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India’s tax officials to review all property deals

With the growing pressure to tackle the black money issue, India’s income tax officials have aimed their guns at the country’s biggest source of black money – property.

Under scanner will be the real estate deals likely undertaken in the 2010-11 year. Indian tax officials will begin reviewing properties bought and sold in New Delhi and the National Capital Region (NCR – which includes Noida and Gurgaon), extending the review to other cities later.

The income tax watchdog will be looking for cash deals in the last 12 months.

The crackdown will be carried out by India’s Central Board of Direct Taxes (CBDT) which hopes to catch property deals in black money which are not detected by the taxation system.


Also read: NRIs can buy property in India

Also read: Rules to buy property in India

It is a common corrupt practice in India to under-report a real estate deal – show a lower purchase price so that both the buyer and seller benefits – the buyer has to pay lower stamp duty and the seller saves on the capital gains tax.

This practice is common in the secondary property market – where occupied properties are bought from the existing owners.

The difference between the purchase price and the officially recorded price is paid in cash – often using black money.

However, tax officials say that transactions are under-reported even where a house is bought from builders directly.

The corrupt practice has maintained a stronghold despite a rule that requires the registrars to report all property deals exceeding Rs 30 lakh.

India’s IT department compares the data of these transactions with the records of PAN (permanent account numbers) to identify any irregularities, an IT official told The Global Indian magazine.

The IT official revealed that it is difficult to assess property deals of less than Rs 30 laksh.

Under pressure from the Supreme Court on dealing with black money, especially wealth stashed away in tax havens, the government is keen to show that it is doing its bit to address the concerns.

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RBI simplifies rules for investing in property in India

The Reserve Bank of India (RBI) has relaxed norms and issued simple guidelines for the convenience of NRIs and PIOs wishing to invest in Indian real estate under the provisions of the Foreign Exchange Management Act, 1999.

This is a good news for Non-Resident Indians (NRIs) and Persons of Indian Origin (PIO), since investment in Indian real estate is monetarily rewarding and emotionally gratifying for them.

As per RBI guidelines, PIOs and NRIs can buy residential and commercial property in India. However, holding agricultural land, plantations and farmhouses is not allowed by the Government of India. Resident Indians owning such property must inform the RBI if and when they acquire citizenship of another country.

However, overseas Indians are also eligible to inherit or be gifted property in India, and in turn, can sell, gift or transfer such immovable assets to resident Indians, NRIs or PIOs.

But persons of Indian origin living in Pakistan, Bangladesh, China, Afghanistan, Iran, Nepal, Sri Lanka and Bhutan are not permitted to own or acquire any kind of property in India. PIOs in this category can only reside on rented property, subject to a maximum lease of 5 years.

As far as foreign direct investment goes, the Ministry of Commerce and Industry relaxed its policies in March 2005, and investment from NRIs falls within its purview. Barring a few sectors, 100% investment is allowed under the automatic route from foreign and/or NRI investors.

Foreign Direct Investment (FDI) flows are welcomed in building up infrastructure in urban locations, and Special Economic Zones, Export Oriented Units, industrial parks, hardware and software technology parks have been permitted under the automatic route for 100% investment.

Overseas Indians have been offered additional entry options to invest in Indian firms or proprietary concerns on a non-repatriation basis through their NRE Account, FCNR Account or NRO accounts.

In case they wish to avail of repatriation benefits government approval is required for the same.

Acquisition of Immovable Property by Inheritance

– In case of inheritance of agricultural land or plantation or farm house property, the RBI has to be informed.

Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan are not permitted to acquire or transfer property in India. Only a lease rental of less than 5 years is allowed for such persons.

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Can NRIs inherit agriculture land?

Manoj Mohapatra* lives in the United States. He is a US citizen with OCI card (Overseas Citizen of India). His parents own an agricultural piece of land in Andhra Pradesh in India.

They are keen to give this land to Manoj. However, Manoj is not sure whether he can inherit agriculture land since he is a US citizen.

India’s laws governing investment by NRIs are governed by Foreign Exchange Management Act. The law prohibits NRIs and PIOs (non-resident Indians and Persons of Indian Origin) from buying agricultural land in India.


Also read: NRIs can buy property in India

Also read: India’s tax officials to review all property deals

However, there’s good news. This law does not prohibit inheritance of agriculture land by NRIs or PIOs.

And some more good news. There is no inheritance tax. Also, NRIs can sell the inherited agricultural land to a resident Indian.

However, they will have to pay capital gains tax on the sale proceeds.

Once this tax is paid, the remaining sale proceeds can be remitted abroad. Such remittance should not exceed US$1 million in any financial year.

This rule also applies to any other property inherited by NRIs or PIOs.

* name changed on request.

(Satyajit Banerjee is a Calcutta-based accountant specialising in NRI accounting. This article is for information only. Please consult an accountant for professional advice.)

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What are the rules for buying property in India?

NRIs have continued to buy and sell houses in India despite the global economic crisis in the recent years. In fact, NRIs have used the gloomy global scenario to their advantage to secure bargain properties in India.

As India Inc continues its success story, and while the country maintains its economic growth prospects, more Indians living abroad are exploring opportunities to invest in India.

Before investing in the real estate in India, it is important to know the rules and regulations governing property investment in India by NRIs or people of Indian origin.

Which law governs NRIs

India’s Foreign Exchange Management Act, 2000 (FEMA, previously known as FERA – Foreign Exchange Regulations Act) provides rules for investment in properties by non-residents. This includes non-resident Indians, persons of Indian origin and other foreign nationals to hold, acquire or sell immovable property in India. The rules apply to divestment as well as investement. Keeping in mind their Indian origin, non-resident Indians (NRIs) and persons of Indian origin (PIOs) have special privileges under FEMA.


Also read: NRIs can buy property in India

Also read: India’s tax officials to review all property deals

Who is an NRI

It is important to understand the difference between an NRI and a PIO. An NRI or non-resident Indian is a citizen of India who is currently living outside India.

A Person of Indian origin (PIO) on the other hand, is someone who is not necessarily a citizen of India but someone who has held an Indian passport at some stage in the past.

A PIO is also someone who was (or whose parents or grandparents were) a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955.

This provision does not apply to the citizens of Pakistan, Bangladesh Sri Lanka, Afghanistan, China or Iran.

What type of property can I buy in India?

The law gives general permission to NRIs and PIOs to buy immovable property in India. This permission is available only for buying residential or commercial property. It does not apply to buying or selling of agricultural land, plantation property or a farmhouse in India. Such properties can be bought or sold with a specific approval of the Reserve Bank of India (RBI).

A foreign national resident in India who is a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan would require RBI’s approval before investing.

Can I take the proceeds out of India?

Yes, you can, provided you use the right mode of remittance. An NRI or PIO can remit the proceeds using normal banking channels, or through funds held in a non-resident external account (NRE account)/foreign currency non-resident (B) account (FCNR(B) account)/non-resident ordinary rupee account (NRO account) maintained in India.

You cannot make a payment using traveller’s cheques or foreign currency notes. Also, you cannot make payment outside India.

If the original investment amount has been received from inward remittance or debit to an NRE/FCNR(B)/NRO account for buying a house or for loan repayment, then the principal amount can be repatriated outside India.

If an NRI or PIO buys properties using foreign exchange, then he can repatriate sales proceeds of only two such properties when he sells them. The NRI will need to credit the additional capital gains to the NRO account and then repatriate up to US$1 million in any one financial year, after any due taxes have been paid.

Citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan and Iran have to seek specific approval from the RBI for repatriation of sale proceeds of immovable property.

Who can I sell the property to?

An NRI or PIO can sell property in India to a person resident in India or to an NRI or PIO. Other types of sellers need an RBI approval.

A PIO or NRI can sell agricultural land, plantation property or farmhouse to a citizen of India without RBI approval. However, foreign nationals of non-Indian origin living outside India need RBI approval to sell agricultural property in the country.

(Satyajit Banerjee is a Calcutta-based accountant specialising in NRI accounting. This article is for information only. Please consult an accountant for professional advice.)

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NRIs can buy property in India

With India’s booming property market, and improving job prospects, many NRIs are keen to buy a house or commercial property in India, and become part of India’s success story.

As per RBI rules, NRIs or persons of Indian origin (PIO) are permitted to buy and sell properties in India. However, it is important to understand what is allowed and what isn’t.

Who is an NRI

To understand who is an NRI for the purposes of investment, we must see who is a person resident in India.

The remittance of money to and from India is governed by the Foreign Exchange Management Act (FEMA), which defines person resident in India as a person residing in India for more than 182 days during the course of the previous financial year.

According to this definition, it does not include a person who has gone out of India for job, business or vocation, or for any other purpose for an uncertain period.

Not just that. A person who has come to stay in India other than on employment, business or vocation, or for any other purpose for an uncertain period is a resident of India. As such, any person who does not meet this definition is an NRI. Basically, an NRI as someone who is not resident in India.

I am an NRI, can I buy property in India?

Yes, if you meet the NRI definition just discussed. You can not only buy but also sell property in India, as long as the transaction is carried out in compliance with the FEMA.

These provisions are simple to follow. Buy the house or property with a registered conveyance deed. You can also buy it on a power of attorney, when an agreement to sell and a power of attorney are executed by the seller in favour of the buyer.

Do I need to get RBI permission?

No. You don’t have to seek permission from India’s federal bank to buy residential or commercial property in India.

Whether resident in India or abroad, foreign citizens of Indian origin have RBI’s blanket permission to buy property in India. This permission is subject to certain conditions.

The property must be for their bona fide residential purposes of the buyer. Also, the buyer must pay either out of inward remittances in foreign exchange through normal banking channels or out of funds in a NRE or FCNR account maintained with a bank in India.

There is one more condition – declaration. The buyer has to file a declaration with the RBI’s head office in Mumbai within 90 days from the date of purchase of the property or final payment of amount.

Such declaration should include a certified copy of the document evidencing the transaction and bank certificate regarding the amount paid.

Now I want to sell my house in India

India’s federal bank (RBI) has made this also a breeze. NRIs can sell their property in India subject to certain conditions. If the property is bought by another foreign citizen of Indian origin, the purchase consideration should be either remitted to India or paid out of the balance in a NRE or FCNR account.

Can I remit the sale proceeds outside India?

Yes, you can take the sale proceeds outside India if:

  • the amount does not exceed the amount paid to buy the property in foreign exchange received from overseas,
  • the amount paid from a FCNR account, or
  • the foreign currency equivalent of the amount paid from funds held in a NRE account.

In relation to residential properties, the RBI considers applications for repatriation of sale proceeds up to the consideration amount remitted in foreign exchange for the acquisition of two properties.

If the sales proceeds exceed the amount brought into the country to buy the house, then the excess of sale proceeds are to be credited to an ordinary non-resident rupee account of the owner of the property.

But wait. There’s one more provision to consider. You can repatriate funds if the sale takes place after three years from the date of final purchase deed or from the date of payment of final instalment, whichever is later.

What about house as a gift?

NRIs, PIOs or foreign citizens of Indian origin can receive a house as a gift. They can also gift a house in India. But only two houses at the most.

The gift can be received from or given to a relative who may be an Indian citizen or a person of Indian origin whether living in India or not. Of course, they have to follow the tax laws of the country.

Can I get a loan to buy a house in India?

Of course you can. Again, the apex bank (RBI) has allowed a selected housing finance banks to provide housing loans to non resident Indians. The loan is avialble for buying a house for self-use.

As per RBI rules, the nature and amount of the loan will be similar to those for residents. The maximum repayment period allowed in 15 years.

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What are tax rates on bank interest for NRIs?

Mrunal Paranjape* lives in the United States and invests her money in Mumbai in India. These are investments in bank deposits in India.

However, her bank is deducting TDS (Tax Deducted at Source) which is very high. She is also keen to expand her portfolio and diversify into mutual funds and property investment in India, but is unsure how much tax she will pay.


Also read: NRIs can buy property in India

Also read: India’s tax officials to review all property deals

She seems to be maintaining an NRO account which attracts TDS. She cannot save tax by filing form 15G which only resident Indians can file. The best way to save tax is by filing an annual return, and claim refund if the final tax payable is less than TDS.

What about mutual funds?

Indian tax rules encourage investments in equity-oriented mutual funds. As such, tax rates are lower for equity-oriented MFs. An equity-oriented mutual fund is one where the investments are 65% or more in domestic equity shares.

Long-term equity-oriented MFs (more than 12 months) are tax free. However short-term MFs attract capital gains tax of 15 percent.

However, non-equity-oriented mutual funds attract a higher capital gains tax of 20 percent after reducing indexed cost or at 10 percent after reducing actual cost without indexation, whichever is lower.

But the good news is – dividends from mutual funds are tax-free. But you will still pay a dividend distribution tax of 12.5 percent if you have invested in a non-equity oriented mutual fund.

What about property investment?

You can save tax if you use property investment as a long term asset – an asset that you own for more than three years. Such long-term property attracts a capital gains tax of 20 percent after reducing indexed cost from the sale proceeds, similar to mutual funds. However, you cannot use the 10 percent option like mutual funds.

What about tax in the United States?

Mrunal will have to pay tax in her host country – the United States – on all the income she earns in the US as well as outside US, which includes all the income from her investments in India.

* name changed on request

(Satyajit Banerjee is a Calcutta-based accountant specialising in NRI accounting. This article is for information only. Please consult an accountant for professional advice.)