Buy home abroad, save tax in India

[RRK]

written by Sandeep Shanbhag

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.

So far, so good. 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 in the case of Prema P Shah (Citation 282 ITR 211) has ruled that the exemption offered by Sec. 54 can indeed be extended to a property purchased in a foreign country.
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This judgment will have 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 claiming tax benefits in India.

read more:
http://www.dnaindia.com/report.asp?newsid=1118379

[sftrade]

this is sweet, it beats the US 1031 exchange rules

[layman]

I don't understand this line in the article. Can some one explain?
>>>>
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.
>>>>
The article started saying "If the capital gain amount is invested in a residential house within one year before to two years after.....". What is the definition of "residential house."? Does it include investment property? Isn't there a requirement to live in the house to qualify as a residential house? If a resident Indian buys a house abroad, he is buying it as investment. He will rent out the house. Is it still a residential house?

[dbs]

What is the definition of "residential house."?

A residential house is a house designed and build for residence in an area allowed for residential puposes by local authorities. Must have a kitchen, bathroom and another room.