Tax rules when an Indian resident works abroad

My wife are United States citizens with Overseas Citizenship of India cards. We purchased one apartment in 2006 and another in 2009. We have plans to settle down in India eventually. We would like to sell our apartment we purchased in 2006.

1. Can you please explain briefly what is this capital gains tax and where does that apply?

2. If we sell this apartment in about two years after we settle down in India, are we eligible for any tax exemption?

3. If we use the money received from the sale of this property for doing interior work (maybe about Rs 5 million or $84,000) on the other apartment, will that help to reduce or avoid capital gains tax altogether?

— Lekshman

1. You will have earned long-term capital gains which is taxed at 20.6 percent. The gains are equal to your sale price less indexed cost of acquisition. This indexed cost is the ratio of the index of the financial years (April to March) during which you have sold and purchased the property. Unless the details of the dates of purchase and sale as well as the cost of acquisition and the targeted sale price is indicated by you, it is impossible to arrive at your tax liability. Fortunately, there are a few ways and means to save this tax.

2. Whether you sell the property now, as a Nonresident Indian, or after returning to India permanently, the tax liability will not change (as per the existing law).

3. No. All you will be doing is to increase the cost of acquisition of the property which gets renovated. However, there are other means available to save the tax on long-term capital gains.

My wife and I live in India. Our son lives in the US. He is in the process of selling his property and reinvesting the money into a bigger property. The sale of the old property is still being finalised while he has to make the down payment on the new property. He was wondering if we could provide him with short-term financial assistance till the sale of the old property is through.

I understand that the law allows Indian residents like us to send him up to $75,000 per year. But he is in need of more. Since I would have exhausted my limit, could I gift money to my wife and in turn have her use the same to send to our son under her own individual $75,000 limit. She would not use the full limit. He needs up to $100,000 and my wife would send him the balance $25,000. Is this workable? Will it be allowed or considered as circumventing the law to send foreign exchange to my son abroad.

— Venugopal

The limit under the Liberalized Remittance Scheme (that was earlier $200,000 and now brought down to $75,000) is applicable per person per financial year.

When you gift any asset (including any sum of money) to anyone including your wife, ipso facto, you end up transferring ownership of the asset from yourself to the donee. Therefore, once you gift the funds to your wife, the funds become hers to apply as she wishes to. If she wishes to use her limit under the LRS to send money to her son, she is perfectly within her rights to do so. There is no circumventing of the law here; it is a clever way of using the provisions of the law to your optimum advantage.

I am an NRI living in the United Kingdom. I have property in Pune, Maharashtra, that I wish to rent out. The prospective tenant has asked me to provide him with my Permanent Account Number and address in the UK. He tells me this is a legal requirement. Is this indeed a legal requirement and will there be any problem with providing this additional information?

— Alroy D’Souza

Your tenant must be an employee who gets a tax deduction on the rent paid. Providing the PAN and address of the landlord is indeed a new legal requirement. As per Circular No 08/2013 issued by the Central Board of Direct Taxes, India, if the annual rent paid by an employee exceeds Rs 100,000 ($1,700) per annum, it is mandatory for the employee to report PAN of the landlord to the employer.

In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.

As long as you are reporting the rent received and submitting the same to tax in India, there is no issue with providing this information. It is the tax authority itself that has allotted the PAN to you. So in a way, you are providing information to them that they already have. 

This requirement acts more as a deterrent to those employees who may misuse the tax deduction on rent by misrepresenting the fact that they indeed pay rent while in fact they might not be.

I am an environmental consultant and have recently got an assignment from the government of Mexico for which I would be paid in US dollars. I will be visiting Mexico often during the year. However, I will continue to be a Resident of India. Since I will be discharging my services abroad, I think there would neither be any income tax nor any service tax on the income earned from Mexico. Is this correct?

— P V Premnath

Income earned by a resident of India from whichever source is taxable in India. Since you continue to be a resident of India, even if the income is from services discharged abroad, the same will bet taxable in India. If you are paying any tax on the same in Mexico, you can deduct the same from your tax liability in India and pay only the balance.

As far as service tax is concerned, since the services are entirely offered abroad, there would be no service tax applicable under Export of Services rules.