Published On: Thu, Aug 6th, 2009

Investment in Immovable Property and Tax Planning for NRIs

Investment in Immovable Property and Tax Planning for NRIs
Rajkumar S. Adukia
Chartered Accountant
radukia@vsnl.com
Investing in immovable properties in India is not a Herculean task for the NRIs anymore. We have come a long way from the days of FERA (Foreign Exchange Regulation Act) regime, when buying or selling of immovable property was governed by the citizenship of a person. According to an estimate, about 25 million NRIs are looking at home country for potential investment opportunities in real estate. The FDI under automatic route in real estate development has also augmented the confidence of overseas Indians to forge strategic alliances with global realty giants for testing select markets across the country. Before we go into the details of the law governing NRI investment in real estate, let us first understand the basic definitions.
Who is a NRI?
Section 2 of the Foreign Exchange Management Act, 1999 (FEMA) deals with various definitions. It defines a person resident in India and a person resident outside India. However, it does not define the term non-resident nor it does define the term Non Resident Indian (NRI).

However, Notification No. 5/2000-RB (dealing with various kinds of Bank Accounts) defines the term Non Resident Indian (NRI) to mean a person resident outside India who is either a citizen of India or is a person of Indian origin. In short, the definition of the term NRI is contextual and can have slightly different connotations for FEMA/Income Tax/Acquisition of Immovable Property etc.
A Non-Resident Indian is termed as 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. (Persons posted in U.N. organisations and officials deputed abroad by Central/State Governments and Public Sector undertakings on temporary assignments are also treated as non-residents). Non-resident foreign citizens of Indian Origin are treated on par with non-resident Indian citizens (NRIs) for the purpose of certain facilities.
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 if,
he at any time, held an Indian passport
he or either of his parents or any of his grand parents was a citizen of India by virtue of the Constitution of India or Citizenship Act, 1955 (57 of 1995)
the person is a spouse of an Indian citizen

For investments in immovable properties, Person of Indian Origin means an individual (not being a citizen of Pakistan or Bangladesh or Afghanistan or Bhutan or Sri Lanka or Nepal or China or Iran)
who at any time, held an Indian passport
who or either of whose father or whose grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955)

A person who is a non-resident can belong to the following categories:

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 60%.
Key Acts Governing Acquisition of Immovable Property in India by NRIs
The Foreign Exchange Management Act, 1999 is the one that regulates foreign investment in India. Under this umbrella Act, Foreign Exchange Management (Acquisition and Transfer of Immovable Properties) Regulations, 2000 has been enacted vide Notification No. FEMA 21/2000-RB dated 3rd May 2000. These Regulations provide the guidelines for acquisition and transfer of immovable properties by NRIs.

Notifications/Circulars by RBI
(a) A.P (DIR) Series Circular No. 93 dated 09.06.2003
(b) A.P (DIR) Series Circular No. 43 dated 08.12.2003
(c) Master Circular No. / 02 /2006-07dated 01.07.2006
(d) A.P (DIR) Series Circular No. 5 dated 16.08.2006

Income Tax Act, 1961
Income Tax Rules, 1962
Wealth Tax Act, 1957
FERA vs. FEMA
There is a major transformation in the protocol as far as regulation concerning immovable property situated in India is concerned. Under FERA acquisition of immovable property in India was governed by “citizenship criteria”, whereas under FEMA the same is governed by “residential status” criteria. It means a foreign citizen who is resident in India (not being a citizen of any of the eight countries listed above) can purchase immovable property in India without any approval from RBI. He is also not required to file any declaration at the time of purchase of such immovable property.
Prohibition on citizens of certain countries
Citizens of eight countries, (namely, Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal. or Bhutan (whether resident in India or not) are debarred from acquiring or transferring any immovable property in India without prior approval of the RBI. However, such a prohibition is not applicable to immovable property acquired on lease for a period not exceeding five years.
General Prohibition
Investment in agricultural property, plantation and farmhouse is prohibited for all classes of persons resident outside India, be it NRIs/OCBs/ foreign citizens or other foreign entities.
Acquisition of immovable property

Acquisition of immovable property by an NRI can be by way purchase, gift or inheritance

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 a PIO.

A foreign national of non-Indian origin, resident outside India, cannot acquire any immovable property in India by way of purchase without RBI’s approval. However, a foreign national of non-Indian origin, including a citizen of the eight countries mentioned above, may acquire only residential accommodation on lease, for not more than five years.

He does not require the RBI’s permission for this. A person resident outside India (that is, an NRI, a PIO or a foreign national of non-Indian origin) cannot acquire agricultural land/plantation/farm house in India by way of purchase.

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 PIO.

A foreign national of non-Indian origin whether resident in India or outside India would require prior approval of the RBI for sale of residential property in India acquired with the specific permission of the RBI to a person resident in India or outside India.

An NRI or a PIO may sell his agricultural land/plantation/ farm house in India to an Indian citizen resident in India. However, a foreign national of non-Indian origin, resident outside India, would require prior approval of the RBI to sell agricultural land/plantation/farm house acquired in India.

Gift of immovable property in India
An NRI or a PIO may gift residential/commercial property in India to a person resident in India, an NRI or a PIO. Further, an NRI or a PIO may gift agricultural land/plantation/farm house in India to an Indian citizen resident in India.

However, a foreign national of non-Indian origin resident outside India would need prior approval of the RBI to gift agricultural land/plantation/ farm house acquired by him in India.

Purchase/ Sale of immovable Property by Foreign Embassies/Diplomats/Consulate Generals
Foreign Embassy/Diplomat/Consulate General has been allowed to purchase/ sell immovable property in India other than agricultural land/ plantation property / farm house provided
clearance from Government of India, Ministry of External Affairs is obtained for such purchase/ sale, and
(ii) the consideration for acquisition of immovable property in India is paid out of funds remitted from abroad through banking channel.

Acquisition of immovable property for carrying on a permitted activity in India (Regulation 5)
A person resident outside India who has established a liaison office in India in accordance with FEMA regulations cannot purchase immovable property in India. Practically, all liaison offices in India acquire premises on lease for not more than five years for which no permission is required from the RBI.

However, a person resident outside India who has established a branch office or other place of business in India in accordance with FEMA regulations can purchase immovable property in India provided it is necessary for, or incidental to, carrying on the activity he is engaged in and all applicable laws have been complied with.

Such an entity/concerned person would have to file a declaration in form IPI with the Reserve Bank, within ninety days from the date of such acquisition. The non-resident is eligible to transfer by way of mortgage the said immovable property to an Authorised Dealer as a security for any borrowing.
IPI
( See Regulation 5 )

Declaration of immovable property acquired in India
by a person resident outside India

Instructions:
The declaration should be completed in duplicate and submitted directly to the Chief General Manager, Exchange Control Department, (Foreign Investment Division – III), Reserve Bank of India, Central Office, Mumbai-400 001 within 90 days from the date of acquisition of the immovable property.

Documentation:
Certified copies of letter of approval from Reserve Bank obtained under section 6(6) of FEMA, 1999 (42 of 1999).

1 Full name and address of the acquirer who has acquired the immovable property

2 (a) Description of immovable property
(a)
(b) Details of its exact location stating the name of the state, town and municipal/survey number, etc.
(b)
3 (a) Purpose for which the immovable property has been acquired
(a)
(b) Number and date of Reserve Bank’s permission, if any,
(b)
4 Date of acquisition of the immovable property

5 (a) How the immovable property was acquired i.e, whether by way of purchase or lease
(a)
(b) Name, citizenship and address of the seller/lessor
(b)
(c) Amount of purchase price and sources of funds.
(c)

I/We hereby declare that –

(a) the particulars given above are true and correct to the best of my/our knowledge and belief ;

(b) no portion of the said property has been leased/rented to, or is otherwise being allowed to be used by, any other party .

Encls: ………………………………….
(Signature of Authorised official)
Stamp
Place………………… Name ……………………………….

Date………………….. Designation:………………………..

Sale proceeds
As far as repatriation of sale proceeds is concerned, such repatriation in respect of properties acquired by the person while being a resident of India or acquired by inheritance from a person who is resident of India, can only be effected with the prior permission of the Reserve Bank of India.

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 seller 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.

The repatriation of sale proceeds has been restricted to US $ 1 Million per calendar year if properties are acquired from rupee sources by way of inheritance or legacy. This repatriation can be done out of the sale proceeds received from sale of property acquired from rupee sources subject to the condition that the property should have been cumulatively held for a minimum period of 10 years. Further the repatriation is restricted to the amount of foreign exchange remitted by way of inward remittances/NR/FCNR account. However, there is no lock-in period in respect of immovable property acquired by way of inheritance/legacy.

The only significant restriction that exists is with respect to PIOs who are citizens of Pakistan, Bangladesh or Sri Lanka, China, Afghanistan or Iran. These PIOs need to obtain prior approval of the Reserve Bank of India with documentary evidence in support of inheritance and tax clearance/no objection certificate from the Income-tax authorities.

Yet another rule exists with respect to the number of residential properties that can be repatriated. In case of residential units, the restriction is two and for commercial properties, there is no limit. However, rental income is freely repatriable since it is a current account transaction.
Interest or share in a Co-operative Housing Society or Apartment Owners Association
Though the word “immovable property” has been widely used in FEMA, no where does it define the term. Further, even the definition of “immovable property” given in the Transfer of Property Act, 1982, the General Clauses Act, the Sale of Goods Act and the Indian Registration Act, taken together, do not clarify what “immovable property” is. They only suggest what is either included or not included in “immovable property”. In fact, in the above Acts, shares in the co-operative society are not so included in the definition of the term “immovable property”.

However, the Supreme Court of India has made its definition clear in the case of Hanuman Vitamin Foods Pvt. Ltd. v/s State of Maharashtra (2000) 6 see 345, confirming the Bombay High Court decision in Hanuman Vitamin Foods Pvt. Ltd. & Ors v/s. State of Maharashtra & Superintendent of Stamps, Bombay (Writ Petition Number 1820 of 1986, dated 17th February, 1989). The matter of contention in this case was whether the instrument of transfer of shares in a co-operative society was an instrument for transfer of an immovable property, for purposes of levy of stamp duty thereon. The Supreme Court held, by referring to another decision in Veena Hasmukh Jain v/s. State of Maharashtra (1999) 5 SCC 725, that the agreement to sell shares in a Co-operative Society is, in effect, the agreement to sell immovable property.

Accordingly, any interest or share in a Co-operative Housing Society or Apartment Owners Association (also known as Condominium abroad) is an immovable property for the purposes of these Regulations.

Repatriation of Rental Income
NRI/PIOs can freely rent out their immovable property, whether purchase through application of forex or otherwise, without seeking any permission from the RBI. The rental income being a current account transaction is repatriable outside India, only if proper tax is paid or provided for.

Where the house is purchased through housing finance and if the house is rented out, the entire rental income, even if it is more than the prescribed installment, should be adjusted towards repayment of the loan. If the rental income is less then the prescribed installment, the borrower should remit the amount of the extent of the shortfall from abroad or pay it out of his NRE, FCNR or NRO account in India.

Refund of Purchase consideration on account of non­-allotment of flats/plots/cancellation of booking/deals in respect of immovable property purchased by NRIs/PIOs in India
Authorised Dealers are permitted to credit refund of application/earnest money/purchase consideration made by the housing building agencies/seller on account of non-allotment of flat/plot cancellation of bookings/deals for purchases of residential, commercial property, together with interest, if any (net of income tax payable thereon), to NRE/FCNR account, of Non-­Resident Indian/Persons of Indian Origin provided, the original payment was made out of NRE/FCNR account of the account holder or remittance from outside India through normal banking channels and the authorised dealer is satisfied about the genuineness of the transactions (refer to A.P. (DIR Series) Circular No.46 dated November 12, 2002).
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.

Apart from housing finance institutions, authorised dealers have also been granted permission to grant housing loans to NRIs for acquisition of a house/flat for self occupation subject to the same conditions as housing finance institutions.

Authorized dealers can also grant housing loan to NRIs where he is a principal borrower with his resident close relative as a co-applicant / guarantor or where the land is owned jointly by such NRI borrower with his resident close relative. Such housing loans availed in rupees can also be repaid by the close relatives of the borrower in India (Please refer to Regulation 8 of Notification No.FEMA 4/2000-RB dated May 3, 2000 and A.P. (DIR. Series) Circular No.95 dated April 20, 2003 and A.P. (DIR Series) Circular No.94 dated May 25, 2003).

Loan against the security of immovable property
An NRI can borrow against the security of immovable property from Authorised Dealer subject to following conditions:

i) The loan should be used for meeting the personal requirements or for borrower’s own business purposes; and

ii) Loan should not be used for prohibited activities, namely;

(a) Business of chit fund, or

(b) Nidhi Company, or

(c) Agriculture or plantation activities or in real estate business, or construction of farm houses, or

(d) Trading in Transferable Development Rights (TDRs),

iii) The loan amount cannot be remitted outside India,

iv) Repayment of loan shall 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. (Please refer to Schedules 1 and Schedules 2 to Notification No.FEMA 5/2000-RBI dated May 3, 2000)

Availing housing loan in rupees from the employer
A NRI can avail housing loan in rupees from his employer subject to the terms and conditions mentioned in Regulation 8A of Notification No.FEMA 4/2000-RB dated May 3, 2000 and A.P. (DIR Series) Circular No.27 dated October 10, 2003.
Investment in Housing and Real Estate Development (10C. 13 of Exchange Control Manual)
RBI has given permission to NRIs/OCBs to invest on repatriable basis upto 100% in the new issues of equity shares/convertible debentures by an existing or new company engaged or proposing to engage in the following activities:
§ Development of service plots and construction of built- up residential premises; 
§ Real estate covering construction of residential and commercial premises including business centres and offices; 
§ Development of townships; City and regional level urban infrastructure facilities, including roads and bridges; 
§ Manufacturing of building materials; and Financing of housing development. 
Repatriation of original investment will be permitted after a lock in period of three years from the date of issue of the equity shares/convertible debentures. Annual dividend on equity shares/interest on debentures can, however, be freely repatriated, subject to payment of applicable taxes. In case of OCBs, net profit (upto 16%) arising from the sale of such investment after the lock-in period of three years can also be repatriated. 
The RBI permission is not required for acquiring/ holding or transfer/disposal of immovable properties by Indian citizens’ resident outside India. Indian citizens holding immovable property in India but who acquire foreign citizenship at a later date are required to take permission from the RBI for continuing to hold the immovable properties.
The facilities are granted to OCBs so long as the ownership/beneficial interest held in them by persons of Indian nationality/origin resident outside India continues to be at least 60 per cent. To ensure this, the OCBs have to furnish a certificate from an overseas auditor/chartered accountant/certified public accountant in form OAC/OAC-1, at the time of applying for the facility for the first time and thereafter as and when required by Reserve Bank/authorised dealers. The overseas auditor/chartered account/certified public accountant has to certify that the ownership interest in the OCBs is held by NRIs. The documentation accompanying Form OAC/OAC-1 have to clarify that the interest held by persons of Indian nationality/origin in the OCB is actually held by such persons and is not held by them in the capacity as nominees.

Provisions regarding PAN
As per Rule 114B(a) of the Indian Income Tax Rules 1962, a person has to quote his PAN in all documents for the sale or purchase of any immovable property valued at Rs 5,00,000 or more. But as per Rule 114C of the rules, an NRI need not apply for and obtain PAN for any transaction regarding the sale or purchase of immovable property.

The non-residents who are filing the Return of Income may be allotted PAN by the Assessing Officer under section 139A (2) of the Income-tax Act. However, if PAN is not allotted he should apply to obtain P.A.N.

The non-residents are exempt from obtaining the PAN under section 139 A (8) (d) of the Income-tax Act. It is advisable to obtain PAN by non-residents who are filing the Return of Income. For others, they may apply for it for the sake of convenience.

Also, procedurally the Income-tax department is not accepting the Returns of Income from any person who has not obtained or applied for PAN. Hence, one may submit PAN application along with his Return of Income.

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.
No wealth tax is payable on his foreign assets and the tax is payable on net taxable wealth which is arrived at after deducting the debts and liabilities related to the taxable assets. The items of wealth which are either totally exempt from wealth tax and or which are so exempt from wealth tax up to a particular limit are deducted from the gross wealth to arrive at the taxable wealth on the valuation date. Generally speaking, the value of assets on the valuation date as per PART B III Schedule to the Wealth Tax Act is taken for the purpose of computation of wealth tax payable by a non-resident individual. Hence, a non-resident should so plan his investments in India that he secures the maximum deductions and exemptions in a manner that he is liable to least possible wealth tax.
Broadly speaking the exemption in respect of wealth tax could be classified under two headings, namely:
(i) Items which are excluded from the definition of ‘‘Assets’’ [as per the definition of “assets” given in Section 2 (e a) of the Wealth Tax Act, 1957].
(ii) Specific exemptions regarding certain other assets [Section 5 of the Wealth Tax Act, 1957]
Wealth Tax Exemptions
In case of NRIs having any of the following assets, the same are not taxable in the hands of NRI under Section 5 of the Wealth Tax Act, 1957
One house property or
One plot of land provided area is less than 500 square meters or less.
In addition to the above, OVERSEAS ASSETS held by NRI is also exempt Under Section 6 of Wealth Tax Act, 1957.

Specific exemption for an NRI returning India
Where an NRI/PIO returns to India for permanent residence, the money and the value of assets brought by him into India and the value of assets acquired by him out of such money within one year immediately preceding the date of his return and at any time thereafter are totally exempt from wealth tax for a period of seven years after return to India.

The liability of a non-resident Indian to wealth tax in India is explained by way of the following two examples:

Example 1

Amit, a non-resident Indian, has bought urban land and jewellery worth Rs. 20 lakh. He has Rs. 40 lakh in bank deposit and other bank accounts, as on 31 March 2006. The wealth tax payable by Amit on the net wealth as on the valuation date of 31 March 2006 relevant to the assessment year 2006-2007 will be computed only on Rs. 20 lakh – Rs. 15 lakh (exempted), i.e. on Rs. 5 lakh as the amount of Rs. 40 lakh, being deposits in bank is exempt. The wealth tax is computed @ 1% on Rs. 5 lakh = Rs. 5,000.

Example 2

Charu, a non-resident Indian and a citizen of India has the following investments in India as on 31 March 2006:

Rs.
(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.

Wealth Tax Rates

In case of NRIs, Wealth Tax is leviable at par with resident.

The Tax rate is 1% of net wealth subject to basic exemption of Rs. 15,00,000/- (Rupees Fifteen Lakhs).

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 property etc.
The capital gains are segregated into long-term capital gains and short- term capital gains in following manner: -

Capital Asset Short-term Long-term
Equity shares, and listed securities ,Units of Unit Trust of India or Mutual Funds If held for a period not exceeding 12 months from the date of acquisition. Capital asset which is not a short-term capital assets is long-term capital asset
All other investments and immovable property. If held for a period not exceeding 36 months from the date of acquisition. Capital asset which is not a short-term capital assets is long-term capital asset
Computation of Capital Gains on transfer of Immovable Property is done for
Long term capital gains- Immovable Property held for > 3 years
Short term capital gains- Immovable Property held for < 3 years
Profit on sale of residential property

The mode of Computing Capital Gains is as under:
                                                                     Rs.
SALE PROCEEDS OF ASSETS                          XXXX
LESS: COST OF ACQUISITION OF ASSET/ 
          INDEXED COST OF ACQUISITION          XXX
CAPITAL GAINS                                          XXXX
Note:
1. Cost of acquisition:
Cost of acquisition in case of long term capital assets other than Specified Assets means Indexed Cost of Acquisition.
2. Indexed Cost of Acquisition:
For long term capital assets other than Debentures and Bonds (except capital index bonds issued by the Government), the Cost of acquisition means Indexed Cost of Acquisition The system helps you to claim higher cost than actual cost of acquisition. The term "indexed cost of acquisition" is the amount which bears, to the cost of acquisition, the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on April 1, 1981, whichever is later.

(i) Long Term Capital Gains - Immovable Property held for more than 3 years
This section deals with
1. Long Term Capital Gain i.e., assets held for more than 36 months and in case of shares and securities more than 12 months.
2. It applies to all Immoveable properties and other assets.
3. Capital Gain will arise at the time of transfer i.e., sale, exchange, relinquishment etc.
4. Long Term Capital Gain shall be computed by considering Indexed cost of acquisition and Indexed cost of Improvement.

EXAMPLE
(A) Capital Gain on Sale of Immovable property purchased after April 1, 1981.
1. Purchase/sale of Plot of Land / Residential House or any other immoveable property
2.  Purchase cost Rs. 2,00,000/- in April – 1982 
( financial year 1982 – 83).
(Purchase cost Includes Stamp paper Expenses, Advocate fees, Registration Charges etc.)  
3. Sale Price Rs.9,50,000/- in  February,  2004.(financial year 2003-04).  
Rs. 
---------------
Sale Proceeds          9,50,000
Less :- Indexed Cost of acquisition
Indexed cost of acquisition
2,00,000 x 463>

——————-
109@

 
 Cost of acquisition/purchase 
> being cost inflation index of the financial year 2003-04  
@ being cost inflation index of the financial year 1982-83   8,49,541  
—————
LONG TERM CAPITAL GAIN (Sale proceeds Less Indexed Cost) 1,00,459  
========
(B) Capital Gain on Sale of Immoveable property purchased before April 1, 1981.
1.   Purchase/sale of Plot of Land / Residential House or any other immoveable property
2. Purchase cost Rs. 1,00,000 in April – 1970 (i.e. financial year 1970 – 71).  
(Purchase cost Includes Stamp paper Expenses Advocate fees, Registration Charges etc)  
3.     Sale Price Rs.9,50,000/-  in  December,2003 (Financial year 2003-04)
4. Fair market value as on April 1, 1981 Rs. 2,00,000/- 
(as certified by valuation officer) being substituted for cost of acquisition.  
Rs. 
—————
Sale Proceeds 9,50,000  
Less :- cost of acquisition
Indexed cost of acquisition:
2,00,000 x 463‚

—————
100ƒ

 
 being fair market value as on April 1, 1981.
‚ being cost inflation index of the financial year 2003-2004  
ƒ being cost inflation index of the financial year 1981-82 9,26,000  
 
—————
LONG TERM CAPITAL GAIN (Sale proceeds-indexed cost)  24,000
========

(ii) Short term Capital Gains-Immovable Property held for less than 3 years
This section deals with
1. Short Term Capital Gain i.e., gain arises from assets held for not more than 3 years.
2. It applies to all short term assets except shares and debentures of Indian Company. For shares and debentures holding period is not more than 12 months.
3. Capital Gain will arise at the time of transfer i.e., sale, exchange, relinquishment etc.
4. In this case, benefit of Indexation is not available.

EXAMPLE
Short Term Capital Gain on Sale of Immoveable property or any other Short Term Capital Asset.
1. Purchase/sale of Plot of Land / Residential House or any other immoveable property
2.  Purchase cost Rs. 2,00,000/- in May – 2003 ( financial year 2003– 04).
(Purchase cost Includes Stamp paper Expenses, Advocate fees, Registration Charges etc.)  
3. Sale Price Rs.4,50,000/- in  April,  2004. (financial year 2004-05).  
Rs. 
————-
Sale Proceeds          4,50,000

Less :-Cost of acquisition 2,00,000
————-
SHORT  TERM CAPITAL GAIN (Sale Proceeds Less cost) 2,50,000
=========
Exemptions available on re-investment
NRIs are entitled to claim exemption from capital gains tax if they reinvests (within 6 months of sale) long-term capital gains into following assets:

Residential house property [Section 54F of the Income Tax Act, 1961]
Bonds of National Bank for Agricultural and Rural Development (NABARD) / National Highway Authority of India (NHAI)/ Rural Electrification Corporation Limited (RECL)/National Housing Bank (NHB)/Small Industries Development Bank of India (SIDBI) (in case of sale of any long term capital asset) –[Section 54EC of the Income Tax Act, 1961]
Eligible public issues of equity shares by Indian companies (in case of sale of listed securities) [Section 54ED of the Income Tax Act, 1961]. With effect from 1st April 2007, the Finance Act 2006 has made this Section applicable to only those capital gains wherein the transfer of capital asset happens before the 1st of April 2006.

EXAMPLE :-
(A)  Capital Gain on Sale of Immoveable property purchased after April 1, 1981.

1. Purchase/sale of Plot of Land / Residential House or any other immoveable property.
2.  Purchase cost Rs. 2,00,000/- in April – 1982 ( financial year 1982 – 83).
(Purchase cost Includes Stamp paper Expenses, Advocate fees, Registration Charges etc.)
3. Sale Price Rs.9,50,000/- in  February,  2004. (financial year 2003-04).
4. Amount Invested in Specified Bonds Rs.1,90,000/-.
                                                                                                        Rs. 
—————
Sale Proceeds          9,50,000
Less :- Indexed Cost of acquisition
Indexed cost of acquisition
2,00,000 x 463?

————–
109? 

 
 Cost of acquisition/purchase 
?being cost inflation index of the financial year 2003-2004
? being cost inflation index of the financial year 1982-83   8,49,541  
—————
LONG TERM CAPITAL GAIN (Sale Proceeds Less Indexed cost) 1,00,459  
========

EXEMPTION .
Long Term Capital Gain (As above) 1,00,459
Less :- Exemption
            being Amount Invested in Specified Bonds within 6 months. 1,90,000
————–
LONG TERM CAPITAL GAIN NIL
========

EXAMPLE :-
(B) Capital Gain on Sale of Immoveable property purchased after April 1, 1981.

1. Purchase/sale of Plot of Land / Residential House or any other immoveable property.
2. Purchase cost Rs. 2,00,000/- in April – 1982 ( financial year 1982 – 83).
(Purchase cost Includes Stamp paper Expenses, Advocate fees, Registration Charges etc.)
3. Sale Price Rs.9,50,000/- in  February,  2004. (financial year 2003-04).
4. Amount Invested in Specified Bonds Rs. 95,000/-
Rs. 
—————
Sale Proceeds          9,50,000
Less :- Indexed Cost of acquisition
Indexed cost of acquisition
2,00,000 x 463?

—————–
109? 

 
 Cost of acquisition/purchase 
?being cost inflation index of the financial year 2003-2004
? being cost inflation index of the financial year 1982-83      8,49,541  
—————
LONG TERM CAPITAL GAIN (Sale Proceeds Less Indexed cost)   1,00,459  
========

EXEMPTION .
Long Term Capital Gain (As above) 1,00,459
Less :- Exemption .
            being Amount Invested in Specified Bonds within 6 months.   95,000
————–
LONG TERM CAPITAL GAIN   5,459
========

These exemptions are limited to the Investment made in specified assets, provided the same are held for more than 36 months from the date of acquisition.

Specified Asset means any bond
(i) By the National Bank for Agriculture and Rural Development (NABARD) or by the National Highway Authority of India or
(ii) By the Rural Electrification Corporation Ltd or
(iii) By the National Housing Bank or by the Small Industries Development Bank of India.

(iii) Profit on sale of residential property
Long Term Capital Gain arising on sale of residential property and exemption in case of purchase of New Residential House from the sale proceeds of Residential property sold, is dealt by Section 54 of the Income – Tax Act, 1961.
This section deals with.
1. Long Term Capital Gain i.e., assets held for more than 36 months.
2. It applies to residential property only.
3. Capital Gain will arise at the time of transfer i.e., sale, exchange, relinquishment etc.
4. Long Term Capital Gain shall be computed by considering Indexed cost of acquisition and Indexed cost of Improvement.
5. Resident as well as NRI is eligible for exemption from tax on Long Term Capital Gain provided
(i) He has purchased or constructed a residential house within specified period, and
(ii) He will not sell new residential house for a period of 3 years from the date of its purchase or construction.
OR
(i) If he deposits the funds before due date of furnishing the return of Income into CAPITAL GAINS ACCOUNTS SCHEME 1988 and
(ii) Utilized the said deposits for purchase or construction of new residential house within the specified period.
6 Amount of exemption – lower of the following
a) The amount of capital gain generated on transfer of residential house property; or
b) The amount invested in purchasing or construction (including the amount deposited in the deposit scheme) new residential property.
7 Specified Period in this case means one year before or two years after the date on which the transfer took place or within a period of three years from the date of its construction.
Set-Off Of Gains against Losses
When NRI has incurred loss on sale of shares and later when he sells other shares where he has capital gains, in such a case the NRI is eligible to claim set off provided both the transactions are in the same year i.e. during April- March financial year. In this case, NRI can apply for tax exemption certificate prior to the sale of shares of second lot where he has capital gains to ensure set – off and Nil or lower deduction of tax.

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 (ii) 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 following reasons:

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.

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.

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.

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.

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.

Interest / Penalties for belated return:
If Return is not filed in time/ filed after the due date:-
The assessee is liable for penal interest @ 1.25% per month or part of the month on tax amount being Tax payable on Total Income Less Tax Deducted at Source.
Penalty of Rs.5000 if filed after the end of the assessment year.
Benefit of carry forward of losses for set-off against income in later years lapses.

In case of an Individual the form for filing the Return of Income is SARAL 2D, SARAL 2 & SARAL 3.The form is to be signed and verified, by the individual himself or by some person duly authorised by him. Such person should hold a valid Power of Attorney which should be attached to the Return.

Certificate for deduction at lower rate or Tax Exemption Certificate
The rate prescribed for TDS from NRI’s income is the maximum rate of tax at which relevant Income is taxable in India. However, in majority of the cases of NRI, the actual tax liability is lower than this. However, the higher deduction of tax so made is generally not claimed as refund by filing Return of Income. In order to assist such situation, the Income-tax Act has provided procedure under section 197 whereby a NRI can apply to the Assessing officer (in prescribed form) to issue specific certificate authorizing the payer of income (who normally deducts tax at highest prescribed rate) to deduct tax at a lower rate or nil rate. The NRI should estimate his income, tax liability and likely TDS and then apply for partial or complete Tax Exemption Certificate. The payer shall deduct tax in accordance with the certificate of the Assessing officer. Normally the Exemption Certificate is issued within 30 Days and it is issued for a period of one year. After obtaining the Exemption Certificate, the NRI needs to submit it to the Payer of the income who will follow the certificate and not deduct the tax or may deduct at a lower rate as given.

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  1. Raziya Clouser says:

    Comprehensive and excellent information. Answered a lot of my questions. Are there any CAs in the Delhi, Faridabad, area who have the expertise to assist with sale of property, taxes, repatriation of funds.

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