533. US Citizen investing in NHAI -

REC bonds to save long term capital

gains in India

Question: Dear Sir, My close relative who is a NRI having a U.S. passport has inherited a property in India. He has sold it and wants to invest in NHAI or REC bond to save capital gains. After the lock in period of three years will be able to repatriate the amount to U.S.? He has an NRO account in City Bank India. I shall be thankful for your reply. Narayanan C.R Answer: Transfer from NRO account of money that is from the sale of property in India, can be done subject to a certificate from a chartered accountant, certifying that applicable taxes if any, have been paid and the source of the funds being transferred are indeed from the sale of property in India. While capital gains tax can be saved by investing in Rural Electrification Corporation Limited (REC) & National Highways Authority of India (NHAI), your relative, as he is a US citizen, will have to declare the capital gains on his US tax returns and pay any US taxes that apply on the capital gain in India. While USA and India Double Tax Avoidance Agreement allows credit for taxes paid in India when filling tax returns in USA, consider this: 1. When property is sold in India that results in a capital gain, the tax becomes due in your next tax filling date. 2. While tax can be exempted in India if the capital gains are invested in bonds such as NHAI or REC, it does not necessarily mean that they are also exempt in USA 3. If capital gains are made in India and the 20% tax paid, then the 20% paid can be claimed as a credit when filling US taxes and declaring the capital gains from the sale of property in India. However if no tax is paid in India by taking advantage of the bond investment route, then full tax amount payable on the actual capital gains on the year of sale may come into play for US taxes. This is something that your relative should seek clarification on, from a US tax consultant or the IRS. When large sums of money are involved, seeking professional advice from the appropriate professionals can save you a lot of money and help keep you in compliance of the tax laws not only of India but also the United States.