Published On: Tue, Sep 10th, 2013

Taxation Aspects for NRIs, PIOs, Foreigners

By Accommodation Times News Service

NRIS, PIOs and Foreigners in India are liable to pay taxes which include the Property Tax, Income Tax, Service Tax, Capital Gains Tax and the Wealth Tax. The Income Tax Act, 1961 grants certain tax concessions to NRIs desirous of returning permanently.

Property Tax

Property Tax is payable on Residential as well as Commercial Property as per rates determined by the concerned Municipal Authorities, irrespective of whether the Property is occupied or vacant. Some Municipal Corporations/Municipalities allow concessions in Property Taxes in respect of the vacant Property. The rates of Property taxes vary from City to City.

Service Tax

Service Tax is an indirect tax which is levied on service providers in India except Jammu & Kashmir. The tax is levied on service providers who have annual revenue of more than Rs. 10lakh.
Budget 2007-08 had introduced the proposal to levy service tax at the rate of 12.36 per cent on rental of Immovable Property used for Commercial Purpose.  If, as per the rental agreement, the rent includes all taxes and levies, Service Tax will have to be deposited out of the total rent received.

Income Tax

In India, as in many other countries, the Income Tax payable and the scope of taxable income vary according to the Residential status of the individuals. Residential status under the tax laws is determined differently, and the definition of the terms ‘Resident’, ‘Non-Resident’, etc. under the direct taxation laws like Income Tax Act, Wealth Tax, Gift Tax, etc., are quite different from the definitions given in the Foreign Exchange Management Act (FEMA) for the purpose of regulating transactions/investment in Foreign Exchange. Resident status under the tax laws is determined on the basis of physical presence in India for every year.

There are two categories of taxable entities viz.
Residents: If an individual stays for 182 days or more in India, he is regarded as a resident in that year regardless of his citizenship. Residents are further sub-classified as (a) Ordinarily Residents: and (b) Not Ordinarily Residents

Non Residents: A Non Resident is defined as a person who is not a “Resident” i.e., one who does not satisfy either of the prescribed tests of residence.

Definition of Non Resident (also including NRI & PIO) as per The Income Tax Act, 1961

“Non Resident means a person who is not a resident and for the purpose of sections 92, 93 and 168, includes a person who is not ordinarily resident and an individual who has been in India in that year for a period or periods amounting in all to 182 days or more, or who has been in India for period or periods amounting to 365 days or more within the four years preceding that year.”

Income Tax is payable on the rental income from the Property as well as the Capital Gains arising out of sale of Property, if the total income of the owners exceed the limit stipulated in the Income Tax Act. The rate of Income Tax payable by each assessee will depend on the constitution of owners and their resident status besides the amount of total income.

Foreign Nationals of non-Indian origin

The residential status of a foreign national of non-Indian origin determines the ability to acquire immovable property in India. The residential status of a Foreign National of non-Indian origin in India also determines the incidence of tax as per the Income Tax Act, 1961. Accordingly, they are further divided into

  • Foreign Nationals of Non-Indian Origin, Resident Outside India
  • Foreign Nationals of Non-Indian Origin, Resident In India also referred to as Residents not Ordinarily Residents

Foreigners residing in India and with Indian residency are bound by the laws covering persons resident in India.

Tax Implications at a glance

Type of Income Tax incidence in case of
Resident Resident but not Ordinarily resident Non- Resident
Income received or deemed to be received in India, wherever accrued Taxable Taxable Taxable
Income accrued or arisen or deemed to be accrued or arisen in India, wherever received Taxable Taxable Taxable
Income received and accrued outside India from a business/ profession in India Taxable Taxable Exempt
Income received and accrued outside India from a business/ profession outside India Taxable Exempt Exempt
Income earned and received outside India, subsequently remitted to India (At the time of remittance) Exempt Exempt Exempt

Therefore, income from Property by way of rent/lease rentals is taxable at rates specified for NRIs under the Income Tax Act, if the total income from the above sources exceeds the minimum level stipulated in the Income Tax Act.

Where the person has occupied more than one house for his own Residential purposes, only one house (according to his choice) is treated as self-occupied and all other houses will be “deemed to be let out” and Income Tax will be levied on annual value of the Property

The following two deductions are available from the income under the head “Income from house Property” under the Income tax Act, 1961.

  • Standard Deduction: 30 per cent of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.
  • Interest on Borrowed capital: Interest on borrowed capital is permitted as deduction if the capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house Property.
    or
    When more than one Property is occupied for one’s own Residential purposes.

Income Tax has to be deducted at source in respect of rent/lease rentals payable by NRI tenants/lessees without including the service tax. TDS is deducted on rentals over Rs 12,000 per month at the rate of 10 per cent for individuals.

Identifying the need for NRIs and PIOs to avoid double taxation, that is paying taxes in India as well as in their country of residence, the Government of India has entered into Double Taxation Avoidance Agreement (DTAA) with 65 countries including the U.S., the U.K., Japan, France and Germany. If an NRI is taxed in his home country on the rental income earned in India, he can claim exemption in the home country only if India has Double Tax Treaty with that country.

In case of countries with which India has Double Taxation Avoidance Agreements, the tax rates, are determined by such agreements. (Read Double Taxation Avoidance Agreements).

Another step undertaken by the Government of India for the ease of tax payers has been the incorporation of the Authority for Advance Ruling in the Income Tax Act. This aims to avoid disputes with regards to assessment of Income Tax liability in case of Non Residents and also specified categories of residents.

NRIs Returning to India

The Income Tax Act has granted certain exemptions for NRIs returning to India with the intention of permanently residing in India.

  • Specific Exemptions are available for investments made in Residential properties using money bought from outside India as on the date of return.
  • Tax Exemptions are also available if house Property bought from balance held in NRI accounts as on the date of return.
  • No Wealth Tax for seven consecutive years is applicable on value of such properties starting from the year of return to India.

Capital Gains: Tax payable on profit from Sale/Transfer of Property

Gains from sale of non-agricultural land are taxable as Capital Gains, only if the land is located within eight kilometers from the urban limits.
There are provisions in the Income Tax Act by which transfer of Property under certain circumstances will be deemed to be a sale. Capital Gains are computed on such transactions and Capital Gains Tax has to be paid thereon, in terms of the provisions in the Income Tax Act.
Exemption from Capital Gains Tax for individual’s and HUF’s is allowed to the extent to which such gains are invested in a Residential Property. Section 54EC of the Income Tax Act provides tax exemption on capital gains if the proceeds from the transfer of a ‘long-term capital asset’ if such capital gains are invested in certain bonds within a period of six months after the date of such transfer.
If the gain from sale of Property relates to a Property which has been held by the assessee for less than the specified period (36 months presently), such gain is taxed as short-term Capital Gains at higher rates.

Wealth Tax

In India, Wealth Tax is payable on the value of wealth to be computed in a manner specified in the Wealth Tax Act. Currently, the Wealth Tax is 1 per cent on the aggregate value of chargeable assets in excess of Rs. 15 lakh as reduced by the value of debts owed on valuation date. The valuation date is prescribed as March 31 for all the assessees.

sources: NHB

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