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Long-terms Capital Gains from Property outside India will be liable to Tax - NRIs and Taxability of Overseas Income

NRIs and taxability of overseas income

The grass is not actually greener on the other side whereas many Indians abroad are figuring it out the hard way. Faced with a gloomy economic and career plan, some are packing their bags and heading back to test the job market.

Though finding a job will be easier in India, specifically for those with good degrees and employment background, figuring out the tax liability - specifically in the basic years which can be an intimidate task. If you are returning to India for employment then there are some tax issues which you have to acknowledge before taking the final decision.

This is essential because the taxability of overseas income like rental income from property outside India, for returning Indians largely depends on their residential status in India. Planning the timing of one's return is very important.

Residential status

Residency rules play an essential role in determining the income that is taxable in India. Indian residency is obtained in either of the following situations: 1) The individual is in India in that financial year for 182 or more days; or 2) The individual is in India in that financial year for 60 or more days and 365 days or more in the 4 financial years previous to that financial year.

If either of the above conditions is not satisfied, the individual will be considered as a non-resident. Even if one satisfies either of the above two conditions, and, therefore, certified as a resident, Indian tax laws give a relief for a category of individuals who are ‘not ordinarily resident’ (NOR).

One can become a NOR either if his/her stay in India in the 7 financial years rapidly preceding that financial year is less than 729 days or if he/she was a non-resident for 9 of the 10 financial years rapidly preceding that financial year. Generally, a resident other than a NOR is referred to as ordinary resident.

Selling your property abroad

As a returning Indian, if you are trying to sell your overseas property while you are still a 'not ordinarily resident' (NOR) or 'non-resident' (NR). As a NOR or NR, if you sell any overseas properties and receive the sale profits outside India then you don’t require to pay any taxes in India. If you require to purchase a house in India out of the sale profits then you can first receive the sale profits in a foreign bank account and thereafter remit part or whole of the profits back to India without creating any Indian tax liability.

Always keep in the mind that the sale of property at a profit will apparently create tax liability in the country where the property is situated. In other countries, it creates sales tax and other liabilities as well.

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Long-terms capital gains from property outside India will be liable to tax

You have become an Indian resident by selling the house liable for taxes both in the country where the property is situated as well as in India. Generally, the country where the property is situated will have the primary taxing rights i.e., the right to accumulate the tax while India will have the liability to give a credit for taxes paid in the foreign country and accumulate only the balance tax, if there is any. The actual tax treatment will be guided by the domestic tax laws of India and the foreign country as well as the tax treaty between the two countries, if there is one.

For an Indian tax resident, long-terms capital gains from a property outside India will ordinarily be liable to tax that can be reduced to some extent by claiming the credit for taxes, if any, paid overseas or by making investments in specific bonds or acquiring a residential property in India and holding such bonds or property for a specific period of time.

Rental income earned abroad

While in India, the rental income is taxable whereas the returning Indians must note that the assumed rental income from more than one self-occupied property is also considered as taxable. It is because an exemption is allowed for only one self-occupied house property irrespective of where it is situated.

An assumed valuation will need to be made of the rent that the self-occupied property will have retrieved and offered to tax in India. The saving grace is that the individual has the choice of selecting one among his several self-occupied properties for claiming the exemption, and he can, therefore, select the property that has the higher rental value as self-occupied.

Further, a deduction of 30% of the net rent (after deduction of tax levies by a local authority) is allowed. Also, the interest due on loans taken to finance the purchase or construction of the house is also allowed as deduction from the rental income.

Dividends of interest from overseas investments will be taxable in India as ordinary income. Dividends from shares held in an Indian company are not taxable in the hands of the recipient.

Generally, losses acquired from the sale of one investment can be set off against gains from sale of another investment liable to the setoff and carry-forward rules administered in the Income Tax Act.

One-time financial settlement

Generally, if the financial settlement relates to the employment exercised overseas, it must not be taxed in India.

But at the time of settlement, the individual is an Indian resident where the circumstance of the settlement is being taxed in both countries. The double tax treaty will help mitigate double taxation depending on the efficient rates of taxes in the two countries.

Assets will either qualify as long-term capital assets, if held for 36 months or more or as short-term capital assets, if held for less than 36 months. As an exception, the shares which are held in a company enable as long-term capital asset if held for 12 months. With long-term capital assets, the cost of buying or developing them are allowed to be indexed and the indexed cost is allowed to be diminished from the sale value. In the case of short-term capital assets, the costs cannot be indexed.

The indexation advantage is meant to take into account the inflationary aims between the year of purchase and the year of sale. The costs acquired on the sale like brokerage charges which are allowed as deduction while calculating gains from the sale of both short-term and long-term assets.

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India tax laws allow tax exemptions if the sale profits or the gains from the sale are re-invested in specific assets. For instance, an exemption can be claimed in respect of gains from the sale of a house property where the gain is re-invested in the purchase or construction of another house property, liable to certain conditions and timelines.

Income received in foreign currency must be changed into Indian rupees at the rates administered by the SBI as on the specific date. The specific date varies depending on the type of income earned.