How Indians in the UAE save on taxes when selling property in their homeland

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Nitin Kakkar

A 43-year-old Indian CEO of an investment consulting firm based in Dubai sold a plot of land in Noida, located in the Delhi National Capital Region, in March. He invested the profits from the sale into tax-saving bonds issued by the Rural Electrification Corporation and the National Highways Authority of India.

It took about a year.

“It took about a year after I posted the ad to sell the plot for the deal to actually go through. I sold it through a broker,” says Mr. Kakaria, who has been living in Dubai for eight months after moving from Singapore.

Nitin Kakkar invested the proceeds from the sale of real estate in India into tax-saving bonds.

The most difficult task

"The most challenging task is when unserious buyers write to you and offer a price that is usually 25-35 percent of your price and sometimes even below the average market price in the area."

“This is usually done by brokers who approach you, claiming they have a serious buyer, and when the discussion starts, they mention a random price, and you realize that there was never a real buyer,” he advises sellers to list their properties on Indian portals like Magicbricks, Nobroker, and Homebazaar, among others.

The Asian country is a preferred destination for real estate investments for non-residents from countries in the ZATO living in the Persian Gulf countries.

According to the consulting company Anarock, in the first three months of this year, NRIs accounted for 10-15% of the total real estate purchased in India. Anarock's data shows that NRIs living in the UAE make up 9% of investors in the residential real estate segment.

Delhi-NCR, Hyderabad, and Bangalore were the top choices among NRIs for purchasing housing.

According to a joint study by the Confederation of Indian Industry and Anarock last year.

According to data obtained from Anarock

The weakening of the rupee and activity in the residential real estate market in India are significant factors attracting the interest of NRIs.

Increasing attention is being paid to secondary cities as locations for long-term investments.

Cities like Lucknow, Nagpur, Pune, Ahmedabad, Kochi, and Jaipur are becoming the most attractive destinations in terms of price and quality, as shown by a separate report from Anarock.

Kiran Nair, Associate Professor at the Abu Dhabi School of Management

He was supposed to pay capital gains tax in India, even though the value of his property did not increase over time.

“Although there was no profit from the sale, I had to pay 1.4 million rupees in taxes. I can request a tax refund, but so far I have only received half of the amount from the tax office,” says the 46-year-old man.

“I wanted to sell this property and invest the money in mutual fund shares or other assets that promise higher returns.”

According to DVS Management Consultancy

The sale of such real estate is associated with tax payments.

When an NRI sells property in India

The buyer is required to deduct 20-25% of personal income tax (withholding tax), tax collection, and additional fees, the company reports.

The right to sell a one-bedroom apartment in the southern Indian city of Chennai.

He purchased the property for about 6 million rupees in 2014 and sold it five years later for the same price.

“Although there was no profit from the sale, I had to pay 1.4 million rupees in taxes. I can claim a tax refund, but so far I have only received half of the amount from the tax service,” he says.

“I wanted to sell the property and invest the money in mutual fund shares or other assets that offer better returns.”

Nidjam Ahmed, partner at DVS Management Consultancy

It says that land ownership legislation in India is not uniform.

Considering that land is a subject of estate, the procedural application varies depending on which state the property is located in, he says.

Therefore, non-residents selling real estate in a territory that is not their home state face certain challenges.

This includes finding reliable agents, preparing extensive documentation, overcoming capital repatriation restrictions, and complying with tax regulations, among other things.

Moreover, personal income tax can also be excessively high, leading to the withholding of a huge amount of tax.

If the holding period of the property is less than 24 months, the income tax rate depends on the income rate of the NRI, and it can reach up to 39 percent, explains Mr. Ahmed.

"One effective way to reduce income tax rates on real estate sales is to apply for a tax withholding exemption certificate or a reduced tax rate certificate [LTC]," he suggests.

"This is a certificate issued by the tax authority, confirming either the absence of an income tax rate or a reduced income tax rate, depending on the specific circumstances of each case."

The process of obtaining the LTC usually takes about six to eight weeks, and the certificate remains valid from the date of issuance until the end of the financial year in which it was submitted, according to Mr.

Ahmed.

The buyer and seller must be identified in order to apply for a certificate of exemption from withholding tax, which requires the conclusion of a sales contract and other relevant documents before submitting the application.

To apply for an LTC, documents are required, such as a sales contract, a permanent account number (PAN) for both the buyer and the seller, a tax deduction and collection account number (TAN) for the buyer, tax returns for the last four years, an assessment order (if available) for the last four years, and a calculation of expected income according to DVS.

In the case of property purchased independently (with personal funds), NRIs can include the sale agreement and relevant contracts if the property was not acquired by the seller independently, for example, through inheritance or as a gift, explains Mr. Ahmed.

In most cases, the actual tax payable may be lower than the withheld income tax on sales.

This can happen for many reasons, such as the lack of other income besides income from real estate sales, a loss in the current year from any other source, or the carryover of a loss from the previous year, says Mr. Ahmed.

Other reasons may include the preferential conditions and deductions provided throughout the year, income not exceeding the basic tax exemption threshold (which is usually around 250,000 rupees), or tax rates lower than the VAT rate established by law, he adds.

To reduce the tax burden, Mr. Ahmed also recommends that NRIs consider reinvesting long-term profits from the sale of real estate into the purchase of another property.

They can also take advantage of capital tax exemption if they invest in bonds issued by the National Highways Authority of India or the Rural Electrification Corporation.

They can also claim all expenses incurred during the sale, such as agent commissions, advertising costs, and document preparation fees, as expenses when calculating the profit from the sale, says Mr. Ahmed.

“To take advantage of the LTS, the nri can submit an application using Form 13. When submitting Form 13, a detailed tax calculation along with supporting documents must be provided for review,” he says.

One of the problems that NRIs often face when applying for LTC.

It is a situation when the property has been inherited, says Mr. Ahmed.

In such cases, the indexing benefit is granted only from the date of inheritance, not from the date of acquisition by the previous owner, he adds.

Moreover, NRIs often face difficulties in obtaining confirmation of the transfer of carryover losses and the proposed benefits under Section 54 from the inspecting officer, he says.

In addition, NRIs have the right to receive proceeds from sales into their regular non-resident account and can transfer only 1 million dollars in a financial year.

However, with prior approval from the Reserve Bank of India, NRIs can transfer more than the established limit, he adds.

Updated: August 21, 2023, 3:17 AM.