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Why NRIs Prefer Under-Construction Properties: Tax & Benefits

CA Arun Tiwari , Last updated: 05 March 2024  
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Introduction

Non-Resident Indians (NRIs) have been drawn to under-construction properties for various reasons. These include the initial pricing incentives offered by builders and the potential tax benefits for smart investors. In this article, we will delve into the reasons why NRIs find under-construction properties so appealing. We'll explore the taxation aspects involved and provide insights on how NRIs can navigate the intricacies of dealing with properties that are still in the construction phase.

Benefits of Buying Under-Construction Property

When under-construction properties are launched, builders often offer attractive prices that are significantly lower than the market rate. This discounted pricing is intended to entice potential buyers and secure easy financing for the builder. For NRIs, this presents an opportunity for a favorable deal and the flexibility to make payments over one to three years. By not having to pay the entire amount upfront, NRIs can manage their investments more efficiently.

Why NRIs Prefer Under-Construction Properties: Tax and Benefits

Taxation Aspects of Under-Construction Property

The taxation considerations for under-construction properties primarily come into play when selling the property and reinvesting the proceeds. When selling a property and planning to reinvest in another under-construction property, NRIs can benefit from certain tax exemptions. By reinvesting the capital gains, they can claim deductions and potentially eliminate or minimize their capital gains tax liability. However, reinvestment must happen within a specific timeframe.

Capital Gain Account and Tax Planning

To facilitate the reinvestment process and take advantage of the tax benefits, NRIs should open a capital gain account. This account ensures that the funds from the property sale are held separately and can only be used for making payments to the builder. It is essential to keep in mind that the money cannot be used for any other purpose. Additionally, by maintaining a separate savings account within the capital gain account, NRIs can make periodic payments to the builder without any complications.

 

Selling Under-Construction Property

Tax Implications and Considerations: When selling an under-construction property, there are two scenarios to consider: selling before the property's completion and selling after the property is fully constructed and possession is granted. Selling before completion requires careful taxation planning, as the capital gains will be calculated based on the sale of rights rather than the completed property itself. It's important to note that a property cannot be sold until it has been officially completed and possession has been handed over. Selling before the three-year mark can result in the penalty of earlier tax benefits, and the capital gains tax liability must be paid. Therefore, it is advisable to assess the tax implications properly before deciding to sell an under-construction property.

 

Mistakes to Avoid and Precautions

One common mistake that buyers, including NRIs, make is avoiding property registration to avoid stamp duty and registration charges. However, this practice can be highly risky and leaves buyers unsafe to various issues. By not registering the property in their name, buyers relinquish their rights and protections. In case of builder bankruptcy or disputes, buyers may face significant financial losses. Proper documentation and legal processes are crucial to safeguard investments and secure property ownership.

Conclusion

Under-construction properties offer NRIs several advantages, including attractive pricing, flexible payment options, and potential tax benefits. However, it's essential to carefully assess the taxation implications before selling such properties prematurely. By considering the potential loss of earlier tax benefits and the limitations on reinvestment, NRIs can make informed decisions.

The author is a Chartered Accountant and former EY employee, serves as the Chief Consultant of the NRI Desk and Influencer Desk at AKT Associates. He specializes in offering consultancy services tailored for NRIs and is dedicated to creating educational content to raise awareness within the NRI community.


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CA Arun Tiwari
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