Indian Origin. (PIO)
3. A non-resident who has established in India a branch office or other
place of business (excluding a liaison) office.
ACQUISITION BY WAY OF PURCHASE
A general permission is available to NRIs or PIO to purchase only
residential/ commercial property in India. There is no restriction on the
number of residential/commercial properties that an NRI or a PIO can buy.
The name of a foreign national of non-Indian origin cannot be added as a
second holder of a residential/commercial property purchased by an NRI or
ACQUISITION BY WAY OF GIFT
An NRI or a PIO may acquire residential/commercial property by way of gift
from a resident of India, an NRI or a PIO. However, a foreign national of non-
Indian origin resident outside India cannot acquire residential/commercial
property in India by way of gift. A person resident outside India cannot
acquire agricultural land/plantation/farm house in India by way of gift.
ACQUISITION BY WAY OF INHERITANCE
A person resident outside India can hold immovable property in India
acquired by way of inheritance from a person resident in India. Further,
with the approval of the RBI, he may hold immovable property in India
acquired through inheritance from a person resident outside India, provided
the bequeathor had acquired the property in accordance with FEMA or
the foreign exchange law in force at the time of acquisition.
SALE OF IMMOVABLE PROPERTY
An NRI can sell residential/commercial property in India to a person resident
in India, an NRI or a PIO. However, a PIO can sell residential/commercial
property in India only to a resident of India. He would need prior approval of
the RBI for sale of residential/commercial property in India to an NRI or a
Purchase/ Sale of immovable Property by Foreign
Foreign Embassy/Diplomat/Consulate General has been allowed to
purchase/ sell immovable property in India other than agricultural land/
plantation property / farm house provided
(i) Clearance from Government of India, Ministry of External Affairs is
obtained for such purchase/ sale, and
(i ) The consideration for acquisition of immovable property in India is paid
out of funds remitted from abroad through banking channel.
In the event of sale of properties other than agricultural land / farm house /
plantation property in India by a person resident outside India who is a
citizen of India or a person of Indian origin, the authorised dealer may allow
repatriation of sale proceeds outside India subject to the condition that the
immovable property was acquired by the sel er in accordance with the
provisions of foreign exchange law in force at the time of acquisition or the
provisions of FEMA and the Foreign
Exchange Management (Acquisition and Transfer of Immovable Property
in India) Regulations 2000 and the amount to be repatriated does not
exceed the amount paid for acquisition of the immovable property in
foreign exchange received through normal banking channels or out of
funds held in Foreign Currency Non- Resident Account or the foreign
currency equivalent as on the date of payment, of the amount paid where
such payment was made from the funds held is Non- Resident External
Account for the acquisition of the property concerned. Repatriation can be
made for a maximum of two residential properties.
LOANS FOR ACQUISITION OF IMMOVABLE PROPERTY
Reserve Bank has granted general permission to certain financial institutions
providing housing finance e.g. HDFC, LIC Housing Finance Ltd., etc., to grant
housing loans to NRIs for acquisition of a house/flat for self occupation
subject to certain conditions. The purpose of loan margin money and the
quantum of loan will be at par with those applicable to housing loans to
residents. Repayment of loan should be made within a period not
exceeding 15 years out of inward remittances or out of funds held in the
investor's NRE / FCNR / NRO Accounts.
LOAN AGAINST THE SECURITY OF IMMOVABLE PROPERTY
An NRI can borrow against the security of immovable property from
Authorized Dealer subject to following conditions:
i) The loan should be used for meeting the personal requirements or for
borrower's own business purposes;
ii) Loan should not be used for prohibited activities, namely; (a) Business of
chit fund, or
(b) Nidhi Company
(c) Agriculture or plantation activities or in real estate business, or
construction of farm houses, or
(d) Trading in Transferable Development Rights (TDRs), ii ) The loan amount
cannot be remitted outside India,
iv) Repayment of loan shal be made from out of remittances from
abroad or by debit to NRE/FCNR/NRO account or out of the sale
proceeds of shares or securities or immovable property against which
such loan was granted.
POWER OF ATTORNEY AND NRI
Meaning of POA: A Power of attorney is an authority given by way of a
formal instrument whereby one person, who is called the donor or principal,
authorises another person, who is called the donee, attorney or agent, to
act on his behalf.
TYPES OF POWER OF ATTORNEY
A general power of attorney:
The principal empowers the agent with the right to carry out all legal acts on
his behalf without restricting it to a particular transaction or act and gives
the agent very broad powers to act on behalf of the Principal.
A special power of attorney:
The authority is restricted to act only on certain matters or only a particular
kind of transaction or to carry out a specific legal transaction for the
Principal. The agent's power of attorney expires on the completion of the
REGISTRATION OF POWER-OF-ATTORNEY
1. Registration of power of attorney is not compulsory, it is optional.
2. In India, where the Registration Act, 1908, is in force, the Power of
Attorney should be authenticated by a Sub Registrar only, (Whenever a
person signs the document and his attorney presents/ admits execution).
3. In other areas, attestation should be by a Notary or diplomatic agents.
4. In case an attorney under a valid Power of Attorney himself signs a
document, he may, as an executing or (signing) party present/admit
execution of a document though it is attested by a Notary, unless the text
of the power specifically excludes such powers
5. Foreign Power of Attorney should be got stamped by the Collector after
its receipt in India within prescribed time of 3 months.
6. Registration of power of attorney authenticates the deed of power of
7. Power of Attorney shall be attested by two or more adult independent
witnesses who are of sound mind.
8. If a power of attorney is in respect of an immovable property of value
more than Rs100 it must be registered.
WEALTH TAX PLANNING
Wealth tax is payable only on non-productive assets, like motor cars,
farmhouses, vacant land, jewellery, etc., over and above the minimum
exemption limit of Rs. 15 lakh. Thus, it is possible to not pay any wealth tax at
all even after possessing assets of crores of rupees; as long as one’s non-
productive assets do not surpass Rs. 15 lakh. Other than that, a
taxpayer may own unrestrained value of shares, bank deposits, units,
commercial property, industrial property, etc. without paying any wealth tax.
The liability of a non-resident Indian to wealth tax in India is explained by
way of the following two examples:
Charu, a non-resident Indian and a citizen of India has the following
investments in India as on 31 March 2006
(a) House property on rent for 250 days 4,00,000
(b) Shares in Indian companies 7,00,000
(c) 8% Relief Bonds 8,00,000
(d) Jewellery and cash in hand 9,00,000
The net wealth liable to wealth tax in India of Charu, a non-resident Indian
will first be computed as: Jewellery and cash in hand & rented house
property Rs. 13,00,000. The other items of wealth are completely exempt
from wealth tax.
CAPITAL GAINS ON TRANSFER OF IMMOVABLE PROPERTY
The profit on sale of capital asset is treated as capital gains. The capital
assets (which are not held as stock-in-trade) are Shares, Debentures,
Government securities, Bonds, Units of UTI and Mutual Funds, Immovable
(i) Long Term Capital Gains - Immovable Property held for more than 3 years
This section deals with
Long Term Capital Gain i.e., assets held for more than 36 months and
in case of shares and securities more than 12 months.
It applies to all Immoveable properties and other assets.
Capital Gain will arise at the time of transfer i.e., sale, exchange,
Long Term Capital Gain shal be computed by considering Indexed
cost of acquisition and Indexed cost of Improvement.
Capital Gain on Sale of Immoveable property purchased before April
Purchase/sale of Plot of Land / Residential House or any other
Purchase cost Rs. 1,00,000 in April – 1970 (i.e. financial year 1970– 71).
(Purchase cost Includes Stamp paper Expenses Advocate fees, Registration
Sale Price Rs.9,50,000/- in December,2003 (Financial year 2003-04)
Fair market value as on April 1, 1981 Rs. 2,00,000/- (as certified by
valuation officer) being substituted for cost of acquisition.
(i ) Short term Capital Gains-Immovable Property held for less than 3 years
This section deals with
Short Term Capital Gain i.e., gain arises from assets held for not more
than 3 years.
It applies to all short term assets except shares and debentures of
Indian Company. For shares and debentures holding period is not more than
Capital Gain will arise at the time of transfer i.e., sale, exchange,
In this case, benefit of Indexation is not available.
FILING RETURN OF INCOME
The filing of Return of Income (ROI) by NRIs is explained as under: -
The ROI for Income earned during any April-March period is required
to be filed by subsequent July (i.e. for April' 2006-March' 2007 income, you
are required to file the ROI by 31st July '2007) provided the Income
chargeable to tax exceeds Rs. 100000 being the maximum amount not
chargeable to tax for the Financial Year April 2006 to March 2007, unless one
is covered by clause (i ) below.
NRI is not required to file the Return of Income if he has income only
from Specified Assets as defined under section 115C of the Income-tax
Act, such as dividends, Interest from Debentures/Deposits from public
limited companies, Long Term Capital Gains on sale of shares an Indian
company and the tax is deducted at source from the Income as per the
provisions of Income-tax Act.
The tax deduction at source for NRI is prescribed at maximum rate in
the Income-tax Act. However, the actual liability to tax for the year
computed in accordance with the provisions of the Act is generally lower for
(iv) Income up to Rs. 100,000 (other than long-term capital gains) earned
by NRI is not liable to taxation. However, the tax is deducted at source when
Income is received. The Income earned may not be liable to tax but the tax
is deducted by the Payer in following cases.
(a) The Capital Losses can be set off against Capital Gains but tax is
deducted at source from capital gains without setting off the losses.
(b) The rate of TDS on investment income is 20% (for Assessment year: 2007-
2008 i.e. Previous year: 2006-2073) but tax chargeable on Income as per
Double Taxation Avoidance Agreements (DTAA) existing with the country
where NRI resides may be lower.
(c) The reinvestments of capital gains as prescribed may exempt it from
tax but nevertheless the tax is deducted from Capital gains.
In view of above, NRI should file Return of Income if his tax deducted
at source is more than his actual tax liability. He is entitled to claim refund of
tax with interest at 8% p.a
(vi) Sometimes, NRI may incur capital loss on his investments. He can set
off such loss against any capital gain from sale of investments in
subsequent year or years provided he has filed Return of Income within
prescribed time for the year in which he has incurred loss. Hence the NRI
should file Return of Income declaring loss in such a situation.
(vi ) NRI may file Return of Income in some years and may not file in some
years. But if he receives a notice from the Tax department to file the return of
Income, he must respond by filing Return of Income.
(viii) Under the provisions of section 139(1) it is obligatory, for an individual,
who satisfies the conditions (i.e. economic criteria) specified therein, to file
the Return of Income even though he may not have taxable income.
However, NRIs, vide Notification No.S.O.710 (E) date 20-8-98, are exempt
from filing the Returns of Income based on economic criteria.
(ix) If Return is not filed within time allowed, you may file Return of that
year, at any time within 24 months from the end of that year.
TAX CLEARANCE CERTIFICATE
Section 230 of the Income Tax Act, 1956 deals with the provisions of tax
clearance certificate. The following categories of persons are required to
produce a tax clearance certificate from the concerned assessing officer
prior to their departure:-
1. Persons who are not domiciled in India, and in whose case the
stay in India has exceeded 120 days;
2. Persons of Indian or non-Indian domicile whose names have been
communicated to the Airlines/Shipping Companies by the Income Tax
3. Persons who are domiciled in India at the time of their departure; but i.
Intend to leave India as emigrants; or
ii. Intend to proceed to another country on a work permit with the object of
taking any employment or other occupation in that country; or
iii. In respect of whom circumstances exist, which in the opinion of the
TAX CONCESSIONS TO NRI’S
An individual is said to be a ‘resident’ in India in any financial year if he has
been in India during that year:
for a period of 182 days or more; or
for a period of periods of 60 days or more and has also been in India
within the preceding four years for a period or periods of 365 days or more;
However, the period of 60 days is increased to 182 days in the case of:
a citizen of India or person of Indian origin who has been outside India
and comes on a visit;
when a citizen of India leaves India for purpose of employment
outside India or as a member of a crew of an Indian ship.
(2) Resident But not Ordinarily Resident
An individual is said to be ‘not ordinarily resident’ in any financial year, if
he has not been resident in India in nine out of ten financial years
preceding that financial year; or
has not during the seven financial years preceding that year, been
in India for a period of periods of 730 days or more.
(3) Non Resident
A person who is not resident in India is a ‘Non Resident’.
Long Term Capital Gains