Both residents and NRIs can benefit from the tax rules to this effect.

For long-term capital gains earned on sale of property, the tax rate is 20%. If the value is above Rs 10 lakh, the tax rate climbs to 22.66%. This applies both to residents as well as non-resident Indians (NRIs). Sec. 54 of the Income Tax Act offers a way out of paying such tax. If the capital gain amount is invested in a residential house within one year before to two years after the sale, then the capital gains earned are fully exempted from tax. In case the investor intends to construct a house, the time limit is extended to within three years of the date of sale. Of course, if only a part of the capital gain is used, the exemption would be proportional and the excess will be chargeable to tax.

Now comes the interesting part, especially for NRIs.
Nowhere does Sec. 54 specify that the new house purchased should be within India.
This means, to save capital gains earned in India, the NRI can even purchase a house in his or her own host country abroad and yet claim exemption. Why just NRIs, now even resident Indians can benefit from this rule. RBI allows an Indian resident up to $1,00,000 per annum to be invested abroad. Such investment could be even in property. So far, this was just a theoretical possibility based on a plain reading of the law. However, in a recent judgment, the Income Tax Tribunal has ruled that the exemption offered by Sec. 54 can indeed be extended to a property purchased in a foreign country.

It's not even necessary that the same amount of capital gains be used to buy the property. The assessee can very well buy the property even on mortgage (housing finance) -- as long as the conditions specified in Sec. 54 are satisfied, the exemption is available. This is because, even for properties bought using mortgage, the borrower instantly becomes the owner of the property. That he is paying his EMIs (mortgage) on the loan taken is an agreement between the lender and the borrower inter se. It has no bearing on the ownership of the property. In other words, as far as Sec. 54 is concerned, an investment has indeed been made in property. Whether it's through the mechanism of mortgage or otherwise is immaterial.

This has far reaching impact, especially on NRI investments and taxation. No one is born an NRI. Indian residents become NRIs when they go abroad for employment or business. More often than not, such persons own property in India, either the one they left behind when they went abroad and became NRIs, or one that is inherited. A number of such persons, who have set up a new life abroad definitely don't need a new property just to save on tax. Now, such persons can actually consider buying property abroad and claim tax benefits in India.


Source: dnaindia.com
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  • So if a NRI was to sell property in India and then transfer
    money to his/her home country and use this money to purchase
    a house in the home country then no tax is due on the money
    transffered.
    Then how do you get a tax clearance certificate in the
    first place to transfer the money.
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  • Is it possiable to buy primary residence in US and save tax in India

    We(me and my husband ) live in United States as PIO’s(Persons of Indian origin) holding US citizenship and in the process of getting dual citizenship.

    We purchased(Joint ownership ) residential land in Hyderabad, A.P. in 2001 with foreign funds. Since we do not own a house in the united states and India and want to sell the property and purchase a primary residence in USA with those sale proceedings.

    We would like to know how much of that sale proceedings to be repatriated without tax on captial gains, since we are buying a house for ourselves. There are some instances, got the RBI permission to do so without any tax obligation. We would like to to know how much money we can repatriate without capital gains tax to buy primary residence in USA within 12 months
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  • Hi Rashmi ,

    This rule applies to PIO's also . I really appreciated if you can get back to me

    Thank you,
    Savithri
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  • Hi Savithri,

    Going by the article that Rashmi has posted, the RBI allows an Indian resident or an NRI to repatriate up to $1,00,000 per annum for investment abroad,which includes investment in property.

    And in any case, as a non-resident Indian, you are entitled to repatriate the entire proceeds from the sale of your property in India, if the property was bought entirely from foreign funds! So go ahead and buy your new home in the US, but do check with your lawyer first!
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