Many Indians working abroad invest in property back home, often through home loans. As NRIs, they can claim tax deductions on loan repayments just like resident Indians. However, the income tax benefits and regulations available to NRIs differ significantly from those available to resident Indians.
In this guide, we will discuss more about the various provisions, rules, and regulations applicable to NRI real estate investors and their taxation.
Eligibility Criteria for Tax Deductions
Any NRI residing in India can benefit from several tax deductions under the Income Tax Act of 1961. However, they must meet certain conditions to be eligible for these deductions.
Who Can Claim Tax Deductions?
NRIs who earn taxable income in India—such as rental income or capital gains from property—can claim various tax deductions. These deductions apply only to income that arises, accrues or is received in India.
Simply owning a property without generating income from it does not make an NRI eligible for tax deductions unless a home loan is involved.
To avail of these deductions—such as interest on home loans (Section 24b), principal repayment (Section 80C), and others—NRIs must file an income tax return (ITR) in India for the relevant financial year. Filing the ITR enables the Income Tax Department to process and allow these claims appropriately.
NRIs’ Earnings in India vs. Abroad
Although NRIs earning taxable income in India are eligible to pay tax and claim deductions, the same does not apply to those who earn income from abroad. This category includes foreign salary, dividends, or business income that does not qualify for Indian tax deductions.
Types of Properties Eligible for Tax Benefits
The classification of property in India plays a key role in determining the kind of tax relief available for NRIs. Residential property, either self-occupied or rented out, qualifies for multiple deductions. Conversely, commercial property is treated differently under tax laws and is usually subject to standard income tax without the benefit of many deductions.
Read Also: Unique Tax Benefits for NRIs
Interest Deductions Under Section 24(b)
Section 24(b) of the Income Tax Act, 1961 offers a significant tax benefit to NRIs who have purchased property in India through a home loan. This section especially allows for a deduction on the interest paid on housing loans.
NRIs are eligible for tax deduction under section 25(b) in case of the following conditions:
- Self-Occupied Property: Deduction at ₹2 lakh per year.
- Let-Out Property: Full interest is paid to be claimed as a deduction without a limit.
- Joint Ownership Benefits: If the property is co-owned, both owners can claim a deduction individually.
Note: Loss from house property exceeding ₹2 lakh is to be carried forward for up to 8 years.
NRIs can claim a deduction of up to ₹2 lakh per financial year on interest paid for a home loan if the property is self-occupied. There’s no upper limit on interest if the property is let out, but the actual rent received must be reported.
The loan must be taken for the purchase, construction, repair, renewal, or reconstruction of a property.
Impact on Taxable Income
The interest paid on the home loan is deducted directly from the gross annual income under “Income from House Property,” thereby reducing the total taxable income. This is especially beneficial for NRIs earning rental income from Indian properties.
By lowering the taxable income through interest deduction, NRIs can fall into a lower tax bracket or reduce the total tax payable.
In the case of a let-out property, the interest deduction can even result in a loss under house property, which can be adjusted against other income to reduce total tax liability.
Read Also: How Interest Rate Impacts High-Value Real Estate Investments for NRI
Principal Repayment Benefits Under Section 80C
Deduction on home loan principal is allowed for NRIs who can repay the loan taken for purchasing or constructing residential house property. The deduction is also allowed for registration fees, stamp duty, and other expenses to transfer such property to an NRI.
NRIs can claim a maximum deduction of ₹1.5 lakh under Section 80C for eligible investments and expenses, such as principal repayment on a home loan, life insurance premiums, and ELSS funds.
The deduction is available only if the home loan principal is repaid during the financial year and the property is not sold within five years of possession; the benefit is reversed.
Additional Benefits Under Different Sections
NRIs in India can also claim all the deductions available to a resident parent’s insurance deductions from income from house property in India. They are also allowed to claim deductions towards property tax paid and interest on home loans.
- Section 80D: NRIs can claim deductions up to ₹25,000 for health insurance premiums paid for self, spouse, and dependent children and an additional ₹25,000 for parents under 60 years.
- Section 80E: Interest paid on education loans for higher studies (self, spouse, or children) is fully deductible without any cap for up to 8 years.
- Section 80G: Donations made to specified charitable institutions or relief funds are eligible for a deduction of 50% or 100%, depending on the institution.
- Section 80TTA: NRIs can claim a deduction of up to ₹10,000 on interest earned from savings accounts held with banks, post offices, or cooperative societies in India.
Steps to Claim Deductions While Filing Tax Returns
NRIs residing in India and investing in the real estate sector must be aware of the steps to claim deductions when filing returns. These include:
- Confirm your NRI status under Indian tax laws to identify which deductions you’re eligible for.
- Gather documents like home loan certificates, TDS certificates, and property tax receipts.
- NRIs with property income must file an ITR-2 to claim real estate-related deductions.
- Disclose rental income or deemed rent and claim municipal taxes and standard deduction.
- Apply eligible deductions like ₹1.5 lakh under Section 80C and ₹2 lakh under Section 24(b).
- Mention any tax already deducted at the source by tenants or banks to avoid double taxation.
- Use Aadhaar OTP or net banking for e-verification after submission to complete the filing.
- Retain all supporting documents in case of a future income tax notice or audit.
Final Thoughts
If you are an NRI earning taxable income in India, you can significantly reduce your tax liability by taking advantage of various tax exemptions and deductions. The key is to choose the right tax-saving investments that align with your financial goals.
With strategic planning, you can not only benefit from available tax deductions but also optimise savings on home loans, if applicable.
At Rustomjee, we offer a curated selection of premium residential properties, helping you secure your future while making the most of your tax-saving opportunities. Explore our projects and start planning today.
FAQs
- Can NRIs claim tax benefits if they purchase property in joint ownership with a resident Indian?
Yes, NRIs can claim tax benefits on a jointly owned property, provided both co-owners are contributing towards the home loan and have their names on the loan agreement.
Each co-owner can individually claim deductions on the interest (under Section 24(b)) and principal repayment (under Section 80C) based on their share in the property and repayment contribution.
- Is there any limit on the number of properties an NRI can invest in to claim tax benefits in India?
There is no restriction on the number of properties an NRI can invest in. However, tax benefits such as interest deductions and principal repayments are subject to limits under various sections of the Income Tax Act.
While interest on let-out properties is fully deductible, only one self-occupied property can be considered “self-occupied” for tax purposes. Hence, others are deemed let-out and taxed accordingly.
- What happens to the tax deductions if the NRI sells the property within 5 years of purchase?
If an NRI sells the property within 5 years of possession, the previously claimed deductions on principal repayment under Section 80C are reversed. The total amount deducted in earlier years gets added back to the NRI’s income in the year of sale and becomes taxable. However, the deductions on interest payments under Section 24(b) are not reversed.
