Tax Implications On NRI When Selling Property

Tax rules for NRIs (non-resident Indians) selling property in India are different from the rules that are applicable to Indian sellers. Let us examine what would be tax liability of an NRI selling his property in India.

Capital gains

If you are selling your property in India within two years of purchasing it, you will be liable to pay short-term capital gains, depending on your income slab. If the property is sold after two years, an NRI has to pay long-term capital gains, at 20 per cent. In case of you are selling an inherited property, you will be liable to pay tax at 20 per cent only, unless the person you inherited the property from bought it within two years of its sale.

TDS

The buyer will have to deduct TDS (Tax Deducted at Source) at the rate of 20 per cent. However, if the property is being sold within two years of its purchase, the applicable rate would be 30 per cent.  

Saving on capital gains

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 one that is leased.

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 may choose to invest either a year before selling your property or after two years of the sale.

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. This property must be in India.

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 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 of 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, 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.

Other tips

Chartered accountant Nitin Bhatia says that 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 a CA for help given that it is a time-taking job. Secondly, if the NRI is willing to pay the capital gains tax in cases where the TDS payable is higher than the tax, he could apply for the Lower tax deduction certificate. Third, you can apply for a TaxExemption Certificate if you are reinvesting to save capital gain tax.