Taxation & Subsidy applicable on NRI

In the last two blogs we covered topics on NRIs and if they can avail home loans in India to buy a residential or commercial property. In this blog, my friend Deepika who is an NRI looking to shift back to India permanently, would like to understand in depth about the taxation and subsidy policies available to NRIs while investing in real estate.

Is an NRI eligible for a subsidy under PMAY?

Pradhan Mantri Awas Yojana (PMAY), an initiative by Govt. of India was launched in 2015 to provide affordable housing to the urban poor with a target of 20 million affordable houses by 31 March 2022. However, there is no subsidy provided under the scheme for those who already own a house or want to undertake any modifications or reconstruction on a pucca house.

Yes, NRIs are eligible for a subsidy under PMAY and Deepika will be eligible for a subsidy under PMAY only if she fulfills the following requirements:

1. If the income of the whole family is under Rs. 18 lacs annually.

2. If the applicant or the direct family member have not have availed for the PMAY scheme already.

3.If the applicant or direct family member does not own a home anywhere in India.

Deepika has an annual income of more than 18 lacs so she isn’t eligible for the scheme. But if any NRI meets all the criteria, he/she can choose a bank which is associated with PMAY. Once the formalities are completed with the banker, they would be required to submit a subsidy claim form to the Housing and Urban Development Corp (HUDCO) or National Housing Bank (NHB). These organisations will then check the database for the NRI’s status and income level and if they already own a house in India. Once the scrutiny is completed successfully, they will be sanctioned a house loan.

Should NRI file tax returns in India?
Tax Rates for NRI on Indian Income & Investments 2019 – 2020

(Source: www.incometaxindia.gov.in)

According to the Indian IT Act 1961, any individual whose income exceeds Rs 2.5 lacs earned in India is required to file an income tax return in the country irrespective of their citizenship status. For Deepika, only her income which is accrued or earned in India shall be taxable. Her USA salary of $3500 p.m. is not taxable in India since it was not earned in India. However, any interest earned in India will be taxable for her whether it’s from property, rent, investment in Govt. or public companies etc. Interest on NRO account is taxable whereas interest on NRE account is exempt from tax which is why Deepika chose the latter. If her tax liability exceeds Rs 10,000 in a financial year, she is required to pay advance tax.

Tax benefits to Deepika for being an NRI in India:

1.NRE (Non-Resident Rupee) account, which as long as the NRI pays taxes on income earned abroad; money transfer to India will be tax free and freely repatriable (principal and interest earned).

2. An NRI is allowed to claim a deduction of 30% for principal repayment, deduct property taxes and take benefits of an interest deduction along with stamp duty and registration charges paid for the purchase of a property.

3.If the income from the investment in Indian assets is the only income an NRI has incurred during the financial year, and TDS has been deducted on that, then they will not be required to file an IT return. However, unlike short term capital gains, exemption can be claimed under sections 54, 54F and 54EC.

4. Exemption is available when capital gains from the sale of the first property is reinvested into specific bonds.

5.In case of an insurance policy, deductions will be allowed only if the policy is in the NRI’s name or his/her family’s and the premium should be less than 10% of sum assured.

6.Deductions are also included for interest paid on an education loan and tuition fees for full time education in school, college and university in India.

7.Deductions are available for premium paid for any health insurance taken. This deduction is available up to Rs 50,000 for senior citizens and up to Rs 25,000 in other cases for insurance of self, spouse, and dependent children.

8.Deduction can be claimed for donations made for charitable causes.

9.Investment in Equity Linked Savings Scheme (ELSS) from mutual funds on amounts up to Rs 1.5 lac are eligible for deduction.

10. Interest earned on Govt. issued bonds and savings certificates is eligible for deductions

Deepika will be required to pay taxes in the following situations:

1. If Deepika renders any service in India for which she receives a compensation/salary then that would be taxable In India irrespective of where she is receiving it. Vice versa, if her employer is Govt. of India and she’s the citizen of India, her salary will be taxed even if her service is rendered outside India.

2.Income from a property which is situated in India is taxable for her. The tax will be calculated in the same manner as for a resident Indian. It’s her decision to keep the property vacant or rent it out.

3.Deepika is allowed to claim a standard deduction of 30% on property taxes and claim an interest deduction if a home loan has been taken to buy that property. She is also allowed a deduction for principal repayment, stamp duty and registration charges paid on the purchase of the property.

4.Interest on NRE and FCNR account is tax-free whereas interest on NRO account is fully taxable.

5.Any income earned by her from a business controlled or set up in India will be taxable.

6.She will be paying taxes on capital gains from transfer of any capital asset located In India and investments in Indian shares and securities.

7.If Deepika invests in certain Indian assets, she is taxed at 20%. But if the special investment income is the only income she earns during the current financial year and TDS has been deducted on that, then she will not be required to file an IT return.

Deepika can avoid getting taxed on the same income twice in the country of residence and India (double taxation), by seeking relief from DTAA (Double Tax Avoidance Agreement) between the two countries. Tax relief can be claimed by two methods under DTAA- The Exemption Method where NRIs are taxed in only one country; and The Tax Credit Method where the income is taxed in both countries and tax relief can be claimed in the country of residence.

Can NRI claim TDS?

Indian IT laws are a little tough on NRIs. Any payment to Deepika will be made only after deduction of TDS even if her income is less than Rs. 2.5 lacs which isn’t the case with her but maybe the case for many NRIs. As an NRI, if Deepika’s tax liability is less than the TDS (tax deducted at source) deducted from her income, she can file an income tax return in India to claim a refund. The returns can also be filed online using the Income Tax e-filing portal.

Income on which TDS is deducted for NRIs:

1. Rent earned from property in India.
2. Sale of property located in India
3. Interest earned on NRO Accounts
4. Sale of Indian companies shares, mutual funds and bonds
5. Amount received for any services rendered in India

Applicable Tax rates for NRI

Deepika was wondering if it is possible to take a loan in the USA to invest in property in India. The good news is that it is possible and for an NRI, it is the most cost and time effective solution as well.
Reasons to take a loan in the USA:

Interest Rates In India

The interest rates in most Indian banks for personal loans start at 11.49% which can go up to 30% which is extremely expensive and in most cases double of what one would get charged in America.

Hidden Fees

Many Indian lenders charge hidden fees like non-refundable application fee or processing fee which is 1% and 2% of the principal amount. On a loan of 1 lac INR, that is an additional charge of 2,000 INR.

Uncommon Collateral Practices

Many Indian banks require collateral to serve as security for the loan. Some banks can even require collateral to the value of $5,000. This can be a tough requirement to fulfill for many loan seekers.

Slow Disbursements

Some Indian banks have lengthy procedures to clear applications for bank loans. It takes a lot of time which can make one lose a good opportunity to buy their desired property.

So Deepika can avail a loan in the USA to buy property in India. The terms and rates she can get for a loan for land purchase in India will vary from lender to lender. Generally, one can expect:

1.Loan amounts between $1,000 and $100,000
2.Repayment terms between 6 months and 7 years
3.Interest rates between 5% and 20% (although this depends on her credit history and if there is a cosigner).