Taxation on Property in India

Non-Resident Indians (NRIs) who own property in India can benefit from various tax provisions designed to reduce their tax liabilities. Here are some key aspects to consider:

Income Tax on Rental Income

Tax Rate: Rental income earned in India is taxable under the Income Tax Act.
- Rental income earned from property in India is subject to tax under the head “Income from House Property”. NRIs are taxed at is 30% plus surcharge and cess. However, NRIs can claim a lower TDS rate by submitting a Tax Residency Certificate (TRC) from their country of residence, proving they are liable to pay taxes in their country of residence.
- NRI property owners can claim deductions under Section 24(b) for home loan interest paid, which is up to ₹2 lakh per annum for self-occupied or rented-out property.
- The Standard Deduction of 30% of the rental income is also allowed for repairs and maintenance costs, regardless of actual expenditure.
Deductions: NRIs can claim deductions for:
- Municipal taxes paid.
- 30% standard deduction on the net annual value.
- NRIs can claim a deduction of up to ₹1.5 lakh under Section 80C for principal repayment if the property is self-occupied or rented out.
- Additionally, the interest on home loans can be claimed as a deduction under Section 24(b) for up to ₹2 lakh.

Capital Gains Tax

Short-Term Capital Gains

If the property is sold within two years of purchase, gains are considered as Short term capital gain and is taxed as ordinary income.

Long-Term Capital Gains

If held for more than two years, gains are considered as Long term capital gains and is taxed at 20% with indexation benefits.

Exemptions that can be claimed for Long term capital gains include:

Exemption under Section 54 – Reinvestment in Property:
- If the NRI sells a residential property and reinvests the capital gains in another residential property, they can avail the exemption under Section 54. The exemption is available for long-term capital gains (LTCG) arising from the sale of a property held for more than 2 years.
- The new property must be purchased within 1 year before or 2 years after the sale of the original property or constructed within 3 years from the date of sale.
Exemption under Section 54EC – Investment in Bonds:
- NRIs can invest the capital gains in specified bonds under Section 54EC (such as bonds issued by NABARD, REC, etc.), which can exempt the capital gains tax to the extent of the investment, up to ₹50 lakh.
Indexation Benefit:
- NRIs selling a long-term property are eligible to claim indexation benefits, which helps adjust the purchase price for inflation. This reduces the taxable capital gain. The indexed cost of acquisition (purchase price) and improvement is calculated using the Cost Inflation Index (CII) published by the government.
Reinvesting in Commercial Property:
- If the NRI invests in commercial property, they may also qualify for the Section 54F exemption, provided the entire sale consideration (not just the capital gain) is reinvested in a new residential property.

Tax Treaties

NRIs may benefit from Double Taxation Avoidance Agreements (DTAA) between India and their country of residence, which can help reduce tax liabilities on rental income and capital gains.

Claiming Refunds

If excess tax is deducted at source (TDS) on rental income or capital gains, NRIs can file for refunds by submitting the appropriate income tax return.

Tax Planning Strategies

Joint Ownership: Consider holding property jointly with a resident Indian, which can help in splitting income and reducing individual tax burdens.
Reinvestment: Reinvesting capital gains in specified instruments can provide tax exemptions.