Sale proceeds of immovable property can be remitted

A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answer your questions on NRI investment.

A Rediff India Abroad feature:

I am a United States-based Non-Resident Indian. My son is a US citizen. Can I open an HUF account? What will be the status of the account (NRI/Resident)? Can I remit money from the US to my HUF account without any tax implication in India?

-- Vivek

An HUF (Hindu Undivided Family) is not born because of some specific actions taken by an assessee. It always exists but may not possess any joint assets.

Assessment can be made for the first time as an HUF upon:

• Inheritance by a person on succession of property from a male ancestor when the legatee has male offspring.
• A Hindu impressing his self-acquired property, either by gifting or blending, with the character of joint family property.

It is not necessary that there should exist -- prior to such impressing -- some nucleus of ancestral or joint family property. There is a delicate difference between gifting and blending. Blending implies a gift of only that part of the converted property, as other members of the family would be entitled to if the partition had taken place immediately after such blending.

Upon blending, income arising from the property, less his own share, is clubbed in the hands of the donor whereas in the case of a gift, the entire amount is clubbed. When subsequently a partition of the family takes place, property allotted to the spouse and minor children will be deemed to be assets transferred to them indirectly. Therefore, it is better to take the blend route and not the gift route.

An HUF can also receive a gift or bequest from an outsider clearly indicating that the donee should hold the gifted property not as an absolute owner but as his HUF.

Where the income from converted property is clubbed with that of the individual, it is to be excluded from the income of the family. The same rule is applicable to wealth. Much of the advantage of creating an HUF is wasted due to the clubbing provision.

Moreover, there was a time when HUF was useful as a tax-saving device. Now that it is possible to save tax on investible funds, irrespective of its size. Thanks to equity-based mutual fund growth schemes, the utility of HUF has got considerably diluted.

Finally, an HUF managed from abroad by an NRI has an NRI status.

I am based in the United States since March 2007 and am an NRI from a legal perspective. We had bought a house (jointly in my and my wife's name) way back in April 2004 (at that point, we were Indian residents). We paid the money for the house through our own funds plus a rupee loan from a bank. Now we want to sell the property and have the following questions:

1. Can we sell the property? What are the tax implications of selling the property? It was bought for Rs 34 lakh (Rs 3.4 million) and we invested around Rs 7-8 lakh (Rs 700,000-800,000) in furnishing and refurbishing the property. We expect to sell this for around Rs 70 lakh (Rs 7 million). How much tax will we need to pay?

2. Do the sale proceeds need to be transferred to a Non-Resident Ordinary account only? Does the NRO account need to be in joint name of my wife and me (we both own the property jointly)?

3. Can I repatriate the funds to the US received through the sale of the property after paying off the loan? Please explain in detail.

-- Samant

1. Yes, you may sell the property. You will be earning long-term capital gains since your holding period is over 36 months. Long-Term Capital Gain (LTCG) is to 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. Indexed cost is the cost multiplied by the index of the year of sale divided by the index of the year of acquisition.

LTCG is taken as a separate block and charged to tax at a flat rate of 20.6 per cent.

2. Yes, the sale proceeds have to be parked in an NRO account, preferably a joint one.

3. Master Circular /0402006-07, dated July 1, 2006, makes it possible for an NRI or a PIO (Person of Indian Origin) to remit as much as $1 million per calendar year for bona fide purposes out of the sale proceeds of assets held in NRO accounts.

He should have acquired the assets in question, out of rupee resources when he was in India or by way of legacy/inheritance from a person who was a resident in India. Sale proceeds of immovable property are eligible for remittance.

The remittance can be effected only when it is sought for all bona fide purposes to the satisfaction of the Authorized Dealer. An undertaking by the remitter and a certificate by a chartered accountant in the format prescribed by the Central Bureau of Direct Taxes vide their Circular 10/2002, dated October 9, 2002, have to be produced.

It is necessary to file Form-A2, a declaration by the individual and a certificate from an accountant, and undertaking for payment of income tax, in the specified format. A no-objection-certificate from the Income Tax Department will be useful, but not necessary.