Tax On Property Sale In India For NRI
Buying and selling property is especially a lucrative option in India. Many, including NRI’s and PIO’s often choose to buy property in India as they know they will earn enough profits from their investments. The last few years have seen a new trend where several non-resident Indians living in North America and Europe have decided to sell their own properties or inherited assets as soon as they become citizens of these countries.
Though this trend hasn’t caught on or examined closely, it makes sense when you consider holding real estate in other countries and maintaining them is not easy, especially when you no longer live in the country. Moreover, if the PIO’s or NRI’s do not travel back to India frequently and like to rent out their properties, selling them off makes better business sense. Such owners would prefer to gain wealth in one go, rather than burdening their friends and relatives with things like paying property tax, society dues including maintenance, water tax etc.
Of course, selling owned properties either residential or commercial is not a big problem; however, what does create problems for NRI’s and PIO’s is the confusion over how the gains should be repatriated to the country they are living in currently.
Tax Implications of a Sale:
Any profits gained by sale of properties in India that falls under the Capital Gains tax, is governed by the Income Tax Act of 1961 u/s 195. There are two types of capital gains and they are short term and long terms capital gains.
When a residential propertyis sold within 2 years or less from the time it was purchased, the income earned is considered a short-term gain. (It was 3 years earlier but has been reduced in the budget for 2017.) Short-term capital gains are taxed at normal tax block rates.
When a residential property is sold 2 years and more after gaining ownership of the assets, the income falls under long-term capital gains.
TDS on long-term capital gain is 20 percent subject to a few terms while short-term gains are taxed at 30 percent irrespective of what tax slab the NRI or PIO falls under.
Calculation of Gains:
The capital income is tabulated as the variance between the value of sales and the indexed cost of the purchase. The indexed price of the acquisition is the cost of the purchase after adjusting price rise over the years. Calculating the indexed cost is not too difficult and can either be done online using several real estate websites or you can get your CA to check for the indexed cost. Short-term capital gain is counted as the variance between the selling price and the cost price of the asset without considering inflation. (indexation)
If the property is inherited, then you would have to consider the date and cost of the original purchase as well as the date and cost since you inherited the said property. To be exact, the sum of long-term capital gains along with the cost to the previous owner i.e. the person from whom you have inherited the property would be considered as the cost of purchase. PIO’s and NRI’s are liable to pay TDS (Tax Deducted at Source) of 20% on long-term capital gains. However, in some instances, an NRI can get a waiver of the TDS. They are
- if the NRI is preparing to re-invest the capital income from the sold property into another property or in tax free bonds, then the PIO or NRI will be excused from paying tax in India, and there will be no deduction of tax.
- If the NRI trades the assets before two years have from the date of acquisition, then he or she will be liable to pay tax as per the tax slab for short term capital gains.
- If the PIO or NRI trading their assets file an application to the Income Tax Department for a tax freedom certificate under section 195 of the Income Tax Act 1961. Their application must be in the same dominion as their PAN belongs to. The NRI is expected to produce evidence of reinvestment of capital income.If the NRI is preparing to purchase another residential property, then he or she must submit a copy of the house allotment letter or payment receipt. However, if tax free capital income bonds are chosen then the NRI must submit an affidavit confirming the purchase.
- Often, buyers can hold back the last portion of the payment till the NRI shows a certificate of tax exemption. An NRI or PIO can re-invest the capital gains in another asset within 2 years from the date of sale or invest in bonds within 180 days of the sale.
Under this section, if NRI trades his or her house after two years from the date of acquisition and reinvests the income in another housing property within two years from the date of sale, the revenue earned is excused to the amount of the cost of new property. For e.g. - if the capital income is Rs.15 lakhs and the new asset costs Rs.10 lakhs, then the residual Rs.5 lakhs are treated as long-term capital gains. The asset sold can be self-occupied or leased out. The new property must be held for at least two years before it is sold if required.
Exclusions to Sec 54
An NRI can’t use the income from the trade of the asset in India to buy a foreign property and still gain the advantage of Section 54. However, in a few recent cases, the appellate authorities have said that a tax exemption can be requested under Section 54 even if the new house is bought outside India. You are advised to consult a tax expert or CA before deciding to use the capital income to invest in properties outside India to avail the benefit/s 54 as it hasn’t been clearly specified under the Tax Act.
Capital Gain Account Scheme
If the PIO or NRI is unable to buy another property using the capital gains within 2 years of the original sale, then to get tax exemption the NRI or PIO can save the sum of capital income in a nationalized bank under the Capital Gain Account Scheme 1988 before the income-tax returns become due. However, this sum must be used to buy or build a new house within a specified period.
According to the section 54EC of the Income Tax Act 1961, an NRI can sell his or her long-term property especially a housing asset after 2 years from the date of acquisition and reinvest the sum of capital income in NHAI and REC bonds within 180 days from the date of sales, then the NRI or PIO shall be exempted from paying the capital gains tax. The bonds will remain locked in for a period of three years.
Tax exemption under the section 54F is available if the capital income is accrued after the sale of an asset that is not a residential property. To avail exemption u/s 54F, the PIO or NRI must buy a house property, within 365 days before the date of transfer or 24 months after the date of transfer or build a house within 36 months after the date of transfer of the capital asset. This new property must be in India and cannot be sold within 3 years of its acquisition or construction.
Moreover, an NRI can’t own more than one other residential property other than the new bought or constructed house. Also, the PIO or NRI must not buy another property within 24 months or build another house within 36 months. The whole sum received from the sale of the property must be reinvested to gain full tax exemption u/s 54F otherwise the tax exemption is proportionately allowed.