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Senthil Kumar S B.Com, FCA

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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.

Under Indian Income Tax Law, income from house property is one of the categories where even notional incomes are determined and liable to tax.  Every individual who owns more than two self-occupied properties has to treat the remaining as deemed let out and offer notional rental income.  A property is treated as self-occupied property if the same is used by an individual for his residential usage.  Also, no other benefit should be derived from such property.  Till FY 2018-19, only one house could be treated as self-occupied, and from FY 2019-20, two properties are allowed.  However, it is important to note that the total housing loan interest allowed as a deduction from both the properties together is capped at INR 2 Lakhs. 

The Income Tax provisions treat a property as ‘self‑occupied’ if it satisfies any one of the following conditions:

  1. The owner of the property is using it for his residential usage; or
  2. The property is vacant due to an individual’s employment, business, or profession in another place, where he has to reside in a property not belonging to him.

Let us understand the law with few illustrations. 

Arun, an individual living in Bangalore owns 2 houses and both are utilized for his own usage.  Arun uses Bangalore house for his self-occupation and the other one is situated in his native place outside Bangalore used by Arun himself during his visits to native place.  As per law, Arun can treat both as self occupied properties as both are used for self usage.

Varun, an individual living in Bangalore, owns 2 houses one in Bangalore used for his family and another one in his native place kept vacant.  Varun would need to treat the house situated in a native place as ‘deemed let-out’ property and offer notional rental income.  The house situated in native is not self-occupied, hence the condition (1) mentioned above is not satisfied. The house situated in native, not satisfying condition (2) as Varun stays in his own house in Bangalore.

It is important to note that condition (2) has two parts.  One part states that the house should be vacant due to an individual’s employment or business in another place and hence this property is vacant.  The second part states that the property being used in place of employment or business should not be an individual’s own property.  In Varun’s case, the native property though vacant due to employment in Bangalore, the second part, i.e. individual’s stay in place of employment should be at a property not owned by him is not satisfied. Hence, the native place property though vacant and even if not intended for let-out, still needs to be treated as deemed let-out property offering notional rental income.

From the above illustrations, it is clear that if a property needs to be treated as self-occupied for income tax purposes, then it should satisfy one of the conditions mentioned above.  Also, the income tax provisions have not defined what instances would be treated as own usage.  

Generally, the individual’s personal occupation alone is treated as self-occupied.  The property occupied by parents or any other family members and which is not used by an individual for his personal stay is not treated as self-occupied.  This principle has been upheld in a few Income Tax rulings also.

In case of individuals who qualify as ‘resident & ordinarily resident’ in India are liable to offer global income to tax in India.  They need to apply the above-said principles/ conditions even to the properties they own abroad in addition to properties owned within India.  Suppose an individual who has come to India on employment, owns one house in India (used for self‑occupation) & another one abroad in USA (kept vacant & not used for letting out or self-usage), then he has to offer the house in USA under ‘deemed let-out’ basis as he does not satisfy either of the conditions discussed above.  Similar issue arises even for non-residents who stay in own house abroad and have vacant house within India which is neither used for the self purpose or letting out purpose.

Based on the above points, each individual needs to analyze his case though he may own only two properties, whether both can be claimed as self-occupied for income tax purposes.

Also, read Taxation of Income from House Property – First guide to basics

The above information of Income from house Property 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 for their specific case.