Rental income generated in India is subject to taxation, and individuals who earn rental income from their property are required to obtain a PAN (Permanent Account Number) and file an income tax return. Additionally, when the property is sold, any profit from the sale will be subject to capital gains tax.
India has DTAAs with several countries which give a favourable tax treatment in respect of certain heads of income. However, in case of sale of immovable property, the DTAA with most countries provide that the capital gains will be taxed in the country where the immovable property is situated. Hence, the non-resident will be subject to tax in India on the capital gains which arise on the sale of immovable property in India. Letting of immovable property in India would be taxed in India under most tax treaties in view of the fact that the property is situated in India.
If a non-resident pays taxes on capital gains arising in India, they typically have the opportunity to claim a tax credit for the taxes paid in India in their home country. This is because income earned in India is also considered in the computation of income in their country of tax residence. The specifics of the tax credit, including the amount and the calculation method, are outlined in the respective country’s Double Taxation Avoidance Agreement (DTAA) and are contingent on the tax laws of the non-resident’s home country where they are considered a tax resident.
If the property was purchased using foreign exchange sources, such as funds remitted through standard banking channels or debited from an NRE/FCNR(B) account, the amount that can be repatriated should not exceed the amount paid for the property, which can be in:
• Foreign exchange received through the normal banking channel, or
• By debiting the NRE account (equivalent in foreign currency, as of the payment date) or debiting the FCNR(B) account.
If the property was acquired using Rupee sources, an NRI/PIO may remit up to USD one million per financial year from the balances held in the NRO account. This includes the sale proceeds of assets obtained through inheritance or settlement. However, this remittance must be for genuine purposes, approved by the Authorized Dealer bank, and compliant with tax regulations. The NRI/PIO can utilize this facility to repatriate capital gains, provided that the property’s acquisition was funded through remittances via standard banking channels or by debiting the NRE/FCNR(B) account.
Certainly, under the general permission granted by the Reserve Bank, NRIs are allowed to acquire property other than agricultural land, farmhouses, or plantation property. However, there are conditions to be met:
1. The purchase consideration must be paid using either inward remittances in foreign exchange through normal banking channels or funds from the purchaser’s NRE/FCNR accounts maintained with banks in India.
2. A declaration in the prescribed Form IPI 7 must be submitted to the Central Office of the Reserve Bank within 90 days from the date of property purchase or the final payment of the purchase consideration.
Indeed, both long-term and short-term capital gains are subject to taxation for non-residents.
