The investment or sale of immovable property in India by a person resident outside India is subject to certain prohibitions and restrictions vide clause (i) of sub-section (3) of section 6 of the Foreign Exchange Management Act, 1999 ( hereinafter referred to as ‘FEMA’) reading as below :
“(3) Without prejudice to the generality of the provisions of sub-section (2) the Reserve Bank may, by regulations, prohibit, restrict or regulate the following –
(a) to (h)--------;
(i ) acquisition or transfer of immovable property in India , other than a lease not exceeding five years , by a person resident outside India;”
Further sub-section (2) of section 6 empowers the Reserve Bank of India (hereinafter referred to as ‘RBI’) to set limits for capital account transactions including property transactions.
Acquisition of immovable property in India
Under RBI Notification No. FEMA 21/2000-RB, dated 3.5.2000 the following category of persons has general permission for acquisition of residential or commercial property in India other than agricultural property/plantation/farm house:-
a) Non resident Indian i.e. a citizen of India residing outside India;
b) Foreign national ( citizen) of Indian Origin.
Person of Indian origin is further defined in section 2 (c) of the Notification as under:
“ ‘ a person of Indian origin ‘ means an individual ( not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan ) who
( i) at any time, held Indian passport; or
(ii) who or either of whose father or whose grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955(57 of 1955);”
Also the term ‘non-resident Indian’ is defined under section 115C of the Indian Income tax Act, 1961 to mean an individual, being a citizen of India or a person of Indian origin who is not a resident. Further it explains by way of explanation i.e. a person shall be deemed to be of Indian origin if he or either of his parents or any of his grant-parents was born in undivided India.
Furthermore there are no restrictions on the number of residential / commercial properties that can be purchased by NRI/PIO.
Further the payment for such acquisition shall be made out of (i) foreign inward remittances from any place outside India through normal banking channels or (ii) funds held in any non-resident account viz., NRE/FCNR (B)/NRO account maintained in accordance with the provisions of the Act and the regulations made by the RBI. Also there is prohibition on payment of consideration either by traveller’s cheque or by foreign currency notes. Also no payment can be made outside India.
Sale of immovable property
There is no restriction on the holding period of such property. (Notification No. FEMA. 65/202-RB dated 29.6.2002). Further any such property so acquired by a non resident Indian (NRI) can be transferred either to a person resident in India or to a Non resident Indian or to PIO. On the contrary the property acquired by a PIO can only be transferred to a resident in India. The proceeds of sale can be credited to NRE/FCNR account where the original investment is made out of inward remittances. On the other hand if the investment is made from NRO account the proceeds of sale are to be credited in NRO account only.
Repatriation of sale proceeds
There is a further cap on the amount of proceeds to be repatriated as not exceeding the amount paid for acquisition price in foreign exchange received through banking channels or out of moneys paid from NRE account. The Capital gains, if any, are to be credited to the NRO account from where the NRI/PIO may repatriate an amount up to USD one million, per calendar year. (A P (DIR Series) Circular No. 67 dated 13.1.2003)
However, there is a further restriction in the case of residential property where the repatriation of sale proceeds is limited to not more than two such properties.
Further NRIs/PIOs may repatriate funds out of balances held in their NRO accounts upto USD one million per calendar year including sale proceeds of immovable property for all bonafide purposes to the satisfaction of the authorized dealers, subject to tax compliance.
Further where such property is acquired out of moneys held in NRO account then any repatriation of moneys realized from its sale is possible only if either the subject property is held for more than ten years or otherwise after the sale proceeds have been held in the account for the balance period. (RBI Master Circular No. 5 of 1.7.2003 & Circular No. 62 of 31.1.2004.)
Any deviation from the above regulations would need a prior approval from the RBI.
In regard to tax implications of such transactions by NRIs/PIOs in the first place if the non resident acquires the property from a non resident then he/she shall be required to deduct tax at source on payment @ 20% plus surcharge as applicable and 3% education cess u/s 195 read with rates of deduction of tax at source in Part II of First Schedule to Chapter III of the Finance Act, 2006.
On the treatment of profits made from sale of immovable property these shall be subject to long term capital gains tax if the subject property is held for more than three years. In that case the rate of tax shall be 20% after benefit of cost inflation indexation under second proviso to section 48 of the Indian Income tax Act, 1961. In the second course where the subject property is held for less than three years the profits there from shall be taxed at the maximum marginal rate of 30%. Likewise any profits made on sale during construction period shall be taxable at 30% as short term capital gain. In addition NRIs may benefit from exemption viz a viz utilization of moneys for reinvestment in qualifying property.
“(3) Without prejudice to the generality of the provisions of sub-section (2) the Reserve Bank may, by regulations, prohibit, restrict or regulate the following –
(a) to (h)--------;
(i ) acquisition or transfer of immovable property in India , other than a lease not exceeding five years , by a person resident outside India;”
Further sub-section (2) of section 6 empowers the Reserve Bank of India (hereinafter referred to as ‘RBI’) to set limits for capital account transactions including property transactions.
Acquisition of immovable property in India
Under RBI Notification No. FEMA 21/2000-RB, dated 3.5.2000 the following category of persons has general permission for acquisition of residential or commercial property in India other than agricultural property/plantation/farm house:-
a) Non resident Indian i.e. a citizen of India residing outside India;
b) Foreign national ( citizen) of Indian Origin.
Person of Indian origin is further defined in section 2 (c) of the Notification as under:
“ ‘ a person of Indian origin ‘ means an individual ( not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan ) who
( i) at any time, held Indian passport; or
(ii) who or either of whose father or whose grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955(57 of 1955);”
Also the term ‘non-resident Indian’ is defined under section 115C of the Indian Income tax Act, 1961 to mean an individual, being a citizen of India or a person of Indian origin who is not a resident. Further it explains by way of explanation i.e. a person shall be deemed to be of Indian origin if he or either of his parents or any of his grant-parents was born in undivided India.
Furthermore there are no restrictions on the number of residential / commercial properties that can be purchased by NRI/PIO.
Further the payment for such acquisition shall be made out of (i) foreign inward remittances from any place outside India through normal banking channels or (ii) funds held in any non-resident account viz., NRE/FCNR (B)/NRO account maintained in accordance with the provisions of the Act and the regulations made by the RBI. Also there is prohibition on payment of consideration either by traveller’s cheque or by foreign currency notes. Also no payment can be made outside India.
Sale of immovable property
There is no restriction on the holding period of such property. (Notification No. FEMA. 65/202-RB dated 29.6.2002). Further any such property so acquired by a non resident Indian (NRI) can be transferred either to a person resident in India or to a Non resident Indian or to PIO. On the contrary the property acquired by a PIO can only be transferred to a resident in India. The proceeds of sale can be credited to NRE/FCNR account where the original investment is made out of inward remittances. On the other hand if the investment is made from NRO account the proceeds of sale are to be credited in NRO account only.
Repatriation of sale proceeds
There is a further cap on the amount of proceeds to be repatriated as not exceeding the amount paid for acquisition price in foreign exchange received through banking channels or out of moneys paid from NRE account. The Capital gains, if any, are to be credited to the NRO account from where the NRI/PIO may repatriate an amount up to USD one million, per calendar year. (A P (DIR Series) Circular No. 67 dated 13.1.2003)
However, there is a further restriction in the case of residential property where the repatriation of sale proceeds is limited to not more than two such properties.
Further NRIs/PIOs may repatriate funds out of balances held in their NRO accounts upto USD one million per calendar year including sale proceeds of immovable property for all bonafide purposes to the satisfaction of the authorized dealers, subject to tax compliance.
Further where such property is acquired out of moneys held in NRO account then any repatriation of moneys realized from its sale is possible only if either the subject property is held for more than ten years or otherwise after the sale proceeds have been held in the account for the balance period. (RBI Master Circular No. 5 of 1.7.2003 & Circular No. 62 of 31.1.2004.)
Any deviation from the above regulations would need a prior approval from the RBI.
In regard to tax implications of such transactions by NRIs/PIOs in the first place if the non resident acquires the property from a non resident then he/she shall be required to deduct tax at source on payment @ 20% plus surcharge as applicable and 3% education cess u/s 195 read with rates of deduction of tax at source in Part II of First Schedule to Chapter III of the Finance Act, 2006.
On the treatment of profits made from sale of immovable property these shall be subject to long term capital gains tax if the subject property is held for more than three years. In that case the rate of tax shall be 20% after benefit of cost inflation indexation under second proviso to section 48 of the Indian Income tax Act, 1961. In the second course where the subject property is held for less than three years the profits there from shall be taxed at the maximum marginal rate of 30%. Likewise any profits made on sale during construction period shall be taxable at 30% as short term capital gain. In addition NRIs may benefit from exemption viz a viz utilization of moneys for reinvestment in qualifying property.
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