What are the taxation aspects of your NRI home loan and overall property transaction? How do you pay for your home loan if you are outside India? Here are some simple things worth noting that will address all your queries.
The first thing that you should note is that your tax liabilities will be defined by what we know as the residential status as per the Income Tax Act. If you are staying for more than 182 days in India for any specific financial year, then you will have to pay taxes with resident status. Otherwise, you will be paying taxes as an NRI.
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Repayment of the Home Loan
Repayment of the home loan is readily possible through either the NRE or NRO account. This account may also be used for remitting or depositing income earned abroad. Any money in this account can always be repatriated outside India anytime you wish. You can also make investments from this account, which may be repatriated upon their maturity or sale.
- You do not have to set up any separate repayment bank account.
- Your existing account may be converted into an NRO account once you settle outside.
- You can get direct credit of all dividends into this account.
- You can give the ECS mandate for your NRO account, in order to deduct the home loan EMI.
- You can also directly repay your home loan in Indian rupees with the money in your NRE account.
The home loan tenure is usually 5-15 years for NRIs in case of some banks while some offer up to 30 years. The rates of interest are also slightly higher than regular home loans. Banks usually charge a 0.25-0.50% margin in order to ensure coverage for higher risks of lending to NRI borrowers.
As seen above, you can readily repay your home loans via NRE (Non-resident external) or NRO (non-resident ordinary) accounts with foreign remittances. You cannot use any other funds for repaying your home loans however. So keep this aspect firmly in mind. At the same time, you should make sure that home loan repayment takes place only in Indian rupees as mentioned.
Taxation Aspects
There are many taxation aspects that NRIs should factor in, while investing in real estate back home in India. You may be investing to get the benefits of future capital appreciation and/or rental income.
NRIs will also get tax benefits on interest repayments on their home loans as per experts with the assumption that they have interest/rental income here in India. The overall implications will largely depend on the end-usage or purpose of the property and also the host nation for the NRI currently. The bigger tax aspect will come into the picture when the home is ready for possession. Here are some points worth noting in this regard for those who are based in the U.S.
For a Home that is Rented out (NRIs based in the U.S.)
- NRIs in the U.S. have to pay income tax on globally-taxable earnings.
- Your rental income from the Indian property will be taxed in the U.S.
- You can get deductions on interest repayments on home loans.
Rented-Out Properties – Other Benefits
Expenditure on renting out your property including brokerage, maintenance charges, registration of agreement, insurance and depreciation can be subtracted from rental income.
Taxation Aspects in Other Countries
- The UK determines tax status for rental income from foreign properties on the basis of residential status, i.e. whether it is remittance, domicile and so on. Rental income will only be taxed from the Indian property subject to meeting certain criteria. If this is the case, then interest repayment on the home loan may be claimed in deductions. Deductions may also be claimed on brokerage, maintenance charges, fees for registration of the agreement, property insurance and other costs.
- Tax-paying Australian residents will have to pay income taxes in the country on global income. This will include rental income from their Indian property investments. They can also claim deductions on the interest paid on the home loan along with other expenditure including brokerage, registration and agreement costs, property insurance and so on.
- Gulf countries do not have any personal income tax and they also offer credit for Indian income tax that is paid on rental income based on the Double Tax Avoidance Treaty. This is a major benefit.
If a home bought by an NRI is occupied by any family member, then the taxation aspects will depend on the host country. The U.S. allows deductions on home loan interest in these scenarios, even if the property is located abroad. You should check these terms and conditions carefully.
