All you wanted to know about the Guidelines for Purchase and Sale of Property by NRIs and Repatriation of Sale Proceeds

 

It is not that complicated for Non-Resident Indians (NRI) to buy or sell immovable property in India and remittance of sale proceeds, but there are certain rules and regulations to be followed during such transactions.  The Reserve Bank of India governs them and they fall under the purview of the Foreign Exchange Management Act (FEMA). In this article we will cover the rules regarding purchase and sale of property by NRIs and repatriation of sale proceeds respectively under separate headings.

 

Purchase of Property by NRIs

 

An NRI or a Person of Indian Origin (PIO) is legally entitled to buy residential and commercial properties in India without prior permission from RBI and there is no restriction on the number of immovable properties they can buy. The only stipulation is that the purchase amount must be paid in Indian Rupees through normal banking channels, or through NRI bank accounts under FEMA and RBI regulations.

 

NRIs and PIOs can also legally inherit property from a person resident in India and can hold it. They cannot buy agricultural land, plantation property or farm house. However, they can inherit such property from a person resident of India and can hold it.

 

Sale of Property by NRIs

 

An NRI can sell their residential or commercial property in India that they have bought or inherited to a person resident in India, NRI or a PIO. However, in case of selling agricultural land, plantation property or farm house, the property must be sold to a person who is a resident in India. After the selling comes the repatriation of sale proceeds to the country of residence. And here you have to follow certain guidelines laid down by RBI under FEMA.

 

Repatriation of sale proceeds of the property by NRIs, bought as a resident of India

 

If you are selling the property bought before moving abroad that is while you were a resident of India, then sale proceeds must be credited to the NRO account. You are entitled to repatriate up to USD 1 million including all other capital transactions per financial year (April-March), given you have paid all your tax dues.  Repatriation is restricted to sale of two residential properties only.

 

You can do this repatriation if you held the property for at least 10 years. If you have kept the property for less than 10 years, you can’t repatriate the money immediately. You need to keep the money in your NRO account till it completes 10 year period and then you can transfer.

 

For example, you are selling a property after holding it for 8 years. Then you need to keep the sale proceeds in NRO account for 2 years. After this 2 year period you can repatriate.

 

Repatriation of sale proceeds of the property by NRIs bought as a Non-resident of India

 

The sale proceeds of the property purchased after you become an NRI can be remitted outside India only after certain conditions are met:

 

The property must be purchased in compliance with the foreign exchange laws prevalent at the time of the purchase.

 

The repatriation cannot exceed the amount of foreign exchange remitted by the NRI to India via normal banking channels for the purchase of the said property.

The remittance cannot exceed the funds paid through Foreign Currency Non Resident (FCNR) Account in buying the property.

The repatriation cannot exceed the amount of loan repayment made using foreign inward remittance or debit to Non Resident External (NRE) or FCNR accounts.

The remittance cannot exceed the amount paid through NRE account at the time of purchase. 

In all cases, the amount of sale proceeds must be credited to NRO account and only then up to USD 1 million per financial year can be repatriated. Such repatriation is allowed for only two properties.

‘Waiting for 10 years to complete for repatriation’ doesn’t apply for properties bought buy NRIs from their foreign money.

 

Repatriation of sale proceeds of inherited property by NRIs

NRIs or PIOs are allowed to repatriate the sale proceeds of immovable property inherited from a person resident in India given they produce documentary evidence in support of their inheritance and necessary tax clearance certificates from the Income-Tax authority. The amount should not exceed USD 1 million per financial year.

Taxation on sale of property by NRIs

If NRIs sell the property after three years from date of purchase, they will incur long term capital gains of 20%. The gains are calculated as difference between indexed cost of purchase and sale value.

Indexed cost of purchase is the cost of purchase adjusted to inflation. In case of inherited property, the date and cost of purchase for the purpose of calculating the period of holding and cost of purchase is taken to be the date and cost to original owner. As per laws, NRIs are subject to a TDS of 20%.

If they sell the property within three years from the date of purchase, they are liable for short term capital gains of a TDS of 30% irrespective of tax slab. Short term capital gains are calculated as difference between the sale value and cost of purchase. No indexation benefit is applicable on short term capital gains.

Tax Exemption  on sale of Property by NRIs

Definitely, NRIs are eligible for tax exemption in certain instance. If they sell their property after three years of purchase and reinvest the sale proceeds into another residential property within two years of sale, gains will be exempt to the extent of the cost of new property.

Another instance of exemption is investment in capital gain bonds. If NRIs sell their property after three years of purchase and reinvest the proceeds in bonds of National Highways Authority of India and Rural Electrification Corp. of India within six months of sale, they will be exempt from paying capital gains tax. The bonds are going to be locked in for a period of three years.

The above mentioned facts are to illustrate the due procedure involved with purchase and sale of property by NRIs and repatriation of sale proceeds. It is advisable to consult a professional to look into finer details of such transactions.

 

Buying a property could be your dream. To achieve all your financial dreams an easy way out is to create a workable financial plan. If you are looking out to create a financial plan for yourself, then you may want to check our financial planning process.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner at www.holisticinvestment.in a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

 

An Overview of Taxation on India ESOPs for US based NRIs

 

 

Employee Stock Option Plans (ESOPs) give employees a right to buy company shares at a pre-decided price and it forms part of taxable income. Most senior employees working with bluechip companies get ESOPs regularly and they have to pay tax on their ESOPs. When an Indian employee moves to the US to work there, he has to pay tax on his India ESOPs in US too, In this article we will explain how ESOPs are taxed in the US vis-s-vis India.

 

ESOPs can be taxed on two occasions: on exercising the option and on selling of exercised shares.

 

Taxation in India on exercising the option

 

It would be easier to understand the taxation on ESOPs with an example. Amit Verma is a 34 year old software engineer with one of India’s biggest software companies. Being a senior employee, he receives his ESOPs regularly in the form of company’s shares listed on the Indian stock exchange.

 At the beginning of the next financial year, his ESOP of 50 shares got vested and he exercised the same at price of Rs 200 per share. The fair market value at that time was Rs 400 per share. Hence his perquisite value for taxation in India stood at Rs 200, that is, Rs 10,000 in toto. As he was in the highest income bracket, he had to pay tax at the rate of 30.9%, that is, Rs 3, 090.

Taxation in India on selling the exercised shares

                                                                                          

 

In India the difference between the sale value and the market value at the time of exercising the option determines the capital gain on ESOPs. For example, if Amit sold his shares at Rs 500 per share, his capital gain per share would be Rs 100. The rationale behind this is that he has already paid the difference between the exercise value and market value, so now he must pay tax on excess only.   

In India, long term capital gains tax is NIL if a share is sold after one year of purchase, on the contrary short term capital gain tax is levied at 15% if the share is sold within a year.

Taxation in US on exercising the option

 

It is mandated by the US tax law that a person who is a citizen or resident of the US must pay taxes on his global income. As is the case with India, in US too, the value of the ESOPs awarded is taxed right away when the employee exercises the option.

Suppose in 2011, Amit moved to the company’s US office in 2011. Now being a US resident, he is bound to pay taxes on his global income in the US, which includes the perquisite value of his India ESOPs.  As per the prescribed exchange rate by the IRS, the ESOP perquisite value of Rs 10,000 would be USD 204. Amit is entitled to claim a tax credit in his US tax return since he has paid tax in India on this income. Using form 1116 he can claim a tax credit of USD 63 (Rs 3,090 converted at the rate of Rs49).

But there are certain limitations on the amount of credit you can claim. For example, the India tax credit you claim should not exceed the tax payable in the US on your Indian income.

Taxation in US on selling the exercised shares

 

In the US, the same method is applied to calculate capital gains as in India. The only difference is that there is no tax exempt on long term capital gains in the US. In the case of Amit, he is not entitled to pay taxes in India on his long term capital gains if he sells his shares after a year, but he has to pay taxes on those gains in the US. With reference to short term capital gains tax, he can claim a tax credit in his US tax return which is paid in India.

So as an US based NRI, when you exercise Indian ESOPs or sell Indian ESOPs, your taxation will not complete if you adhere to the Indian Taxation Rules. In addition to the Indian Taxation rules, you also need to comply with the US taxation rules.  The only good news is you will get tax credit in US tax return for the taxes you paid in India with reference to these ESOPs.

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

 

 

5 Things NRIs need to know when filing Income Tax Returns in India

5 Things NRIs need to know when filing Income Tax Returns in India

The income that NRI earn abroad is not taxable in India. Nevertheless, some NRIs also have an earning in their aborigine country, India in the form of interest from deposits, property rent, etc. This income has a basic limit of exemption, which is Rs 2 lakhs. If the NRI earnings from such native sources cross the fixed limit of two lakh, then they should file their tax return.

In addition to the income sources mentioned above, if these NRIs carry out transactions in shares, mutual funds and/or similar securities, the monetary gains from the same are also tax accountable, for which they are supposed to file returns. The due date for this, only in case of NRIs, is July 31.

However, there are certain things that NRIs filing returns must take into consideration. By considering the following practical scenarios, one can ease out his/her tax-return filing process in India.

·         When should an NRI file for the return?

There are three major criteria for filing the return. These include if their income from the country exceeds the maximum limit permissible as basic exemption, or it can be filed to claim a return if the deducted tax is more than what was payable. To settle the claims for the amount set off as capital losses, one should file his returns.

·         What all documents do you need as a non-resident Indian?

The documents that one should submit include their passport of the residence country. This shows the total number of days spent outside India for them to qualify as a non-resident Indian. Apart from this, they should provide their de-mat account statements, and the TDS certificates they received from other parties. The statements for de-mat accounts are required for the knowledge of their bank accounts and transactions held in India.

·         What are the exemptions and the deductions for which you are eligible?

There are certain exemptions in India by which an individual can reduce his/her taxable income. These include certain investments, payment of the principal amount of the housing loan, etc. These exemptions are applicable to NRIs as well. Therefore, for those exemptions that are applicable, the NRIs can claim the same under the Income Tax, such as Section 80C.

There are certain deductions that are specifically not applicable to NRIs. Firstly, NRIs do not benefit from differential exemption limits, based on age and gender, and applicable to resident Indians. Secondly, an NRI’s short-term or long-term capital gains from their investment sale in India, is also not included under tax exemption.

·         What should you do to claim a refund?

To expect a refund from your filed tax return, you should ensure to put the exact bank details, which includes your account number and the branch MICR code. In case of an online filing of returns, the processing of your refund happens electronically. Therefore, precise bank account details are always helpful.

·         What are the alternatives available to file returns?

The NRIs can file their return online via the Income Tax Department’s e-filing portal.Alternative to this, they may also use other ways to do the same. This includes taking the help of tax advisors, or by using other private and paid e-filing portals for getting their purpose served.

Some more points to remember

A point to remember is that an NRI, whose total income during the concerned financial year comprises only of investment earnings and/or long-term capital gains, should not necessarily file the returns. Apart from this, if the tax deduction has already taken place at the income source, then too the non-resident Indian may not file the tax return.

With the help of above-mentioned tips, NRIs can simplify the whole process of filing their tax returns in their motherland, India.

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company