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NRI Property and Income Tax

Investing in Property and Real Estate is one of the most preferred vehicles for parking money for NRI’s. However the tax processes and compliances are often overlooked by the NRI, due to various factors like:

Ignorance of Law & Tax legislations

>  Lack of qualified and experienced consultants

Inherited incorrect information from older NRI’s and resident tax consultants

>  General callousness, laziness  and insensitivity of the individual

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We have seen most of the NRI’s live in a situation of total “Tax Bliss”.

NRI Tax Returns 

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Most NRI’s assume that having an NRI status absolves them of any taxes in India and they need not file any tax returns and they can continue enjoying the benefits of investment, repatriation, travel, tax, real estate … etc. etc. without having any requirement to any financial, tax or legal compliances.

This is far from the truth.

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An assumption of NIL tax compliances is largely incorrect, but deeply etched into minds of most NRI’s, because of incorrect communication and incorrect interpretation and assumptions to suit the NRI’s requirements.

However, ignorance of law is not an excuse.

In this article we will discuss the Property purchase aspect for NRI’s and the inter-relation with Income Tax and Income Tax Returns.

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Multiple properties in India

Let us take an example of a typical NRI, who is working in Dubai. He has been in Dubai for a couple of years and with his savings he now plans to purchase a residential apartment in India, close to his home town for the comfort of his family and parents.

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A typical Real Estate purchase transaction for an NRI is as follows:

>  Selects a property

>  Transfers funds into his account in India from his overseas accounts

>  Make a ‘down’ payment to the Builder/Seller from his funds (or funds partly borrowed from family and friends) and takes a Bank Loan for the balance amount.

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Now, post his first purchase, he has got his parents and family to move into this new apartment. Now with the increase in income, he now buys a new residential property, more as an investment in a city of his choice.

So a similar process is followed, where he again transfers funds from overseas and takes a loan from the Bank, family and friends and makes the payments for the 2nd property.

This process can continue for the 3rd, 4th and following properties depending on the personal, socio-economic back ground of the NRI individual.

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Ignorantia juris non excusat("ignoranceof thelawdoes not excuse" or "ignorance of the law excuses no one") is a legal principle holding that a person who is unaware of a law may not escapeliabilityfor violating that law merely because he or she was unaware of its content.

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Now, as per Income Tax Act, if an individual owns more than 1 property then, the first property can be assumed to be self occupied, and the tax on the same is NIL.

However for the 2nd property, and onwards, you need to either declare the rent received (if property put on rent) or declare the deemed rent received even if the property is lying vacant or if the property is occupied by your family members. Hence you will need to file your tax returns and declare the deemed rental income and pay taxes if applicable.

There is a specified computation, to calculate the annual value of a property or the deemed rental income chargeable to tax for which it is advisable you appoint a qualified and experienced NRI Tax Consultant for your tax matters in India.

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Property is defined in the Income Tax Act as “building and any land appurtenant”, which can hence include, flats, houses, apartments, villas, godowns, factory buildings, offices, shops, etc.  

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One Property in India and One Overseas

When drafting the Income Tax Act, it was not envisaged that an Indian could own properties overseas, hence it was assumed that the Indian would have properties in India only and the provision were subsequently interpreted.

However with Indian moving in employment across the world, often the NRI owns properties in countries other than India also. Hence the rule of more than one property would apply for all properties held by the Indian across the world.

Hence, suppose you are an NRI living in a self owned property in London (UK) and having an apartment  in Kolkata (India), then your Kolkata (India) apartment will be considered to be deemed to be let out as you already have a self occupied property n London (UK). Hence you will need to file you returns and declare the taxable amount of the deemed rental income.

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Commercial Property in India

Suppose as an NRI you have a commercial property in India, then there can only be 3 options available in terms of the use of the property:

>  Self used

>  Rented out

>  Vacant

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In each of the options you are required to file your tax returns in India after a proper accounting and computation.

If a commercial property is under self use, then practically you will be running a business in India, hence you need to comply by filing your Income Tax Returns.

If you have rented out the property, then again you may need to file your tax returns and declare the rental income.

In case the commercial property is vacant, then you need to compute the deemed rental value of the same for the year and declare the same in your IT Return every year.

Tax Filing 13

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Inherited Property in India

If you have inherited property in India, then technically you become the owner of the property and hence you need to comply with the provisions as mentioned previously in terms of computing income, paying taxes and filing your Income Tax Returns in India.

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Tax Computation on Property

The deemed rental value of a property is arrived at based on various rules and legislations as per the Income Tax Act. The factor used to compute the deemed rental values are:

>  Municipal Value of the property

>  Cost of Construction

>  Standard Rent as per Rent Control Act 

>  Local Rental estimate

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Once the deemed rental value is determined then the normal rates of taxation can be applied to determine the tax payable. It has often been observed that there is normally a tax refund that is received by NRI’s when they file their Income Tax Returns rather than having to pay taxes. Hence filing your annual IT Returns can make you richer apart from keep you compliant with the law.

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Income Tax Action against Non-Filers/Evaders

The Finance Ministry and the Income Tax Department has recently initiated enquiry against more than 12 lakh assesses who may have evaded taxes, knowingly or unknowingly, primarily on the basis of non filing of tax returns and property or large value transactions made by them over the past years. Once you are in this net of assumed evaders/defaulters, it is going to be an expensive gateway in terms of time, money and anxiety.

With enhanced computing and networking across Departments, tracking transactions has become much easier for the Income Tax Department. Hence, future years will call for stricter policing and law implementation by the Income Tax Department.

It is better to be safe than sorry, hence do get you house in order.

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A Stitch in Time

If you have not been compliant with the law and have not been filing your tax returns or have unpaid tax liabilities, it is best advised to contact a qualified and experienced NRI Tax Consultant immediately. Once you have updated the consultant of the details, they will best be able to advise you on the way forward and clear your dues and tax files of liabilities.

It is better no to cry over the spilt milk and concentrate on the milk available in the cup. Hence whichever best possible way to clear and update your previous tax compliances, it is advisable to put things in order from now onwards.

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Get it Right and Sleep Tight.

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