When NRIs want a home
In the first part of a series on housing for NRIs, we look at the provisions of the Income Tax Act applicable for them
For the l arge numbers of NRIs and PIOs based overseas, having a house in India is symbolic of an emotional and financial link to the home country. They usually want a house for their parents or to rent out and at times use it as a base during their visits to India. These days aapravasi or non-resident Indians are being urged to retain a foothold in the country. Maintaining a house in India is a means of doing so.
Property purchase in India is fairly liberalised and simple. Some of the regulatory norms should, however, be kept in mind to ensure compliance with various regulations: tax and exchange control. This also smoothens the process of a sale of property in the future.
If the individual already has a house in India by way of inheritance, gift or an earlier purchase, he must keep in mind that in certain circumstances, a second house in India may be considered taxable. For a non-resident, any one property in India as per the individual’s choice is treated as self-occupied and its annual value is computed as nil provided the property is not actually let out (no benefit derived). The other house property is deemed to be let out even if not actually let out and a notional rent as per the provisions of the act is computed as the taxable income under income from the house property.
In computing the taxable income of a let-out or deemed to- be-let-out-property, some deductions are allowed. These include municipal taxes paid during the year, a fixed quantum of 30% of rental income (after deduction of municipal taxes) for repairs and maintenance charges and interest charges if the house is purchased with a loan. The actual interest paid on the housing loan is allowed as deduction with no limits in case of a rented property. However, in the case of a self-occupied property, the deductible interest on housing loan is limited to ₹ 2 lakh per annum.
Non-residents already owning property in India but seeking to invest in a new house can look at selling the old property and investing the proceeds in a new one in India. The individual could avail of capital gains exemptions on sale if the proceeds are invested in a new house in India and the prescribed conditions are met.
Beneficial provisions of a tax treaty may be available to the owner of the property if the individual is a resident of a country with which India has signed a double tax avoidance agreement. In such a case, the provisions of the Income Tax Act or the treaty, whichever is more beneficial, will apply.
Tax deduction obligations
Buying a house property is likely to result in taxable income for the seller and the tax regulations ensure that taxes are paid at the time of payment of consideration to the seller by way of tax deduction. The rate of tax to be applied would depend on the residential status of the seller. If the seller is a resident, the purchaser is required to withhold tax at the rate of 1%, where the consideration payable is ₹ 50 lakh or more except where the immoveable property is rural agricultural land. The 1% tax deduction rate is required to be applied on the total consideration, and not just on amount exceeding ₹ 50 lakh and on each installment in case the payment is made in multiple installments. It may be mentioned that taxes are to be deducted at the rate of 20%, if the deductee (seller) does not furnish a PAN.
Where the transferor is a non- resident, the benefit of tax withholding at the rate of 1% is not available. Any sum chargeable to tax for a non-resident needs to be subject to tax deduction at applicable rates. The buyer may not be in a position to determine the extent of income which is required to be subject to tax or the rate to be applied and may request a certificate from the tax authorities to determine the quantum of taxes to be withheld. He may otherwise request for a certificate from a chartered accountant, certifying the income and withhold taxes applicable.
To meet the tax withholding obligations, in the case of payment to a resident, the purchaser is not required to obtain a tax deduction account number (TAN). The taxes need to be remitted by quoting the permanent account number (PAN) of both the buyer as well as the seller.