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Residential Status – Income Tax Act 2021

This article - Residential Status – Income Tax Act 2021 would be pertinent for NRIs and would help them in understanding their Residential Status under Income Tax Act 2021. This article is written in FAQ style to address most common questions & issues.

When is an individual considered as a Resident in India under the Act?

ANSWER: An individual is considered as a Resident in India under the Act if :-

1. he stays in India for 182 days or more in a FY; or
2. he is India for 60* days or more in a FY and for 365 days or more in preceding 4 FYs.

*However, the condition of stay of 60 days is extended to 182 days for:

1. Member of the crew of an Indian Ship leaving India
2. Indian citizen leaving for purpose of employment
3. PIO or Citizen of India, being outside India, having come on a visit to India


When is an individual considered as a Non-resident (NR) in India under the Act?

ANSWER: If an individual does not satisfy any of the conditions for being a Resident in India as per prior question, he/she shall be considered as a NR in India.


When is an individual considered as a RNOR in India under the Act?

ANSWER: If an individual is a Resident of India for a particular FY (as explained in the above question)

AND

if the said individual is –

1. a NR in India in 9 FY out of 10 preceding FYs; or
2. is in India for less than 729 days in preceding 7 FYs,

then he/she shall be considered as a RNOR in India provided he satisfy either of the above additional condition.

However, if both the aforesaid additional conditions are not satisfied, then he/she shall be considered as ROR in India.


Whether date of arrival in India and date of departure from India to foreign country must be included while calculating number of days of stay in India?

ANSWER: Generally, while calculating the number of days of stay in India, date of arrival and date of departure in India shall be treated as days of stay in India. Normally, dates stamped on Passport are considered as proof of departure from and arrival in India.

However, in case where an individual is a Citizen of India and a member of the crew of a Indian Ship, on a voyage having originated from any port in India, with destination being any port outside India or vice versa, then number of days of stay in India for the said individual, shall not include the period beginning on the date entered into the Continuous Discharge Certificate (CDC) in respect of joining the ship till date entered into the CDC in respect of signing off from the ship.


An Indian citizen leaves India for the first time on July 1, 2018 for taking up employment abroad. He/she does not return to India till March 31, 2019. What will be his/her residential status for the FY 2018-19?

ANSWER: The individual in the aforesaid case stays in India for 92 days during FY 2018-19.

As per provisions of the Act, in the following cases, only the condition of stay in India for less than 182 days is applicable for determining Residential Status to be NR:

1. In case of a person, who is citizen of India or PIO being outside India, who is on visit to India;
OR
2. In case of a person, who is citizen of India, and leaves India for employment outside India or as a member of the crew of an Indian ship.

Accordingly, as his/her stay in India is 92 days which is less than 182 days, the residential status shall be a NR for the FY 2018-19 under the provisions of the Act.

It may be noted that the same conditions may not be applicable in case of family members of the person leaving India who has left India for the purpose of employment abroad.


Would the ANSWER: in the above example be different in case he/she was not an Indian citizen but a PIO?

ANSWER: As explained above, he/she is not an Indian citizen, so he/she would not be eligible to claim benefit of 182 days, even though he/she is a PIO. Hence, as his/her stay in India in the FY 2018-19 exceeded 60 days and for the 4 years preceding the FY 2018-19 exceeded 365 days, his/her residential status would be Resident of India.


A foreign citizen who is a PIO is settled overseas since 2004. She/he comes on a visit to India in FY 2018-19 on June 1, 2018 and leaves India on February 1, 2019. For the past 13 years, her/his days of stay in India were less than 180 days per year, however her/his total stay for the last 7 years in India was around 1000 days. What will be her/his residential status for FY 2018-19?

ANSWER: The individual in the aforesaid case stays in India for 246 days during FY 2018-19.

So, she/he shall be a Resident for FY 2018-19, as her/his stay in India for FY 2018-19 is more than 182 days. However, she/he shall not be ROR despite her/his stay for the past 7 years is exceeding 729 days, as she/he has been a NR for all the past 10 years by virtue of her/his stay in India being less than 182 days for the past 10 years. Accordingly, her/his residential status for  FY 2018-19 shall be that of a RNOR.


Who is treated as a PIO as per the Act?

ANSWER: A person shall be deemed to be of Indian origin if he/she, or either of his/her parents or any of his/her grand-parents, was born in undivided India (i.e., India, Pakistan and Bangladesh before 1947).


During FY 2018-19, an Indian citizen left India for the purposes of employment overseas on August 1, 2018. He/she came on a visit to India on January 20, 2019 and left for the foreign country on February 1, 2019. What shall be his/her total number of days of stay in India? What would be his RS?

ANSWER: His/her stay in India for FY 2018-19 will be 136 days (April 1, 2018 to August 1, 2018 - 123 days and January 20, 2019 to February 1, 2019 - 13 days). The day of leaving India and returning to India both will be calculated as ‘stay in India’ for the purposes of counting number of days of stay in India. He would be a NR of India for FY 2018-19.


An Indian citizen is leaving India for the first time for taking-up employment overseas. What is the best time for his/her departure from India?

ANSWER: As it is his/her first year of leaving India for the purposes of employment, being an Indian citizen, he/she will become a resident in India only if his/her stay in India for the concerned FY is 182 days or more. Hence, he/she should leave India on or before September 28 to maintain status of NR for that FY. This is on the basis that he/she does not return to India for any visits personal/ official until the end of such FY.

If he/she fails to do so, he / she will qualify as ROR and by virtue of taxation rules will be taxed on global income for residents, subject to DTAA benefits. There will also be an obligation to report foreign assets in India. Thus, he/she may need to plan his/her departure and subsequent visit appropriately keeping in mind the tax provisions.


If an Indian citizen settled overseas wishes to return to India for good, what is the best time for her/him to do so?

ANSWER: On the basis that he/ she was a NR in the previous FYs, she/he should try to come back on or after February 1 (or February 2 in case of a leap year). However, if her/his stay in India in prior 4 previous FYs does not exceed 365 days, then she/he may return after October 2 (or October 3 in case of a leap year). In both the cases, she/he will continue to remain NR for that FY.


A Karta has an HUF comprising of himself, his wife, two sons and an unmarried daughter. The family is based in India, except for the Karta who resides overseas for his employment purposes. He visits India once in four months and takes the financial decision on his stay in India. Will the HUF be categorized as a resident?

ANSWER: An HUF will be categorized as NR only when it is wholly controlled and managed from outside India. Accordingly, because the HUF will be managed wholly in India, as the decisions are taken when Karta comes India, its residential status shall be Resident. Further, the HUF will not be considered ROR-Resident if its Karta has been a Resident for less than 2 FY out of 10 FY preceding that FY, or has not during the 7 FY preceding that FY been in India for more than or equal to 730 days. Accordingly, if the Karta is not ROR-Resident, the HUF shall not be ROR-Resident.


An Indian citizen stays in India for less than 182 days in FY 2018-19 and leaves India for the first time for the purpose of self-employment / business outside India. What will be his/her residential status for the FY 2018-19?

ANSWER: The expression ‘employment’ may also include business and self-employment.

So, in case of a person, who is citizen of India, and leaves India for self-employment or business outside India, then only the condition of stay in India for less than 182 days may be applicable for Residential Status to be NR.

Accordingly, he/she shall be a NR for the FY 2018-19 under the provisions of the Act, as his/her stay in India is less than 182 days for the said FY.

The same provisions may not apply for the family members accompanying such person.


An Indian citizen leaves outside India for the first time for the purpose of education (PHD) in FY 2018-19 in July 2018 What will be his/her residential status for the FY 2018-19?

ANSWER: In case of a person, who is citizen of India, and leaves India for employment outside India, then only the condition of stay in India for less than 182 days may be applicable for Residential Status to be NR.

However, in the above case, the individual is leaving for education purpose and not employment, so the condition of physical presence of 60 days during the FY and the more than 365 days during the immediately preceding FY is required to be evaluated.

As he is going outside India for first time and has been in India for more than 60 days during the FY 2018-19, he will qualify as ROR-Resident.


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Sale of Immovable Property by NRI in India 2021

This post covers the FAQs on Sale of Immovable Property by NRI in India 2021.

How is Capital Gains on sale of Immovable Property computed and what are the rates of taxation?

ANSWER. Capital Gains on Sale of Immovable Property in India generally refers to the difference between the sale consideration received and purchase price paid for acquisition of the property (subject to other conditions and exemptions available). Capital Gains may be classified as ‘Short Term Capital Gains’ (STCG) or ‘Long Term Capital Gains’ (LTCG) based on provisions of the Act.

Classification of Capital Gains

Capital Gains on sale of an asset may be classified into LTCG and STCG based on the period of holding as follows:

 

Capital Asset

Short Term

Long Term

Immovable property including rights and interest in Immovable Property

If held for a period not exceeding 24 months from the date of acquisition

 

If held for a period exceeding 24 months

Tax Rates applicable

As per applicable slab rates – Highest slab being 30%*

 

20%*

Tax to be deducted by the buyer, where seller is NR

30%*

20%*

* Plus applicable Surcharge and Health and Education cess on Income Tax

Manner of Computation of Capital Gains

Illustrative Computation of Taxable Capital Gains in case of Sale of Immovable Property is as follows:

 

Particulars

Amount

(in Rs.)

Amount

(in Rs.)

Full value of sale consideration

 

100

Less: Expenditure incurred wholly and exclusively in connection with such transfer (e.g. Transfer Fees, Brokerage, Society Charges, etc.)

 

(5)

Net Sale Consideration

 

95

Less: Cost of Acquisition

35

 

Less: Cost of Improvement (E.g. Renovation, painting, addition of floor, etc.)

15

(50)

Capital Gains

 

45


What is Cost of acquisition and Indexed Cost of acquisition for computation of Capital Gains?

ANSWER. Cost of acquisition generally refers to consideration paid for purchase of property. Cost of improvement generally refers to any capital expenditure incurred in making any additions or alterations to the Immovable Property. The cost of acquisition may vary based on several scenarios which are reproduced below:

Property held prior to April 1, 2001:

 

Where property has been acquired by a person before April 1, 2001 or where the property was acquired through gift or inheritance from the person who acquired the property before April 1, 2001, then the cost of acquisition is the higher of:

  1. Actual cost of acquisition of the property or;
  2. Fair market value as on April 1, 2001.

However, as per recent amendment in law, the fair market value as on April 1, 2001, has been capped as  not exceeding the ‘’stamp duty value’’ of the property. Further, the term ‘’stamp duty value’’ has been defined to mean the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property.

Inheritance / Gift:

In case of inheritance/ gift, the aforesaid cost of acquisition/ improvement shall be the actual cost of acquisition/ improvement of the person from whom the asset is received. The period of holding will be considered from date of original acquisition till the date of sale.

However, there is some difference of opinion regarding whether the benefit of Indexation will be given from the date of Inheritance/ Gift or from date of acquisition of the person from whom the asset is received. The said issue is litigative and pending before Court of Law.

 Indexation: It is a process by which the cost of acquisition/ improvement of a capital asset is adjusted against inflationary rise in the value of asset 


A NRI is selling his residential house in India to a resident Indian. What are the tax obligations of the resident Indian purchasing property from a NRI?

ANSWER. The resident Indian is liable to deduct tax at 30% on STCG or 20% on LTCG arising to NRI from the consideration payable for purchase of Immovable Property and the failure to deduct tax attracts penalty and interest on the resident Indian

He may request NRI to arrange for a Tax Exemption Certificate (TEC) from the Tax Officer directing the amount of appropriate tax to be deducted and withheld from the sale consideration and deposit the same with the Tax Department within the prescribed timelines

It takes about 3 weeks to 6 weeks to obtain TEC from the Tax Department but that protects the resident Indian  from any liability.


What is Stamp duty Value and what if the Stamp duty Value of the Immovable Property sold is greater than the sale consideration?

ANSWER. In case of transfer of an Immovable Property, the Act provides that the actual sale consideration should be compared with the stamp duty value. Stamp duty value is the value assessed at time of registration of the sale of the property with the Registration Authority of the State Government in India. Accordingly, while calculating capital gains, the actual sale consideration is compared with the stamp duty value and higher of the two values should be taken as sale consideration.

However, as per recent amendment in law, only if the Stamp Duty Value exceeds the actual sale consideration by more than 110% of the sale consideration, then in such case while calculating Capital Gains, Stamp Duty Value shall be considered as Full Value of consideration for the purpose of computing the Capital Gains.


What are the options available to NRI to ensure minimum deduction of tax on sale of his Immovable Property?

ANSWER. The normal rate of tax deduction is at the rate of 30% (Plus applicable Surcharge and Health and education cess on Income Tax) on STCG or 20% (Plus applicable Surcharge and Health and education cess on Income Tax) on LTCG, depending upon the period of holding of the Immovable Property. 

However, NRI may be liable to tax at much lower or nil rate on account of:

  1. Tax exemption for reinvestment in a residential house or specified Bonds or in CGAS (Capital Gains Account Scheme)
  2. There may not be taxable gain on account of benefit of CII or benefit of step up to market value as on 1st April 2001 as cost.


In such a situation, NRI has two options:

  1. Apply for Tax Exemption Certificate to Tax officer which directs the Buyer to deduct tax at the amount specified in the TEC.
  2. File Return of Income and claim Refund of excess TDS withheld and deposited to Tax Department by the Buyer.


NRI has sold a residential house on September 1, 2020 after holding it for a period of ten years, and intends to claim exemption of tax on Capital Gains arising on sale of the said house. What are the options available with him to claim exemption? What are the timelines to claim such exemptions?

ANSWER. NRI has the following options to claim exemption of LTCG tax on sale of residential house which is held for more than two years.

Option 1 -- Reinvest in a residential house:

 

  1. At present, NRI can avail exemption if long term capital gains arising on sale of a residential property are re-invested in one residential house property. The Government has extended the said benefit of re-investment to two residential properties, effective from AY 2020-21 i.e. from FY 2019-20 onwards.
  2. The aforesaid benefit can be exercised only when the capital gains on sale of residential property does not exceed Rs. 2 crore. It is pertinent to note that the benefit of this provision can be availed, at the option of the person only once in his lifetime.
  3. The exemption can be availed if a new residential house was purchased one year before the date of sale of the old residential house (i.e. by September 2, 2019), or purchases a new residential house within a period of two years from the date of sale of the old residential house (i.e. before August 31, 2022), or, construct a new residential house within a period of three years from the date of sale of the old residential house (i.e. on or before August 31, 2023).
  4. If NRI has not purchased/constructed the new residential house before July 31, 2021 (i.e. due-date for filing tax return for the year in which the old residential house is sold), and he would like to claim tax exemption then he has to open a banking a/c under the ‘Capital Gains Account Scheme’ (CGAS) with a Nationalized Bank and deposit the amount of Capital Gains and utilize the said deposits for purchasing/construction of the new residential house within the time lines prescribed However, if the amount deposited in CGAS is not utilized wholly or partly in purchasing/construction of the new residential house property within the time lines prescribed in paragraph 1(iii) above, then such unutilized amount would be subject to LTCG tax in the 3rd year from the date of transfer of old property.
  5. Having obtained the tax exemption as above he must hold the new residential house for at least a period of 3 years from the date of its purchase/construction as otherwise he may lose the Tax exemption. If the same is sold before 3 years, while computing Capital Gains from sale of the said new residential house, the cost of acquisition of the new residential house shall be reduced by the amount of exemption claimed and thereby resulting into higher capital gains amount subject to taxation

 

Option 2 -- Invest in Specified bonds:

 NRI can reinvest the amount of LTCG arising on sale of residential house in Tax saving bond issued by :

  1. National Highways Authority of India (NHAI)
  2. Rural Electrification Corporation Ltd (REC)
  3. Bonds as may be notified by the Central Government. (No bonds are notified by Central Government till date)

Investment is to be made in the above specified bonds within 6 monthsfrom the date of sale of the property.

He investment in specified bonds should not exceed Rs. 50 lakhs and NRI is required to hold the specified bonds for a period of five years. However, if the same is transferred or converted into money within 5 years then exempted capital gains will be taxable in year of ‘’transfer/conversion’’ of such specified bonds.

Further, any borrowings against security of these bonds shall tantamount to ‘’conversion/transfer’’ of such specified bonds into money.

 

Option 3 -- Investment in equity shares of a new eligible Indian company:

 NRI will be eligible to claim exemption in proportion of amount reinvested in equity shares of a new eligible Indian company or eligible start-up (as defined in Section 54GB of the Act) to the sales consideration received on sale of residential house.

There are several conditions to be complied with in order to claim this reinvestment exemption.

Option 4 -- Investment in units of specified fund:

The Government has provided for an additional amount of exemption of Rs. 50 lakhs that may be invested in the units of specified fund. However, no such specified fund has been notified till date


Whether the reinvestment options change if NRI sells a Capital Asset other than residential house (old capital asset)?

ANSWER.

Option 1 -- Reinvest in a residential house:

  1.  If a NRI sells any Long Term Capital Asset, other than residential house, he is eligible to avail exemption from Capital Gains tax if he purchases a new residential house one year before the date of sale of the old capital asset, or purchases a new residential house within a period of two years from the date of sale of the old capital asset, or, construct a new residential house within a period of three years from the date of sale of the old capital asset
  2. If NRI has not purchased/constructed the new residential house before July 31, (i.e. due-date for filing tax return for the year in which the old residential house is sold), and he would like to claim tax exemption then he has the option to open a banking a/c under the ‘Capital Gains Account Scheme’ (CGAS) with a Nationalized Bank and deposit the amount of net sale consideration and utilize the said deposits for purchasing/construction of the new residential house within the time lines prescribed However, if the amount deposited in CGAS is not utilized wholly or partly in purchasing/construction of the new residential house property within the time lines prescribed in paragraph 1(i) above, then such unutilized amount would be subject to LTCG tax in the 3rd year from the date of transfer of old property.
  3. Having obtained the tax exemption as above he/she must hold the new residential house for at least a period of 3 years from the date of its purchase/construction as otherwise he may lose the Tax exemption. If the same is sold before 3 years, while computing Capital Gains from sale of the said new residential house, the cost of acquisition of the new residential house shall be reduced by the amount of exemption claimed and thereby resulting into higher capital gains amount subject to taxation
  4. If NRI invests the entire net consideration* from sale of such capital asset, he/she shall get total exemption of Capital Gains tax. However if he/she invests partial net consideration, then the exemption shall be available in the same proportion as the proportion of amount reinvested in the residential house bears to the sales proceeds received on sale of the old Capital Asset: The same is reiterated for ready reference as below :

 *Refer answer to FAQ a. above for meaning of Net Sale Consideration

NRI should not hold more than one residential house (other than the new residential house) on the date of sale of the old capital asset.

NRI should not purchase another residential house within a period of 1 year from the date of sale of old capital asset or construct a residential house within a period of 3 years from the date of sale of old capital asset. Ifsaid condition is not satisfied, then capital gains claimed as exempted above on sale of Capital Asset other than residential house property, shall be taxable in year in which such other residential house is purchased/constructed.

Invest in Specified bonds:

Similar to exemption mentioned in FAQ f (2) above.

Investment in units of specified fund:

 Similar to exemption mentioned in FAQ f (4) above.


A NRI sold his residential house and earned LTCG on such sale. He invested the said Capital Gains in another residential house situated in Dubai. Can he/she claim exemption from LTCG?

ANSWER.  Exemptions mentioned in FAQ f (1) and g (1) above are available if a new residential house is purchased in India. Hence, in above case, NRI shall not be eligible for claiming exemption from LTCG.


A NRI sold his residential house and earned LTCG of Rs. 65 lakhs on such sale. From the said Capital Gains, he purchased two residential houses of Rs. 35 lakhs and Rs. 30 lakhs in Mumbai and Bangalore respectively. Can he claim exemption from LTCG?

ANSWER. As stated in FAQ f (1), the Government has extended the benefit of re-investment to two residential properties with effect from AY 2020-21 i.e. from FY 2019-20 onwards. In this case, as the capital gains amount is less than Rs. 2 crore, the NRI can claim exemption from LTCG. However, such exemption can only be availed, at the option of the person only once in his lifetime.


Is filing of Return of Income compulsory for claiming the various exemptions from Capital Gains on sale of Immovable Property?

ANSWER. Yes, the NRI has to file the Return of Income by prescribed due date for claiming the exemptions.


What if the whole or any part of amount invested in Capital Gain Account Scheme is not utilized for purchase of new property within 2 year or construction of the new property within 3 years, as the case may be?

ANSWER. Amount which is not invested in the new property would be subject to the LTCG tax in the year in which the period of 3 years expires from the date of sale of old property.


l. NRI is the owner of a residential house, which was purchased by him in November, 2002. He died in December, 2012, leaving behind this house to his son. His son intends to sell this property in December, 2016. When, how and in whose hands will the Capital Gains be taxed?

ANSWER.

At the time of inheritance:

There shall be no Capital Gains tax in the hands of NRI or his son at the time of inheritance, i.e. on the death of NRI.

At the time of Sale by son:

At the time of sale of the inherited house, the son shall be subject to Capital Gains tax on such sale. The Capital Gains shall be computed as follows:

 

Cost

The cost of acquisition of property for son shall be the cost of acquisition of the father

Period of Holding:

The period of holding of the asset for the son shall be from the year 2002, the date on which father acquired the property.

 

Further, since period of holding is more than 24 months, the Capital Asset shall qualify as Long Term Capital Asset and shall be eligible for indexed cost of acquisition for the period 2002 till the year in which the property is sold by son.

However, there is legal uncertainty and a possible litigation regarding whether the son will be allowed the benefit of indexation from the year in which the father bought the property (i.e. 2002) or the year of inheritance i.e. upon death of the father (i.e. 2012).


A NRI received advance money/ earnest money for the sale of an Immovable Property. Subsequently, the sale of property transaction was cancelled. However, the NRI retained the advance money/ earnest money as per the agreement. What will be the tax liability on such advance money/ earnest money retained?

ANSWER. Advance money/ earnest money retained by NRI received by him on or after April 1, 2014, shall be taxable under the head ‘Income from Other Sources’. NRI shall be required to pay appropriate taxes on the said income.


Is there any Capital Gain tax implication in case where property is compulsorily acquired by the Government authorities?

ANSWER. Compulsory acquisition of the property by any Government Authority is regarded as ‘transfer’ and/or ‘sale’ and is subject to capital gains as per the provisions of the Act.

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