What should an NRI know about tax before buying property in India?

Most individuals, from any nation, move abroad with the purpose of making significantly higher earnings and to increase savings alongside. Once these two goals are substantially met, they move on towards investing the excess earnings in different avenues available. One of the most preferred options for an NRI is to purchase properties back in India. This may be in the form of land, house property or shares.

Although there are overabundant rules surrounding NRI investments in India, such as ensuring TDS deduction and its related compliances, in this article we are focusing on the risk of initiation of tax assessments in the name of NRIs as a result of undertaking purchase of Immovable Property in India. NRI investors who take a peek into the rulebook only at the time of sale of an asset often miss out on the tax implications following the purchase of an asset.

Now the primary question that arises is how the Tax Department becomes aware of a property transaction that was effected. The primary source of information is the reporting made by the Registrar / Sub Registrar to the Income Tax Department which includes the PAN data of the buyer and seller of the property. The details of such reported transaction would also be available in the Tax Credit Statement and Annual Information Statement of each Individual / NRI.

Since the Tax Department is in possession of the details of purchase of property made by each person, the value of such investments could be treated as unexplained income in the hands of the buyer in a scenario wherein the buyer has not filed his tax returns in India substantiating his sources of income. In case of NRIs, filing tax returns in India declaring themselves as NRIs could help the Department form an understanding that the major source of income is from outside India and thereby, such investments could escape the ambit of “unexplained income”. On the contrary, failure to file returns or satisfactorily prove to the Assessing Officer, the source of income, could result in initiation of assessment proceedings in the name of the buyer. Failure to comply with notices initiated by the Tax Department could result in the assessment being completed with the available information and the entire value of the investment would be taxed in the hands of the buyer of the property. Among the many consequences of not filing Income Tax Return in India, this could be one with multi fold repercussions for an NRI.

Case Study

Let us look at one of the cases that we recently came across. Mr. X filed his ITR in India as a “Resident” in the year 2010. Thereafter, he had not filed any tax return in India in any of the years. He left India for the purposes of taking up employment abroad in the year 2012 and in 2015, Mr. X purchased a property in India for a value of INR 1 crore.

In 2019, to gain clarity regarding the source of income used for the purchase, the Tax Department issued a notice for reassessment of income on Mr. X, requiring him to file his Income Tax Return within 30 days. Mr. X, unaware of any of the communication received from the Tax Department, failed to submit any response.

As no action or response was recorded by Mr. X to the notice and all attempts made by the Department to locate the assessee proved futile, the assessment was completed by the Tax Department with the available information. Since Mr. X had not filed any tax returns in India, the Tax Department could not track that Mr. X is an NRI and the investment could have been made out of foreign sourced income.

Resultantly, Mr. X was assessed as a Resident of India and the entire value of the property was added to the total income of the assessee and taxed at 30%. The tax demand along with interest constituted 85% of the value of the investment. In addition, penalty proceedings for concealment of income and for non-payment of demand was initiated by the Tax Department over a span of 2 years.

By the time Mr. X came to know about the proceedings, the Tax Department had already initiated recovery proceedings in India. Mr. X who was residing abroad at the time of receipt of the notice for recovery, was deeply burdened by the financial liability from the enormous tax demand. The distress was further aggravated by the stringent deadlines for responding to the recovery notice coupled with the necessity to find appropriate professional help within the short deadline. Eventually Mr. X had to travel to India for a period of two weeks to sort out the mess owing to the assessment proceedings that had opened up in his name.

What could have been avoided by timely filing of tax return in India, along with timely response to the Tax Department, resulted in a major tax demand for Mr. X in India. It is also interesting to note that the instances of such tax litigations are not isolated, and such assessments are rapidly increasing in number. Recently, in a similar case handled by the Mumbai Tribunal, the Tribunal has taken a stand favorable to the NRI and has held that investments made in India cannot be taxed as unexplained income unless it is proved that the investments are made out of income generated in India.

To summarise, the key areas of shortfall from the standpoint of Mr. X are as under:

  1. He failed to file returns for any of the financial years prior to and after the year of purchase. Therefore, his NRI status remained unknown, which could have explained his source of income. He should have filed a return at least in the year of purchase; 
  2. He also failed to discuss the implications of entering into such a transaction with his tax consultant, thereby, the possibility of questions on the subject transaction being raised by the Department was high;
  3. He did not monitor his online account in the Income Tax website for any notifications; and
  4. He failed to keep track of any communications received from the Department in his e-mail or delivered at his address in India.

From the above case, it is amply clear that the importance of filing returns cannot be stressed enough. This was a problem that could have been solved with timely filing of tax return in India. Therefore, it can be safe to say that filing of Income Tax Return by an NRI is mandatory particularly when he has investments or is intending to make investments in India.

Any NRI intending to enter into such high value purchase of any security or land or house property should ensure that he files Income Tax Return in the year prior to the year of purchase, during the year of purchase and in the subsequent years. Further, in order to ensure timely receipt of communication from the Tax Department, it is recommendable that the contact details, namely, the phone number and the E-Mail ID are updated online on the Income Tax portal. It is also advisable to remain updated about the Income Tax regulations relevant for NRIs which undergo significant changes every year.

Disclaimer: The views / the analysis contained therein do not constitute a legal opinion and is not intended to be an advice. Readers of this document are advised to seek their own professional advice before taking any course of action or decision, based on this document.

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