Taxation on the sale of Immovable Property for NRIs

The capital gains from the property which is sold by NRIs in India are liable to be taxed in India. The amount of tax that is to be paid on the sale of such property is dependent on the fact whether such a gain is a Short-Term Capital Gain or a Long-Term Capital Gain. If a property is sold after a period of two years from the date of purchase, it is classified as a long-term capital gain. If a property is sold within a period of two years from the date of purchase, it is classified as a short-term capital gain. The tax payable on the sale of the property is deducted at the time of making the sale in the form of TDS, i.e. Tax Deducted on Source.  The proceeds of the sale after the deduction of the TDS can be transferred to the NRO Account. 

Tax Payable on the sale of property by NRIs

Short-Term Capital Gains

If the property is sold after holding it for a period of less than 2 years, the rate of TDS deducted depends upon the income tax slab of the seller. 

Long-Term Capital Gains

The base rate for long-term capital is 20% for NRIs. This is applicable if the property is sold after a period of two years. In addition to the long-term capital gains tax, an additional surcharge along with health and education cess is also applicable on the sale value of the property. 

LTCG based on the value of the property
Property ValueLess than Rs 50 LakhRs 50 Lakh to Rs 1 CroreMore than Rs 1 Crore
LTCG Tax20%20%20%
Additional SurchargeNil10% of LTCG10% of LTCG
Health and Education Cess4% of LTCG4% of LTCG4% of LTCG
Effective Rate of TDS20.8%22.88%23.92%

Impact of Indexation on the Capital Gains Tax 

The property is often bought at a lower rate in cases where long-term capital gains are accrued. This means that the cost at which the property was originally purchased will not be the same as the cost at which the property will be purchased at the time of the sale. There is a cost-inflation index which is specified each year by the Government which allows the indexation of the price of the property to bring it in line with the existing rate of inflation. The capital gains tax would only apply to the gains made on a property after its indexed value has been determined. This can be understood via an illustration:

A property has been bought by A for a price of Rs 50 Lakhs in 2010. He sells the property to B for a price of 75 Lakhs in 2014. The indexed value of the property in the year 2014 comes out to be 72 Lakhs. Therefore, the Capital Gains Tax to be paid by A will be on the sale amount minus the sum of the purchase amount. As a result, the Capital Gains Tax would only be payable on the sum of Rs 3 Lakhs. 

Repatriation of the proceeds of the sale 

If an NRI wishes to repatriate the proceeds from the sale of immovable property other than agricultural land/farmhouse/plantation property, it is allowed provided the following conditions are fulfilled:

  • The acquisition of the immovable property by the seller was in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of FEMA Regulations.
  • The amount which is to be repatriated does not exceed:
    • The amount paid for the acquisition of the immovable property in foreign exchange received through normal banking channels or out of fund held in a foreign currency Non-Resident Account.
    • The foreign currency equivalent as on the date of payment, of the amount paid where such payment was made from the funds held in the Non-Resident External account for the acquisition of the property.
    • If the sale is of residential property, the repatriation of such sale proceeds is limited to two such properties in a Financial Year. 

If the sale is for an immovable property that is purchased out of Rupee funds, the repatriation of funds out of the balances which are held by NRIs in their NRO accounts can be allowed for a sum of up to US$ 1 million per financial year subject to production of undertaking by remitter and a certificate from the Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes. If an NRI wishes to repatriate an amount of more than US$ 1 million in a financial year, special permission from the same has to be sought by the RBI. 

In most cases, when funds are remitted abroad from India, tax is levied on such transactions. However, under Section 206C(1G) of the Foreign Exchange Management Act, TCS is not applicable on money remitted by NRIs from their NRO account to NRE/ foreign account. Therefore, no tax will be applied for the remittance of such funds abroad. 

Refund of TDS – Saving of Taxation on Capital Gains

The TDS levied on the sale of property by an NRI forms a significant portion of the proceeds of the sale. NRIs are allowed to claim exemptions from paying the Capital Gains Tax under Section 54, Section 54 F and Section 54 EC of the Income Tax Act.

Section 54

The exemption under this section is applied when a long term capital gain accrues from the sale of a house property which is owned by an NRI. In order to claim the benefit under this section, the amount of capital gains accrued on such sale is to be used for one of the two purposes:

  • Purchase of another residential house one year before or two years after the sale of the house.
  • Construction of a new residential house within three years after the sale of the house.

The amount of capital gain which is invested will be exempted from capital gain. 

For example, if the capital gains amount is Rs 10 Lakh and Rs 8 Lakh are invested in the new house, then tax will be charged only on Rs 2 Lakh. If the entire capital gains, i.e., 10 Lakh is invested in the new house, then no tax will be charged. 

Section 54 EC 

The other mode to save taxes on the sale of property is by investing the capital gains amount into the bonds issued by the following entities within a period of 6 months from the sale of the property:

  • Bonds issued by the National Highway Authority of India (NHAI)
  • Bonds issued by the Rural Electrification Corporation of India (REC)
  • Bonds issued by the Power Finance Corporation Ltd. (PFC) 

The amount of capital gains which is invested in such bonds will be exempt from tax. 

Section 54 F

This section provides that if an NRI makes a long-term capital gain on any investment other than a residential house property, if an NRI purchases a house property, within one year before the date of transfer or two years after the date of transfer or construct one house property within 3 years after the date of transfer of capital asset. In order to enjoy the benefit of this provision, the property so purchased should be situated in India and not be sold within a period of 3 years of its purchase or constriction. The exemption is allowed in proportion to the amount of the capital gains invested. 

Claiming a refund of the TDS deducted 

In order to claim a refund of the TDS which is deducted, an NRI has to file an income tax return in India. The tax liability of the NRI is computed and a refund is claimed for the excess of the TDS which is paid by the NRI during the financial year. The time-period for processing of the refund is usually 6% and may be longer in some cases. 

How can a full service law firm assist you with taxation on property?

  • The Taxation Lawyers, Chartered Accountants and Company Secretaries of the firm provide you advice regarding the sale of the property and re-investment of the proceeds. They will also suggest you the appropriate account and route for remittance of the finds abroad, if required. 
  • If you do not wish to travel to India for the sale of the property, you can assign the Power of Attorney to the property management team of the firm who would carry out the transactions on your behalf. 

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