NRI Tax Guide: NRE Transfers, Mutual Funds, and Property Sales

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As an NRI finance and cross-border taxation expert advisor, a common question people ask me is, How to get through the complex process of handling money internationally. In this blog, I shall be responding to three pressing questions that most NRIs face, varying from mutual fund taxation and account transfers to property transfers. Grasping these technicalities will help you make intelligent decisions and save a lot of money in taxes and charges.

NRE-to-NRE Transfers: Will They Attract Tax Notices?

Another general question on the minds of NRIs is whether moving large sums between individual NRE accounts would attract unwanted attention from tax authorities. Luckily, transferring funds between your own NRE accounts should not attract an income tax notice in India. Such transfers equate to the reallocation of your existing foreign-source funds and not new earnings generation. Since both accounts enjoy the same tax treatment in Indian taxation laws, such transfers are regarded by the Reserve Bank of India as well as tax authorities as merely a reshuffling of your assets, not as taxable transactions. But it’s important to make sure both accounts are correctly marked as NRE accounts and PAN-linked. Also, keep complete records of all transfers, particularly big ones. These should encompass SWIFT messages, bank statements, and confirmation of transfers. Fun fact: while the transfers are not taxed, your NRI status may still force you to file Indian tax returns if you possess taxable assets like property or other income in India!

Mutual Fund Investments through NRE Accounts: The Tax Reality

It is also a general belief among most NRIs that the investments made from tax-free NRE accounts also have the same tax-free status, but it is a myth that must be clarified. While your interest accrued and NRE account balances are tax-exempt in India, the investments from such accounts have entirely different tax consequences. When you invest in mutual funds as an NRI and then redeem them, after even five years, the capital gains would be taxed in India, regardless of which account you initially invested from. At redemption, the fund house will typically withhold Tax at Source (TDS). The rates depend on whether your investment is short-term or long-term capital gains. For equity-oriented funds held for more than one year, the rate would be 10% over gains of ₹1 lakh, and for debt funds, 20% after indexation benefit. Fun fact: You could be eligible to pay lower tax rates or be exempted with the Double Taxation Avoidance Agreement (DTAA) between India and your resident country. This can reduce your tax liability considerably, especially if you’re residing in countries like the UAE or Singapore!

Property Transactions: Capital Gains and TDS for Long-Term NRIs

Indian real estate transactions have complex tax effects for NRIs, especially capital gains tax and mandatory TDS requirements. In case you’ve been an NRI for over 12 years and are selling real estate property with investment intentions in another real estate property, here’s what you need to know:

First, capital gains tax: As an NRI selling Indian residential property, you’ll be taxed on capital gains. After owning the property for over 12 years, this is long-term capital gains, which are charged at 20% with indexation relief (which calculates your purchase price for inflation, reducing your tax liability). But you can exempt yourself from this tax under Section 54 of the Income Tax Act if you spend all the proceeds on a new residential property. You must either purchase the new property within one year of disposing of the old property (or construct within three years of its sale).

The most important key that most NRIs miss is for TDS: Even being Section 54 eligible for exemption, the buyer of property from an NRI must deduct TDS at 20% by law. This is as per Section 195 of the Income Tax Act and cannot be waived even with written plans to reinvest. Fun fact: You can choose a lower TDS certificate from the Income Tax Department by submitting Form 13 before the transaction, which might reduce the TDS rate from 20% to 1% or less based on your situation!

Cross-Border Finance Simplified

Grasping these nuances of NRI money management might allow you to make more informed choices and save tremendous amounts of money. The key points of these questions are:

Inter-NRE account transfers are tax-free transactions but are properly documented Investments from NRE accounts do not benefit from the tax-free status of the account Transactions in property require careful planning to address TDS requirements even for exemptions under capital gains

With changing laws and evolving personal circumstances, staying updated on cross-border taxation and financial management is essential for NRIs. Working with a trusted financial planner for NRI needs can help you make informed decisions and align your investments with both Indian and global regulations. Expert guidance ensures your wealth is managed efficiently, tax obligations are minimized, and compliance is maintained. Have questions about your personal financial situation? Contact us at office@primewealth.co.in or visit www.primewealth.co.in to schedule a customized consultation focused on optimizing your cross-border financial strategy.

FAQs

1. Are all transfers between NRI accounts tax-free in India?
   Ans- Transfers between your own NRE accounts are non-taxable events, but transfers from NRE to NRO accounts may have different implications.
2. Do I need to report NRE-to-NRE transfers in my Indian tax return?
   Ans- No specific reporting is required for these transfers as they’re not considered income, but maintaining documentation is advisable.
3. If I invest in ELSS mutual funds from my NRE account, are gains still taxable?
   Ans- Yes, ELSS funds follow the same capital gains tax rules as other equity-oriented mutual funds despite their tax-saving nature.
4. Can I avoid TDS on property sale by showing my reinvestment plans to the buyer?
   Ans- No, the buyer must deduct TDS regardless of your reinvestment plans; you can only claim refunds later or apply for lower TDS certificate.
5. How do I claim exemption under Section 54 for property reinvestment?
   Ans- File your tax return declaring the capital gains and claiming exemption by providing details of the new property purchase.
6. Are capital gains on property sales taxable in both India and my country of residence?
   Ans- Potentially yes, but DTAA provisions may provide relief; consult a cross-border tax specialist for your specific situation.
7. What happens if I don’t reinvest the entire proceeds from my property sale?
   Ans- The portion not reinvested will be subject to long-term capital gains tax at 20% with indexation benefits.
8. Can I claim indexation benefits on property purchased before I became an NRI?
   Ans- Yes, indexation benefits apply based on your holding period, regardless of when you acquired NRI status.
9. Is TDS applicable when transferring funds from my NRE account to a family member’s account in India?
   Ans- This would be considered a gift, not subject to TDS, but the recipient may have tax implications if the amount exceeds ₹50,000.
10. How often should NRIs review their investment and tax strategy?
    Ans- At least annually, or whenever there are significant changes in tax laws in either India or your country of residence.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.