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Things to do if you own a Property Overseas using the LRS Window

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Things to do if you own a Property Overseas using the LRS Window

When US property market fell in 2008, many smart Indians invested in US properties market. Similarly, a lot of affluent Indians have acquired the properties outside India either out of their foreign earnings or taking the advantage of LRS – Liberalized Remittance Scheme, which allows an individual to invest upto USD 2,50,000 on yearly basis. These investments were made with varied purposes, viz. diversifying investment, having a holiday home or for kids studying abroad. But with time they started realising the downside of having invested in offshore properties.

Understanding the LRS window

RBI had introduced the LRS window in 2004, and over the last few years, the permissible remittance has been raised from $25,000 to $250,000. This means that a family of four can remit a total of $1 million if they want to buy a foreign property in their joint names. Indian residents have, since then, availed this LRS window to invest in properties in various foreign locations.

Reporting of Foreign Assets by ROR and Deemed Rental

Finance Act 2012 made it mandatory for all taxpayers qualifying as ROR-Resident and Ordinary Resident, to report details of their foreign assets including immovable properties in their income tax return. Now based on this information a lot of people were beign questioned about the ‘deemed rental income’ that they were supposed to report in their India tax return and pay the consequent taxes on it. It has therefore become important for foreign property owners to understand the whole concept of deemed rental income and their tax liabilities.

There are certain things that you need to keep in mind if you own a property overseas. A majority of people who have invested in offshore property have either misunderstood the rule that one has to pay taxes on properties purchased abroad or are completely oblivious to this fact. One needs to know that person resident in India is liable to pay taxes on his global income. So it becomes more crucial to understand how tax on house property abroad is calculated in India.

Understanding taxation on house property

For tax purposes in India, one house, be it in India or abroad, is treated as self-occupied and other properties are treated as let out or deemed to be let out if not actually let out. The owner is therefore liable to pay tax on rental income from this house (houses). In case the other house or houses (other than 1st one) are not rented out, the owner will have to come at a notional or deemed rental income and then pay tax on the same. As per the IT law, a person residing in India has to pay tax on his foreign income. Therefore, rental income on such properties will be taxable in the country of residence subject to double taxation reliefs. There is no difference between house properties situated either in India or abroad while calculating income from house property according to the income tax law.

Computing and arriving at a taxable value of let out properties

If you have properties in India as well as abroad, you will have to declare any one of them as self-occupied and others as let out. In case the other properties are not rented out, you will have to calculate the tax on notional rental income. To achieve this, you will first have to obtain quotes from property brokers of the similar area or check on the website for rental rates in case property in that foreign location. To calculate the deemed rental income you will have to consider the annual let-able value of the said property or standard rent if any prescribed by the foreign authorities. In case of foreign properties some times the tax demand can be significant as there is a surge in rents in various markets along with the surge in property prices. Especially when you convert the foreign currency rentals in INR it can add-up a decent sum to your gross taxable Indian income and may push you in higher tax bracket.

Reducing the tax burden by claiming deductions on rentals from foreign property

As the provisions for paying tax in case of having properties in India as well as abroad remain the same, taxpayers can claim following deduction while calculating the taxable income from a foreign property.

  1. Taxes levied by any local authority in respect of the property situated abroad under Section 23(1)
  2. Standard deduction to the extent 30% of Net Annual Value (NVA). As this deduction covers the repairs and maintenance of the property no further deduction for property management can be claimed.
  3. Interest paid on the housing loan taken for acquiring the property situated abroad. If the property is a rented property, you can claim the deduction of entire interest paid, but for a self-occupied property, this will be restricted to Rs. 2 lakh only.

There are two differing views when it comes to deductibility of commission charged as % of rent collected from tenant. Few consider this as deductible from the amount of gross rent as it is in the nature of diversion of income.  But other few opinions that this should be part of 30% standard deduction and no separate deduction is admissible for it. So this should be evaluated in light of fact of each case based on the terms of agreement with the agency.

Claiming foreign tax credit under DTAA

If because of your residential status you are getting taxed on your global income you also become eligible to claim the credit of taxes paid on such income abroad. So you should check if you are eligible for claiming the foreign tax credit which is related to the taxes paid abroad where the property is situated. If you are eligible to avail the tax credit for paying the taxes under the relevant tax treaty provisions, you can further reduce your net tax liability in India.

As more and more Indians are trying to expand their horizon and invest outside India, it has become important for them to consider tax liabilities of such investment. With RBI coming forward and allowing HNIs to invest in properties abroad, people are getting a different opportunity to purchase properties overseas and thus diversify their interests. However, ignoring the tax implications on such foreign properties may lead to additional charges in the form of interest or even penalties.

Think about your investment plans in foreign countries wisely and include the rental income from such properties while filing tax returns, to avoid further complications.

Chetan Chandak
Chetan Chandak
Chetan is a Tax-Lawyer by profession and has been working with H&R block as Assistant Manager-Tax Advisory from last four years. He has more than 7 years’ experience in audit, taxation and finance fields. He specializes in personal taxation of HNIs and Top Management Executives. His major area of interest is tax litigation, tax research handling dual tax impact for ex-pat clients. He loves to travel, trek and cook.

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