Over the years, non-resident Indians (NRIs) have made significant investments in the real estate sector of India, be it from an investment perspective or as a reflection of their emotional attachment to the country of their origin. Whatever the root cause may be, the Indian government views this as a major source of fund inflows. What’s more, it also promises several benefits to NRIs in terms of tax exemptions, to further encourage such investments.
Before delving any deeper, you should know that the term NRI has a legal definition under the Foreign Exchange Management Act (Fema), 1999 and the Income Tax Act, 1961. According to Fema, an NRI is a citizen of India who either resides outside the country or is a person of Indian origin and has not resided in India for at least 183 days or more. Likewise, it is interesting to note that according to Section 6 of the Income Tax Act, an individual falls under the category of NRI provided he/she satisfies the following criteria: if he/she has not been in India for a period of at least 182 days in a particular year or if he/she has not been in India for a period of 60 days or more during the previous year and minimum 365 days during four years preceding that year.
Tax benefits that you should know more about
Once you establish yourself as an NRI, you should know that you can avail of all the tax benefits that locals residing in India enjoy, barring the TDS rate during the property sale. Moreover if you apply for home loans to buy property in India, you will be eligible for multiple tax benefits which will eventually bring down your overall tax outgo.
Now let’s take a look at the tax benefits on home loans for NRIs:
As an NRI, you can get home loans from various banks and non-banking financial institutions. However, depending on the tenure of the home loan, the rate of interest may be higher or lower. The benefits include:
- Deduction on principal repayment and stamp duty and registration charges: Section 80C of the Income Tax Act lays down that NRIs can claim tax deductions on home loans upon repayment of the principal amount. Besides, they can also avail deductions for stamp duty and registration charges paid to purchase the property. The maximum deductions on both these amounts available are Rs. 150,000 per annum. However, if you want to claim this benefit, you cannot sell the house within five years of possession.
- Deduction on repayment of interest charges under Section 24 of the Income Tax Act: As far as a self-occupied house is concerned, you can claim tax deductions on the interest amount of the EMI with the maximum limit being Rs. 200,000 per annum. Thanks to the Budget 2019, the benefit of self-occupied property has further been extended to two houses, which implies that if you occupy more than one property you will not need to pay income tax on the notional rental income of the second property.
- Further deduction for first-home buyers: If, as an NRI, you are availing a home loan to buy your first home, then you are eligible for an additional deduction of Rs. 50,000 per annum on the repayment of interest under Section 80EE. That being said, it should be noted that the loan amount should be 3.5 million rupees or less while the property cost should not exceed Rs. 5 million.
- Tax benefits on joint home loan: In cases where the home loan is taken jointly, each co-owner can claim tax benefits separately. NRIs looking to buy property should know that the wife of an NRI can also become a co-owner, and both can individually claim tax benefits. Thanks to Section 80C of the Income Tax Act, each co-owner can claim tax deduction on the principal loan amount with the maximum amount being Rs. 1,50,000 each. Therefore, if you want to claim a larger tax benefit, taking up a home loan on a joint basis is a better idea any day.
To sum up, NRIs who are keen to invest in property in India should take the above-mentioned points into consideration so that they can make the most of the exclusive benefits that the Indian government offers to them.