Worried about taxation on your property sale in India?

As a Non Resident Indian, NRIs have typically two different countries to pay taxes into, unless the resident country comes under the DTAA of India, in which case, NRIs just have to pay taxes in one country. But paying taxes is an unmanageable task especially when you have to pay the tax in your home country, India.

In India, tax rules for NRIs are quite different from those being applied to the residents of India especially when they sell their property in India. If an NRI sells a property in India after holding it for a period of more than 2 years or more, then according to the laws, long-term capital gains tax of 22.66% is applicable.

However, NRIs can save TDS by applying for a lower TDS certificate from the banks in advance. Other ways in which NRIs can save their taxes on the long-term capital gains is through claiming deduction under various sections of the Income Tax Act, 1961. Here are some ways in which you can save tax on property transactions in India:

1. Invest in Bonds

Under section 54EC, NRIs can invest in bonds to save taxes on long-term capital gains. If you already possess a house and do not want to purchase another one, investing in bonds is a good choice. Some of the important points for subscription to such bonds are:

• Resident Individuals, Hindu Undivided Families, Non-resident Indians, and approved institutions can invest in these bonds.
• The amount has to be invested in the capital gains bonds within six months of the transfer of assets or before filing the returns, whichever is earlier.
• Rural Electrification Corporation and National Highways Authority of India issue these bonds.
• The minimum and the maximum investment allowed during a financial year is Rs. 10,000 and Rs. 50 lakhs respectively. The tenure is three years.
• They cannot be transferred to another person’s name.
• The exemption available is; lower of the capital gain or the investment amount.
• There is no TDS on the interest paid. However, the interest earned is taxable and the tax has to be paid on the interest income as advance tax.

2. Invest in new property

Under section 54/54F, NRIs can either purchase or construct a new house to save taxes on capital gains, which arises from selling a house property or a residential property. Some of the important points to know under this option are:

• The benefit is available to an individual or HUF.
• The new property has to be bought within two years after the sale/transfer of the
• Old house or one year before the sale/transfer of the old house.
• If you are planning to build a new house, the construction has to be completed within three years from the sale of the property. The cost of land is included in the construction cost when you buy a plot to build the house.
• Buying an under-construction property is also eligible for tax deduction provided the construction is completed within three years of the transfer of the old property.
• The deduction allowed is; lower of the capital gain or the actual investment.
• If you sell the newly acquired property within three years of construction or purchase, the deduction will be reversed, and short-term capital gain tax would be applicable.
• If more than one house is purchased or constructed, the exemption is available for only one property under section 54.
• There is no exemption available if the house is purchased outside India.

2. Invest in Start Ups

Under section 54EE/54GB, NRIs can save their taxes by investing start-ups. You may choose to invest in funds-of-funds under section 54EE/54GB, which will, in turn, invest in start-ups. However, investing in such funds comes with the below-mentioned conditions:

• The maximum amount that can be invested is Rs. 50 lakhs.
• There is a lock-in of three years.
• The tax benefit will be reversed in case of premature withdrawal. You can also directly choose to invest in an eligible start-up and avail tax exemption under section 54GB. The predefined conditions under this option are:
• The individual should be the majority shareholder in the start-up or hold more than 50% shares in the start-up.
• The amount shall be utilized by the start-up for the purchase of new assets before the due date for filing tax returns.

4. Invest in Capital Gains Account Scheme

If you want to buy the property at a later stage and save tax on your capital gain, this is the option you can opt for. You can deposit your capital gains under Capital Gain Account Scheme in any of your public sector bank accounts; this will serve to inform your taxman that you are not planning to buy a property now, but at a later stage.

Some of the important points for subscription under this scheme are:

• The benefit is available only to an individual or HUF.
• The amount has to be deposited before filing your tax returns in the same year in which the sales are made.
• The deposited money can only be used in the purchase of a new house or construction of a new house within the specified time frame.
• If the amount deposited in the Capital Gain Account Scheme is not utilized for purchasing or constructing a new house with the specified time frame, the unutilized amount shall be taxed as income by way of long-term capital gains once the specified time frame gets over.
• The specified time frame could be two or three years.

Tax planning is a very essential part of financial planning. Therefore, evaluating tax implication on capital gains and choosing the right option will certainly help you reduce the tax burden.

For any help in regards to tax planning for Capital Gains, get in touch with us and we would be more than happy to help you out.