US based NRIs: Don’t sell your Indian immovable properties fearing FATCA

There are disconcerting reports about the US based Non-resident Indians (NRIs) selling their immovable properties in India in panic.

 US based NRIs: Don’t sell your Indian immovable properties fearing FATCA

Don't rush, it's all good/ Reuters

Some are selling to their relatives in the sobering belief that the discount on account of distress sale would at least go to their kindred souls. The panic stems from Foreign Accounts Tax Compliance Act (FATCA) of the US pursuant to which India, as indeed other countries, is committed to furnishing all the information about Indian properties and Indian income of residents of the US.

There is however no need for panic because FATCA hasn’t altered the Indo-US Double Taxation Avoidance Agreement (DTAA). Indeed it couldn’t have. DTAA is sacrosanct. And the DTAA vide article 6 says if a resident of the USA holds any immovable property in India, income therefrom becomes amenable to taxation by the Indian government, period. Likewise, residents of India will have to pay tax in the US on income arising out of their investments in immovable properties in the USA.

Both India and the US tax their residents on their global or world income. Therefore in the absence of the above DTAA provision, the US based NRIs would have been obliged to cough up tax to the US government on both their rental income and capital gains emanating out of their immovable properties in India. But the DTAA has consciously overruled the normal provisions of the income tax law of both the countries.

FATCA hasn’t changed this position a wee bit. FATCA cannot overrule DTAA. Its object is to enable the US authorities to crack down on tax avoidance or evasion. Taking advantage of, or complying with, the DTAA is very much kosher. By no stretch of imagination can this be termed as tax evasion or avoidance.

In the event, the panic selling by US based NRIs of their Indian immovable properties, born of ignorance of the true import of the new-fangled FATCA, must stop. The panic was set off by the apprehension that the NRIs would be taxed by both the countries. The truth however is the US based NRIs will continue to pay tax in India alone on their income from Indian immovable properties. FATCA alas has unnecessarily fluttered their dovecotes. One could also suspect mischief by vested interests---spread misinformation and force them (NRIs) to make distress sales. Of course, those who sold out to their own kith and kin won’t regret as much as those who sold out to rank outsiders.

The Central Board of Direct Taxes (CBDT) would do sell to make a public announcement quelling all the doubts and misinformation in this regard. Mere clarification in its website will not do because this site is after all accessed once a year by and large---to file returns.

The Indian embassy in the USA and various consulates should swing into action to contain the panic selling and educate the NRIs about the true position of the law. Advertisements in the Indian media would also help immensely because the relatives back home would get to know the correct position and pass it on to their NRI brethren.

Panic selling means distress sale, and distress sale means less than optimum price. Not only that, capital gains have to be parked in tax shelters which do not yield attractive returns.

False alarm can trigger a chain effect, none of them palatable.

FATCA is US’ attempt to tighten the grip by the US authorities on US residents having properties and sources of income abroad. It is not India specific nor does it target Indian diaspora in the US alone. In any case, NRI investment in immovable properties in India isn’t targeted by FATCA.

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Updated Date: Dec 21, 2015 22:11:29 IST