Tax Benefits for NRIs on Housing Property

NRIs who file income tax returns in India are eligible to enjoy some of the tax benefits offered by the Government of India under the Income Tax Act of 1961. These include deductions on home loan stated under sections 24, 80C and 80EE of the act. Here we are providing an insight of what these legislations have to offer for the non-resident citizens.

Defining an NRI

NRI is a broad term used collective for Indian citizens who do not reside in India on a regular basis. It means that these citizens are residing outside the country for a considerable part of the year. According to the Income tax Act, 1961 a person is eligible to qualify as an Indian Citizen if he:

  • resides for at least 182 days in India in the current financial year (April 1 to March 31) or
  • Has resided for at least 365 days in the last four years and at least 60 days in the present year in India.

The citizens, who do not satisfy either of the two conditions mentioned above are considered as NRIs.The act does not independently define an NRI. An NRI is defined in The Foreign Exchange Management Act, 1999 (FEMA) as an Indian citizen who is not a resident of India and also, who is a resident in some other country outside of India.

NRIs and Home Loans

An NRI who has been a salaried employee outside India for not less than one year or who has been self-employed for not less than three years is eligible to apply for a home loan in India. The amount sanctioned for the home loan, its tenure and rate of interest will all depend upon a borrower’s customer profile, his salary and age age at the time of maturity of the home loan. Normally, the rate of interest that is offered to NRIs by Indian banks is higher than an interest rate offered to the ordinary residents of the country. Also, the duration for which the loan is sanctioned is also shorter compared to the residents, keeping in mind the fact that the loan paying capacity of NRIs is higher than the ordinary residents.

Benefits up to Rs. 2 Lakhs under Section 24

This section provides for tax deductions that can be claimed on the payment of interest over home loans. The beneficiary can file the claim on the completion of construction. The benefits can provide a tax exemption of 30% and extend up to Rs. 2 lakhs per year. However, the maximum amount of annual deduction gets lowered to Rs. 30,000 in case:

  • The loan was borrowed before April 1, 1999
  • The construction does not get completed within five years from the end of the financial year in which the loan was borrowed.

Benefits up to Rs. 1.5 Lakhs under Section 80C

The section 80C of the Income Tax Act deals with the deduction of taxes available on the repayment of principal amount. Any person including NRIs can avail an annual tax deduction of up to Rs. 1.5 lakhs starting from the year of possession of property provided that she does not sell it for the first five years. If the property is sold within five years, all the benefits that were availed will get reversed and will be charged in the year of selling.

This section further provides for tax deductions on the amount paid as registration charges and stamp duty at the time of buying. The claim for such deductions shall be filed in less than one year of buying the property. However, the total benefits availed under the section shall not cross the cap of Rs. 1.5 lakhs. That means that the deductions on registration charges will be provided only and only if the tax deduction availed on repayment of principal amount is less than Rs. 1.5 lakhs.

Additional Benefits of up to Rs. 50,000 for First Time Buyers

Any citizen who is buying a residential property for the very first time in India is eligible to enjoy an additional tax deduction of up to Rs. 50,000 every year under Section 80EE of the Income Tax Act. These benefits are available for those individuals who have taken a loan between the time period extending from April 1, 2016 to March 31, 2017 and can be enjoyed till the loan is repaid completely.

Benefits up to Rs. 2 Lakhs During the Pre-Construction Phase

The act also provides for a yearly tax deduction of up to Rs. 2 lakhs for interest payments that are made while the house was still under construction. For enjoying these benefits, claims have to be filed in five equal instalments starting from the year of completion of construction and with not more than one claim filed in one year provided the construction is completed within five years from the end of the financial year during which the loan is borrowed. If somehow, the construction is not completed within the stipulated five year period.

No Taxation on Self-Occupied Property

If any property occupied by an NRI is used for family purposes, it is considered as self-occupied and is exempted from taxation. Earlier if an NRI would own more than one self-occupied properties then only one would be considered as self-occupied. All the other houses would be considered as rental property and tax had to be paid on such properties based upon a notional rent. However, the interim budget that was presented in parliament by Finance Minister Piyush Goyal in February 2019 has provided to consider even the second housing property as self-occupied. The notional rent provision would now be imposed from third property onwards.

Less Taxation on Purchase of Property from a Resident

If an NRI purchases a residential property from a resident citizen, he is required to pay taxes at the rate of 1% for properties valued Rs. 50 Lakhs or more. On the other hand, if the property is purchased from a non-resident tax needs to be paid at 20% even if the property is valued less than Rs. 50 lakhs. Thus, an NRI can save taxes by choosing to buy property from the residents.

It is to be noted that all the above benefits can be enjoyed only and only if the NRI person claiming them has filed his tax returns in India. So ensure that you have filed your tax returns in India and enjoy tax benefits at par with the resident tax-payers of the country.

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