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NRI selling Property

Majority of Non-Resident Indians (‘NRIs’) have investments in immovable properties in India in form of residential house / flat, residential land, etc. In the current scenario, due to Covid and various other factors, there are a lot of such residential properties vacant which were previously fetching good rental income for NRIs. Due to such conditions, some NRIs are planning to sell their properties in India and repatriate the funds to their home countries instead of keeping the properties idle without any good returns.

Tax rules for NRI selling Property in India.

Under Indian Income Tax law, any sale consideration paid/ payable to NRI selling property in India is subject to India Income Tax deduction at source (‘TDS’). In simple terms, a specified percentage of the amount out of gross sale value needs to be deducted by the prospective buyer and remitted to Indian Income Tax Authorities in the form of TDS. Further, depending on the period of holding the properties by NRIs, the TDS rate would be determined. The basic TDS rate would be 20% plus applicable surcharge and cess, if the property has been held by NRIs for more than two years; else the basic rate would increase to 30%. The NRI seller on filing their India Income Tax Returns for capital gains arising on sale of immovable property can claim credit for such TDS while computing the taxes due on such sale.

Things to consider before buying a property from NRI.

All persons who intend to buy properties from NRIs have to also follow certain other specified Income Tax compliances such as obtaining Tax Deduction Account Number (‘TAN’), file applicable quarterly TDS returns, etc. A brief explanation of these aspects is discussed later in this article.

Let us understand the law with a few illustrations and scenarios.

Arun is an NRI staying in USA and has a residential flat in India, which he purchased in 2010 for INR 30 Lakhs. Varun, who stays in India is interested in buying this flat for INR 45 Lakhs and has approached Arun for the same. Since the flat has been held by Arun for more than two years, the flat is treated as a long term capital asset and Varun needs to deduct basic TDS @ 20% plus applicable surcharge and cess on INR 45 Lakhs and remit the same to Income Tax Authorities and pay the balance sale amount to Arun.

In the above illustration, suppose Arun had bought this flat only in 2020, then the flat would have been treated as a short-term capital asset and liable for basic TDS @ 30% on the gross sale price as a period of holding is less than two years.

Suppose in the above illustration, if Varun was also NRI purchasing property, still same tax provisions are applicable and required to be followed as under Income Tax provisions there is no distinction or difference in compliance requirements for a resident buyer or an NRI buyer while purchasing a property from NRI seller.

In case NRI seller wants the buyer to do TDS only on appropriate taxable gains alone instead of TDS on the entire gross sale price, the NRI can file an application to Tax Authorities and obtain a lower tax deduction certificate from jurisdictional Income Tax Authorities. Based on such a lower TDS certificate, the buyer can do TDS only to the extent provided as per such certificate.

In case the buyer fails to deduct TDS or short deducts TDS on the payments made to NRI seller, then Tax Authorities may levy interest on the TDS amount defaulted to deduct or short deducted on the buyer for non-compliance with the Income Tax provisions. They may also levy penalties equivalent to the TDS amount not deducted or short deducted.

Based on the above points, it is very important for each buyer while buying property from NRI sellers to consider the above-discussed Income Tax compliances to avoid any notice for non-compliance.

The above information is for general understanding and awareness purposes only. It is highly suggested that the readers discuss their facts specifically with their respective tax consultants to determine the appropriate compliances applicable to their specific case.

How much should I save for my retirement and when should I retire?

These two questions are like uninvited relatives. One cannot chase them out but at the same time got to treat them special.

Americans love numbers to the extent that they measure everything with a pinch of stats (cups of coffee consumed or the number of honks, in key F, their gas-guzzling cars have blared – I am not sure what is the use of the latter one). No other country loves numbers like America. Every part of their life, however trivial it could be, is bombarded with statistics. In my opinion, most of the stats (commercial ones) are influenced by marketers to increase market share, destroy competition, and ultimately drive “unlimited profits” to the shareholders!

I will talk about these mind-blowing trivial statistics and how convoluted logic is used to pursue one’s agenda – in another article.

Right now – another thumb rule is on your way. And that is “4% Rule”!

What is the 4% Rule?

The retirement pool or fund is no exception to the whirlpool of stats. Amongst them, the “4% rule” is probably the simplest. This rule answers the fundamental question of what should be the size of your investment portfolio when you retire? The rule helps you plan for a corpus that would enable you to enjoy the current lifestyle till your last breath. Generally, one lowers his/her standard of living after retirement. If you plan well in advance and accumulate enough corpus, maintaining your current standard of living should not be an issue.

Then let’s delve into the mechanics of it.

First step is to define your current & retirement lifestyle.

Second step is estimating your yearly expenses to maintain your current lifestyle and then make adjustments to reflect changes in your post-retirement lifestyle.

Third step is estimating your retirement age and arrive at the “corpus” amount.

Define Your current & retirement lifestyle.

This should be your retirement corpus when you retire. You must invest this sum – say 50% in equity and 50% in bonds. Collectively it can give an average of 7% yearly returns.

Let us say you retire at the of 60 and this corpus will take you through for another 25 to 30 years. You can start withdrawing 11 lacs from the corpus in the first year.

How Inflation affects Retirement Corpus?

You might ask what about inflation? That’s a very important aspect that can jeopardize any financial plan. The 4% rule is built in such a way that you can withdraw enough money to maintain the same lifestyle despite inflation, say 3 to 4%. So, you can withdraw in the second year an amount of (11 lacs + 33K for inflation) and third-year withdrawal will be 11.67 lacs and so on.

Caveats

    • This is just a thumb rule – consult your financial advisor for detailed advice.
    • This corpus is only to maintain regular expenses. Any extraordinary major expenses like college admission, children’s wedding is not covered. One should create separate funds for them.
    • Financial discipline is paramount – DO NOT withdraw big chunks from the corpus. This will affect future earnings and might lead to financial distress.
    • Not applicable in hyperinflationary economies like Venezuela.
    • Pension is not considered

Although there have been several studies to indicate 4% rule sufficiently takes care of ups and downs in the economy. However, for many skeptical and conservative investors like me 4% rule might not be good enough. I personally would go for the 3% rule. That means I will start my retirement with a corpus of around 3.67 crores instead of 2.75 crores. Arriving at the corpus amount is just a start – one needs to carefully manage his investment portfolio by reviewing periodically and suitably adjusting/reallocating assets as and when required.

Do let me know your thoughts in the comment section.

Read also: Double your Money