How Rental Income Of NRIs Will Be Taxed In India Post Budget 2020?
Non-resident Indians (NRIs) earning rents in India will now be liable to pay taxes for their income, with the Budget 2020 proposing tightening of provisions of the Income Tax (IT) Act to stop abuse of the existing norms.
Presented by finance minister (FM) Nirmala Sitharaman on February 1, 2020, the Budget proposes to amend section 6 of the IT Act, in order to “stop people from taking advantage of the existing one." The FM mentioned about instances where NRIs earning rental income in India reported that income in the country of their current domicile and evaded paying taxes altogether.
"If you have a property in India and earn rent out of it, we have a sovereign right to tax that income. You may be an NRI but you are generating revenue here," Sitharaman said.
According to the Budget document, “Notwithstanding anything contained in clause (1) (of section 6), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he isn’t liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature."
"Indian citizen shall be deemed to be resident in India if he isn’t liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it’s noticed that some Indian citizens shift their stay in low or no tax jurisdictions to avoid payment of tax in India," the Central Board of Direct Taxes (CBDT) said in a statement.
As noted that Indians managed their stay in the country of their origin such that they remained a non-resident in perpetuity and weren’t liable to pay tax on their income, the Budget 2020 also proposed to tighten the residency provisions. Now an Indian citizen, who isn’t liable to tax in any other country by virtue of his domicile or residence, will be deemed as a resident of India.
“In many cases, we have found that some people are residents of no country in the world. They may be staying a certain number of days in different parts of the world. Now, any Indian citizen, if he isn’t a resident of any country in the world, would be deemed to be resident in India and then his worldwide income will be taxed," Revenue Secretary Ajay Bhushan Pandey said.
Who is a Non-resident Indian?
Non-resident Indian: To be classified as an NRI earlier, a person had to stay out of India for 183 days in a year (about six months). This limit has been increased to 240 days in a year now.
Persons of Indian Origin (PIO): To be categorised as non-residents, PIO have to restrict their India stay to 120 days under the new provisions as against 182 days in a year earlier.
Not ordinarily resident: Under the proposed definition, ‘not ordinarily resident’ would be those who have been a non-resident in India in seven out of 10 previous years preceding that year. Earlier, an individual had to be a non-resident in India in nine out of 10 years to be considered not ordinarily resident.
What will be taxed now?
Only Indian income of NRIs is proposed to be taxed under the new provision. Income earned outside by an Indian citizen who becomes deemed resident of India under this proposed provision wouldn’t be taxed in India, unless it’s derived from an Indian business or profession.
Who wouldn’t be taxed under the new regime?
- Bonafide workers in other countries
- Indians working in the Middle-East (Countries in the Gulf region don't tax income earned by individuals)
- People working in the Merchant Navy
Tax rate on NRIs in India
Income of NRIs in India is taxed depending on the slab they fall under. NRIs’ rental income in India is taxed in the same manner as the residents. Do note that an NRI taxpayer has to pay tax on income from house property, on its estimated annual rent-generating value, even if it’s lying vacant.
Standard deduction: A standard deduction at the rate of 30 percent is allowed on an NRI’s rental income in India.
Deduction on property taxes: While calculating the income, the NRI taxpayer has to deduct the payment made towards property tax.
Deduction under section 80C: NRIs are allowed deductions for principal repayment of home loans, apart from stamp duty and registration charges, under section 80C. Deductions under this section are limited to Rs 1.5 lakh in a year.
Deduction under section 24: NRIs can claim deductions of up to Rs 2 lakh in a year against interest paid on home loan, if the property is lying vacant. If it’s rented out, the entire interest payable can be claimed as exemption.
Deduction under section 80EE: If an NRI is buying his first home in India, an additional deduction of up to Rs 50,000 is available on repayment of home loan interest. This is over and above the Rs 2 lakh deduction allowed under section 24. To enjoy this benefit, however, certain conditions must be fulfilled.
Meant only for the benefit of first-time buyers, section 80EE is applicable if the worth of the property doesn’t exceed Rs 50 lakh, and the home loan amount (should be issued by a financial institute only) is Rs 35 lakh or less. This loan must also be sanctioned between April 2016 and March 2017.
3 Income-Tax Exemptions NRIs Can Avail Of In India
Being a non-resident Indian or NRI, you are eligible for certain tax exemptions from your income generated from sources in India, including property.
In Budget Speech 2017-18, Finance Minister Arun Jaitley announced a reduction in the period of short-term capital gains from three to two years. What does it mean? So, if you sell a property within two years of its purchase, you will be liable for short-term capital gain at the rate of 30 per cent. On the other hand, if the same property sold after two years of purchase, it will be considered as long-term capital gain at the rate of 20 per cent. There is no disparity between these rates of taxes for NRIs or resident Indians.
However, NRIs are eligible for certain tax sops under the Income Tax (IT) Act over and above the exemptions available under section 80C. Let's take a look at these exemptions.
You can claim exemption under Section 54 of the IT Act if you invest your long-term capital gain from sale of a property in buying another residential property in India.
The exemption is limited to purchase of only one residential property from capital gains. The amount invested in buying such property may be higher than the capital gains, but the exemption is available only for the long-term. Also, you can claim this exemption on property purchased before one year of getting long-term capital from sale of a property. So, if you have bought a residential property in 2017 and sell another in 2018, the capital gains made out from the latter
can be adjusted with the former, while filing the IT return.
You can also claim the exemption if you utilise your capital gain in buying another residential property in the next two years. This exemption is available for buying only one residential property in India. You can also claim it for construction of a residential property, but, the construction must complete within three years.
What if you can't buy another property for any reason? At times, NRIs do not get the desired property within two years. In such a scenario, deposit the amount of capital gain in an Indian bank, under the Capital Gains Account Scheme and you won't have to pay tax on that amount.
The exemption under section 54F is available on long-term capital gain from sale of a property other than residential property. In order to claim exemption under this section, you have to buy a residential property utilising the long-term capital gain from a property.
Moreover, the new property for which you avail of an exemption must not be sold before three years.
Section 54 EC
Besides investing long-term capital gains in buying another residential property, you can also invest in specific bonds issued by the government of India. This includes bonds issued by Rural Electrification Corporation (REC) and National Highway Authority of India (NHAI). These bonds can be redeemed after
three years of purchase In order to avail an exemption, you have to buy these bonds within six months of selling a property in India. Also, the maximum amount of investment in these bonds is fixed at Rs 50 lakh.
Please note that none of the above tax exemptions is available for buying an asset outside India.