Indian Budget 2017-18: Impact On NRIs

The Indian Finance Minister Arun Jaitley presented the Union Budget 2017-18. Here are the highlights of this year’s budget:

  • Income Tax rate cut to 5% for individuals having income between ₹2.5 lakh to ₹5 lakh
  • 10% surcharge on individual income above ₹ 50 lakh and up to ₹1 crore to make up for ₹15,000 crore loss of due to cut in personal Income Tax rate
  • 15% surcharge on income above ₹1 crore to continue

The Finance Ministry said the pace of re-monetization has picked up and the effects of demonetization will not spill over to next year.

What Does The 2017-18 Indian Budget Imply For NRIs?

NRIs want 2017-18 Union budget to be NRI-friendly by revamping tax reforms. NRIs face difficulty in claiming tax refunds, if they are not having a bank account in India. Currently, there is no regularized system for direct remittance of making a refund to a foreign bank account of an NRI.

  • An electronic system to not only file tax but also get refunds and other facilities, so that a middleman required in India for the same is averted.
  • Alternative sources to Tax Residency Certificate (TRC) which should be obtained from the country of residence. Currently, this mandate puts pressure on people residing in Tax-free countries.
  • Taxation at par with the resident citizens.
  • Clearer property taxes.

Property Tax Reforms for NRIs

  • The Tax Deducted at Source (TDS) on Sale of Property is not applicable to an NRI who wants to sell his property.
  • NRIs cannot avail tax exemptions if they sell their property in India to a foreign company.
  • The criterion for sale of an immovable property should be sold to Indian residents or companies, or other NRIs or PIOs.
  • For selling the same an NRI has to go through various documentation process like having a certificate of lower tax deductions or non-deductions.
  • If the NRI is eligible for Long-term Capital Gain (LTCG), then he can claim for refund by filing Income Tax Return (ITR).

The Indian Government has introduced new policies to accelerate real estate investment in India by the NRI community. Policies like the Real Estate Reform Act (RERA), demonetization and relaxing the las by the RBI for NRIs to invest in properties, will boost transparency, purchasing power and interest. The availability of affordable properties and ready-to-move options in the Indian real estate market are drawing in NRIs.

Taxation For NRI Long-term Capital Gain (LTCG)

All the changes are aimed at encouraging sellers to disclose the correct sale price:

  1. The holding period for capital gains on sale of immovable property: land and building, to qualify as long term capital gains (LTCG) is reduced to 2 years instead of 3 years in the Union Budget. Currently, capital gains on land and building qualify as long term capital gain if holding period is minimum 3 years.
  2. The base year for calculation of such capital gains with indexation benefit is also proposed to be shifted from 1981 to 2001. These steps are expected to reduce the capital gains tax burden on property sellers and thereby make movement of immovable capital easier. 
  3. Currently, if a property is sold within three years of buying (acquiring) it, any profit from the transaction is treated as a short-term capital gain in the hands of the individual. This is added to the total income of the owner and taxed according to the slab rate applicable to him.
  4. If you sell a property after three years, the profit is treated as long-term capital gains and taxed at 20% after indexation.
  5. Indexation takes into account the inflation during the holding period and accordingly adjusts the purchase price, thus easing the tax burden for the seller.
  6. There are other benefits too. The owner can claim various exemptions in case of long-term capital gains, but no such benefit is provided for short-term gains.
  7. Expenses incurred on repairs and renovation can be added to the cost of acquisition of the house while computing long-term capital gains.
  8. Also, the interest paid during the pre-construction period of the house can be added to the cost, if not already claimed as a deduction earlier.
  9. There are several ways to avoid paying tax when you sell a house. There is no tax to be paid on the gains, if you use the entire gain from the transaction to buy another house within two years or construct another house within three years. The two- and three-year period applies even if you bought another house a year before selling the first one. But the property should have been bought in the name of the seller.
  10. If you are not keen to lock-in your gains from the sale of the house in another property, you could. You can claim exemption under Section 54 (EC) by investing the long-term capital gains for three years in bonds of the National Highways Authority of India and Rural Electrification Corporation Limited within six months of selling the house. Budget 2017 proposes new list of companies whose bonds can be used for such purpose. But you can invest only up to ₹50 lakh in these bonds in a financial year.

According to the Income Tax Law, if income earned is beyond a certain limit in a given financial year, then a resident Indian is required to pay TDS on that income only. In the case of NRIs, there are no such exemptions. The TDS is deducted as per the NRI tax slab under I-T Act. If the government wants to increase foreign investments then there is a need of reform in tax exemption. Many financial experts said the Union Budget 2017-18 is progressive and promotes India’s growth through the various schemes proposed.