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Sale of NRI Property in India, Taxation & Money Transfer to UK and other Foreign countries

The reason for this article is that I believe this is an important area of interest to all Indians living in the UK and holding some kind of assets in India. There are a lot of enquires, and people get confused and they panic about the subject. So I thought it is good idea to clarify the points of this matter.
As per RBI, NRIs/ PIOs are allowed to repatriate an amount up to USD one million, per financial year (April-March). This amount includes sale proceeds of assets acquired by way of inheritance or settlement.
Agriculture land is allowed to be transferred by way of sale or Gift.
Many Indians live in the UK and still believe they should not pay any tax on the income or assets held in India. They think they have paid tax on their UK income and it has nothing to do with their Indian assets or income. This is wrong, because they are avoiding UK tax and that leads to penalties and later a big tax bill.

As for the tax laws of UK concerned, worldwide income is taxable for the UK tax resident.

Tax residency should not be confused with your residential or passport status. Even if you are Indian passport holder and/or a student in the UK, you are still a tax resident in the UK.

While you are filing a tax return or declaring income in the UK, it is your responsibility as a UK tax payer to disclose your worldwide income. If you are domiciled in UK, you have to pay tax on your worldwide income, whether or not it has been remitted or not. But if you are a non-domiciled in the UK, you can opt for a remittance basis. In that case, you need to pay a fixed tax payment on the basis of the number of years of residency in the UK.

I believe this tax rules will affect all Indians living in the UK, who have some kind of assets or income in India. It will affect even property inherited from parents or a share of family property.

Considering the laws of two countries, it is very complex subject unless you planned in right way.

If you buy a house, property or land in India and subsequently you sell it, you need to pay tax in India as well as tax in the UK. Even though this property is inherited from your parents, you still need to pay tax in India as well as in the UK. However you could claim ‘foreign tax credit relief’ whilst computing their UK tax liability.

Many residents in UK still think they are not required to pay tax in either place and are being wrongly advised, and finally end up with more tax liability.

This article is specially targeted at Indians who have settled in the UK, US or other countries and having assets in India. The assets may be owned out of the investment from overseas income or inherited from their parents. We will analyse below these two in a separate way.

1. NRI’s acquired assets out of NRI saving and living in the UK and abroad & subsequently disposing.

Tax payable in India

They are liable to income tax or short-term or long-term capital gains tax. NRIs cannot purchase Agricultural land in India. However, if the land they bought is used for agriculture, sale of same will be exempt from capital gains tax in India if the same is located in rural area. In case of house properties and other assets, they are subject to income tax as short- or long-term capital gains tax. Tax is levied on Long term capital gains at flat 20% and on Short term capital gains at applicable slab rates. NRIs are exempted from tax upon making of specified investment within specified time limit. Various investment options are available for assessee to reduce tax burden.

The buyer needs to deduct the withholding tax, and he can transfer up to 1 million US dollars to the UK. For any amount more than that, he is required to obtain prior RBI permission. Otherwise, he needs to open an NRO account and repatriate only the cost of investment and the remaining amount can be repatriated after paying the appropriate tax in India. Any transaction in property over 3 million Indian Rupees needs to be informed by the registrar to the local income authority, and subsequently they can be investigated.

Rate of Tax: On Long Term CapitalGain-20%

On Short Term Capital Gain-
a) 15% in case of transfer of Equity shares or units in Equity oriented funds and transaction was subject to securities transaction tax.
b) slab rate in other cases of short term capital gain.

Tax payable in the UK

The person needs to pay tax, either income tax or capital gain tax, depending on the cases. But they are eligible to apply for double taxation exemption and claim back that tax credit.
But in the case of a non-domiciled UK resident, they can opt for the remittance basis. Many Indians can claim for non-domiciled status .But if they are domiciled in the UK, even though they are in Indian, they need to pay tax on worldwide income, whether it is income tax or capital gains tax. They are not able to pay tax on a remittance basis, but they need to pay tax on an accrual basis of income.

2. NRI’s acquired assets by inheritance from parents in India or their family share of property and assets in India
This is a very typical situation of Indians living in the UK with their parents living in India who are tax resident in India.
While parents have passed on their assets to their children, but if they are UK resident, they are taxable for the capital gains tax, while they are selling this property in India. We can analysis the tax treatment of both the countries, as follows:

Tax payable in India

Assets received from parents are not taxable at the time of receipts. Sale proceeds from such assets, land, property or any other assets in India are subject to capital gains tax. This will happen at the time of selling the inherited property in India.
If the property is agricultural land it is exempt from capital gains tax and income tax if the same is situated in rural area.
But if the property is situated in non-rural area, it is not exempt from income tax or capital gain tax.
Again, NRIs can avoid tax by making specified investments to the tune of capital gains or net sale proceeds as per available options.
Indian tax shall be withheld by the buyer and pay to the credit of central government and balance amount remitted to the UK up to an annual limit of one million US dollars. For any amount higher than that, prior RBI permission is required.
NRI need to open a NRO account and transfer all the sale proceeds to that account. After paying the local tax the Tax clearance certificate is required to remit up to one million US dollars, and they can even pay more with the prior permission of RBI.
Claim of specified investments in India out of the sale proceeds will be available, against Indian tax, but they still need to pay UK tax and Foreign tax credit can be claimed.

Rate of Tax: On Long Term CapitalGain-20%
On Short Term Capital Gain-
a) 15% in case of transfer of Equity shares or units in Equity oriented funds and transaction was subject to securities transaction tax. b) slab rate in other cases of short term capital gain.

Tax payable in the UK
The tax payer in the UK needs to pay income tax or capital gains tax depending on the nature of the Indian income. But they can claim double taxation relief on tax they have already paid for the same income in India. But in the case of non-domicled residents, they can opt for a remittance basis, but they need to pay fixed fees up to £50,000, depending on the individual case.

But in the case of a domiciled person in the UK, they need to pay tax on an accrual basis of income. This means they need to pay tax, whether remitted to the UK or not remitted to the UK

By applying non-domicile status, they need to state separately in their tax return that their status is non-domiciled.

3. Other Income or profit in India

Tax payable in India
Any Gift received without consideration or for inadequate consideration for an amount more than Rs. 50,000 is taxable in the hands of person receiving gift. Tax shall be charged at applicable slab rates.
Gift received from certain persons and under certain situations are exempted from tax.
In case of income from residential property such as Rent, NRIs shall be chargeable to tax. While calculating taxable rental income NRIs can claim municipal tax, 30% of rent received, interest & principal amount on housing loan. Balance amount shall be taxed at applicable slab rates..
The following income is exempt from taxation for NRIs:

• Interest on notified securities or bonds and premium on redemption of such securities
• Interest on Non Resident External rupee account (NRE account) / Foreign Currency Non Resident (FCNR) Accounts/ non resident non repatriable (‘NRNR’) Deposits and other securities, bonds, savings certificates notified
• Interest on notified saving certificates subscribed in foreign currency by an Indian citizen/person of Indian origin
• Income from units of Unit Trust of India (‘UTI’) acquired in foreign exchange by Indian citizen/person of Indian origin.
• Interest from notified bonds (7 year dollar bonds issued by the state Bank of India notified) purchased in foreign exchange, exemption continues even after person becomes resident
• Interest paid by scheduled banks on RBI approved foreign currency deposits

Tax payable in the UK
NRIs who are UK Residents need to pay tax in the UK and they can claim double taxation tax relief. Cash gifts from non-resident parents are not taxable and this exempt from tax.

Mortgage
NRI / PIO can mortgage a residential / commercial property to:
(a) an Authorised Dealer / the housing finance institution in India without the approval of Reserve Bank
(b) a bank abroad, with the prior approval of the Reserve Bank.
(c) A foreign national of non-Indian origin can mortgage a residential / commercial property only with prior approval of the Reserve Bank.
(d) A foreign company which has established a Branch Office or other place of business in accordance with FERA/FEMA regulations has general permission to mortgage the property with an Authorised Dealer in India.

Agricultural Land
NRI / PIO may sell agricultural land /plantation property/farm house to a person resident in India who is a citizen of India. NRI / PIO can gift an agricultural land / a plantation property / a farm house in India only to a person resident in India who is a citizen of India. However a NRI cannot purchase Agriculture land in India.
In case Agricultural land falls in rural area, sale of same is exempt from Capital gains tax. So, if the agricultural land falls in non rural area same shall be taxed. But, NRIs can avoid tax charge through specified investments

Other Matters
TDS
Person paying Income to NRIs by way of rent or sale proceeds of property sold shall deduct Tax at source;
In case of Short term capital gain/Rental Income/Interest – 30% + applicable cess
In case of Short term capital gain from sale of Equity shares/units of Equity oriented funds which is subject to security transaction tax - 15%+ applicable cess
In case of Long term Capital Gain – 20%+ applicable cess
NRI by submitting Form 10F, TDS on interest on Bank deposit shall be deducted at a lower rate.

Situations where NRIs have to file Income Tax Return:
• The Indian Taxable income exceeds 2,50,000
• For claiming Refund
• For claiming DTAA benefits

Assessment
India
CBDT has the power to reopen assessment and determine Income and Income tax payable upto16 previous Financial years. So willful neglect would attract Tax with huge Penalty and Interest. In India to avoid the cases, assessee’s are required to declare their income and to file proper return of income in the resident country.

UK
Residents need to follow money laundering regulation and bank will verify the source of income and will report of HMRC. Tax and Penalty is charged to non-disclosed tax payee.

Remittance of Sale Proceeds to Abroad
NRI to remit sale proceeds to abroad have to submit Form 15CA along with Form 15CB certified by Chartered accountant to the bank through which remittance is to be made.

Checklist of Remitting money from India
1. Sale of property in India
2. Approach local bank for remitting
3. Bank will instruct Tax clearance certificate from Chartered Accountant
4. Electronically upload remittance details in Form 15CA, submit signed copy of same along with certificate from Chartered Accountant to bank.
5. Bank will finally remit the amount after communicating with RBI and Income tax authorities.
6. I million US$ can be transferred without RBI permission.
Form 15CA and 15 CB is not required to be submitted for transactions covered in notification no. 67/2013 which is as follows;

 Sl.No.            Purpose code as per RBI                                                                                                         Nature of payment
 (1)  (2)  (3)
 1  S0001  Indian investment abroad -in equity capital (shares)
 2  S0002  Indian investment abroad -in debt securities
 3  S0003  Indian investment abroad -in branches and wholly owned subsidiaries
 4  S0004  Indian investment abroad -in subsidiaries and associates
 5  S0005  Indian investment abroad -in real estate
 6  S0011  Loans extended to Non-Residents
 7  S0202  Payment- for operating expenses of Indian shipping companies operating abroad.
 8  S0208  Operating expenses of Indian Airlines companies operating abroad
 9  S0212  Booking of passages abroad -Airlines companies
 10  S0301  Remittance towards business travel.
 11  S0302  Travel under basic travel quota (BTQ)
 12  S0303  Travel for pilgrimage
 13  S0304  Travel for medical treatment
 14  S0305  Travel for education (including fees, hostel expenses etc.)
 15  S0401  Postal services
 16  S0501  Construction of projects abroad by Indian companies including import of goods at project site
 17  S0602  Freight insurance - relating to import and export of goods
 18  S1011  Payments for maintenance of offices abroad
 19  S1201  Maintenance of Indian embassies abroad
 20  S1 202  Remittances by foreign embassies in India
 21  S1301  Remittance by non-residents towards family maintenance and-savings
 22  S1302  Remittance towards personal gifts and donations
 23  S1303  Remittance towards donations to religious and charitable institutions abroad
 24  S1304  Remittance towards grants and donations to other Governments and charitable institutions established by the Governments.
 25  S1305  Contributions or donations by the Government to international institutions
 26  S1306  Remittance towards payment or refund of taxes.
 27  S1501  Refunds or rebates or reduction in invoice value on account of exports
 28  S1503  Payments by residents for international bidding".


Who needs to file tax return in the UK?

1. If you are self-employed
2. Company directors,
3. Ministers of religion
4. £10,000 or more income from saving and investments
5. £2500 or more untaxed saving and investments
6. £10,000 or more income from property before deducting allowable expenses
7. £2500 or more income from property after deducting allowable expenses
8. If your annual income is more than £ 100,000
9. If you are employed and want claim for expenses or professional subscriptions of £ 2500 or more
10. You have capital gain tax to pay
11. You are living or working abroad or not domiciled in the UK
12. If you are trustee


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