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NRIs' rental income is repatriable

By A N Shanbhag & Sandeep Shanbhag
May 31, 2007 16:02 IST
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A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answer your questions on NRI investment.

A Rediff India Abroad feature:

1) I am planning to buy property in India. For that I have transferred funds in US dollars to my Non-Resident External account from which I am planning to issue checks to buy the property.

a) If I rent the property out, can I repatriate the rental income and any interest earned from the rental income deposited into my account?

b) If I sold the property after 5-10 years, can the principal and capital gains, after payment of the appropriate taxes, be repatriated?

2) I may be also getting some from selling my mother's property in India. I believe this money will have to be deposited only in my NRO rupee account. From my NRO rupee account can I repatriate the whole inheritance amount after paying capital gains?

If I decide to reinvest in properties in India paying through my NRO account and if I sold the property after 5-10 years, can the principal and capital gains, after payment of taxes be repatriated?

If I cannot repatriate the principal and capital gains by reinvesting the inheritance through my NRO rupee account, am I better off repatriating my inheritance after capital gain taxes back to USA and then remitting the net sum in US dollars into my NRE account to reinvest in properties in India. I keep hearing I cannot repatriate any capital gains through my NRO account except the original inheritance that goes into my NRO account.

-- Pushkar

1) Rental income, being a current account transaction, is repatriable, irrespective of whether the property was purchased through forex or other means, only if tax is paid or provided for.

The same holds good for capital gains on property acquired through inheritance or other sources. Since you have used forex to purchase the house, you can repatriate the capital equal to the US dollars used for the purpose.

2) An NRI is allowed to remit up to $1 million per calendar year out of his NRO balances representing sale proceeds of immovable property and assets acquired through inheritances and legacies.

Such remittances can be made only when it is sought for a bona fide that satisfies an Authorized Dealer. An undertaking by the remitter and certificate by a chartered accountant in the format prescribed by the Central Board of Direct Taxes in its circular 10/2002 of October 2002.

In case the remittance is to be made in more than one installment, all installments should be remitted through the same dealer.

Long-Term Capital Gain should be computed by deducting from the full value of the consideration i) any expenditure incurred in connection with the transfer; ii) indexed cost of acquisition; and iii) indexed cost of improvement.

In the case of assets, acquired prior to April 1, 1981, the option of substituting the fair market value (FMV) in place of original cost is open to the investor.

In other words, if the actual cost of acquisition is lower than FMV as on April 1, 1981, the investor may decide the FMV as his cost of acquisition. On the other hand, if the actual cost of acquisition is greater than the FMV on that date, the investor may choose that as the cost.

The cost-inflation index, based on 1981-82 only will be taken into account, whatever be the choice of the investor.

LTCG is taken as a separate block and charged to tax at a flat rate of 20.4 per cent. No deductions on LTCGs are allowed under Chapter-VIA as done under sections 80C, 80D, etc.

The tax on all long-term capital gains that are chargeable to tax can be saved by investing, within six months, the capital gains in infrastructure-related bonds of the National Highways Authority of India or Rural Electrification Corporation under section 54 EC.

The lock-in period for such investment is three years. The current interest rate is around 5.5 per cent and this sum is fully taxable.

The assessee may claim exemption under section 54 by purchasing a residential house a year before or two years after selling the old house. Alternatively, he may construct a residential house within three years after the date.

Section 54 applies to capital gains from the transfer of a residential house and requires that the capital gains be reinvested. The new house cannot be sold for three years. Sale within this period entails the loss of the exemption claimed earlier and the corresponding capital gains is treated as taxable LTCG during the year of sale.

The amount that is not invested before the filing of returns for the year or the statutory last date for filing the returns, whichever is earlier, must be parked in a 'Capital Gains Account Scheme' with a bank in India.

The indexed cost is computed by multiplying the cost of acquisition with the ratio of the Cost Inflation Index of the year of sale by that of the year of acquisition.

I have long been an NRI (Non-Resident Indians) and have now taken British citizenship along with Overseas Citizenship of India. Can I continue maintaining my Non-Resident Ordinary account? Am I now a Resident but Not Ordinarily Resident? In the past I have never received any reply to this query.

 -- Murli

The tax provisions are related to your residential status, not citizenship. Since you are now a British citizen, you will be deemed a Person of Indian Origin and not an NRI.

NRIs and PIOs have almost similar rights and privileges. You will not be RNOR because an RNOR is a type of resident. You remain an NRI or, technically, a PIO.

I have shifted to Singapore from India on November 14, 2006.  Hence, for the financial year 2006-2007 (April -March) I am still an Indian resident.

For the next FY, that is, 2007-2008, does the period of 182 days of stay outside India again starts April 1, 2007? Or will my status be that of an NRI from May 14, 2007 (182 days from November 14, 2006)?

For the FY ending March 2007 I shall be an NRI, but does that NRI status start on May 14, 2007? Accordingly can I open NRO and NRE accounts in India?

Is it compulsory to open separate NRO/NRE account in India after becoming NRI? Or can the existing savings bank account be changed to an NRO/NRE account after I am deemed an NRI?

-- Sharat

According to the Foreign Exchange Management Act you become a Resident Outside India if you travel outside India on business or employment. Hence you could have opened NRE/NRO accounts from November 11, 2006 itself.

In other words, you have become an NRI from FEMA point of view, and therefore, legally, you are required to inform all your banks and all companies where you have investments about the change in your status within a reasonable time.

The banks will redesignate your accounts as NRO. You can use this account the same way as you used it before becoming an NRI.

It is illegal for an NRI to continue to hold their normal resident bank accounts.

Your residential status for income tax purpose for 2006-2007 is that of a resident and for 2007-2008 is likely to be that of an NRI if your stay in India is less than 182 days during the year.

For the 182 days, your stay in India is reckoned from April 1 to March 31 of each financial year. Hence for FY 2006-2007, you will be a resident of India and for FY 2007-2008, if you don't stay in India for 182 days, you will be deemed an NRI.

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First published in India Abroad

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A N Shanbhag & Sandeep Shanbhag