Tax rules for NRIs (non-resident Indians) who are selling a property in India are different from the rules that are applicable to Indian sellers. In this edition of our NRI Knowledge Series, let us examine what would be tax liability of an NRI selling his property in India.
TDS – If NRI sells a property, the buyer of the property is liable to deduct TDS of 20% + cess + surcharge & if the house property is sold before 2 years TDS of 30% + cess + surcharge shall be applicable.
Capital Gains Tax – When any individual sells a property (either self acquired or inherited) then the difference between purchase price of property and the sale price of the property is considered as capital gains. If an NRI sell their property in India, they are required to pay Capital Gains tax like any resident Indian. But the tax rate that is applicable depends upon whether it’s a short term or a long term capital gain.
Short Term Capital Gain– If a property is held for less than 2 years then short term capital gain will be applicable. The Capital Gain tax rate applicable will be same as income tax slab rate in which the NRI falls.
Long Term Capital Gain– If a house is sold after a period of 2 years from the date it was purchased, then it is known as a long term capital gain and the applicable tax is 20%. In case of long term capital gains the NRI has a choice to pay the tax as 20% with indexation or 10% without taking indexation benefit.
Capital Gains Tax will have to be paid at the time of sale of property even if the property is inherited or have been received as a gift from either their parent or relatives or any other person.
Saving on Capital Gains Tax – Under Section 54 and Section 54EC of the Income Tax (I-T) Act, NRIs can save on LTCG tax if they invest in another property or capital gain bonds.
Tax exemption under Section 54 for NRIs (Residential): This is applicable only if the property is being sold after two years of purchase. It could be a self-occupied property or which has been purchased for investment purpose.
To avail of the benefits provided under this Section, it is not necessary that you invest all the sales proceeds into a new property. But, do note that you need to put in the amount corresponding to the tax implication into a new purchase. Exemption is limited to the total capital gain on sale. You are required to invest within six months from the date of sale of property to get the tax benefit.
If you are planning to use the proceeds in the construction of a new property, remember that the construction must be completed prior to three years of the sale of your property. You can invest the sales proceeds only in one property to claim the exception. Now this rule has been amended form the current financial year and a individual can invest the sale proceeds in one or two properties in India to save tax.
In case you sell the new property within three years of buying/constructing it using the sales proceeds, the tax benefits can be taken back from you.
Tax exemption under Section 54F for NRIs (Non-Residential)- Those planning to save taxes on the sale of a non-residential property have to follow specific rules to do that under this Section.
One residential property must be bought using the proceeds before one year of sale or within two years of sale. If you are planning to construct a new house, it must be a completed within three years of the sale. The property should be in India, and should be held for the next three years.
Unlike exemptions under Section 54, Section 54F mandates that you must invest your entire sales proceeds to be eligible for exemption. If part proceeds are invested, you will still be eligible for tax exemption, but only proportionately and not for the entire 20 per cent.
Tax exemption under Section 54EC for NRIs- If you are not investing the sale proceeds in a property, you can still be eligible for tax exemption. You could invest in bonds issued by government owned bodies such as the National Highway Authority of India (NHAI) and the Rural Electrification Corporation (REC) to avail of the exemption. You cannot sell these before the specified period of three years calculated from the date of sale of your property.
Mind here that if you choose this option, you cannot claim exemption under any other Section. You are allowed a period of six months from the date of sale to invest in these bonds. However, you must invest before filing your returns.
Capital Gains Account Scheme, 1988- What if you have failed to invest the capital gains and it is time to file the returns of the financial year? The Capital Gains Account Scheme( this a special saving account also commonly referred as capital gain tax account), 1988, lets you deposit your gains in a public-sector bank or other banks and you could claim this for an exemption without having to pay any tax on it.
Country of Residence-Another tax implication for NRIs will be tax in their country of residence or citizenship. Like any other income in India even capital gains might be taxable in the country in which NRI is a tax resident. India has a Double Taxation Avoidance Agreement (DTAA) with 88 countries which the NRI can take advantage of and avoid paying extra tax in their country of residence.
Other tips – Once you have planned on saving on tax, there could be three possible scenarios. One is where the capital gain is zero and in fact there is capital loss on property sale. In such a case, an NRI property seller must apply for NIL Tax Deduction Certificate in the Income Tax Assessing Office. Based on the assessments made by the I-T department, a certificate will be issued, and the buyer wouldn’t deduct TDS on sale consideration value. It is advisable that you go to an expert for help given that it is a time-taking job. Secondly, in case the capital gains tax payable is lower than the TDS payable, he could apply for the Lower tax deduction certificate. Third, you can apply for a Tax Exemption Certificate if you are reinvesting to save capital gain tax.
Hope this information is useful to those NRIs who are in the process of selling their property in India. This informative article is brought to you by Global Indian Solutions, the trusted partner to global Indians for managing their assets in India. If you need any help, do connect with our experts here.