There is a fair amount of confusion about the tax implications for NRIs who want to sell any property they may have in India. This article explores how much tax liability will arise in India and how TDS will be deductible in this case.
How are Gains from the Sale of Property in India Taxed to NRI?
NRIs who sell a house in India are required to pay capital gains tax. The amount of tax payable depends on whether the gains are short-term capital gain (STCG) or long-term capital gain (LTCG).
LTCG: When a property is sold after holding it for more than two years, the gains arising from such property will be treated as LTCG.
STCG: Whereas in a case where a property is sold within two years of acquiring it - the gains arising on such property will be treated as STCG.
If property is inherited, tax implications will also arise. In that case, you should remember to consider the date of purchase of the original owner when calculating whether it’s an LTCG or STCG. In such a case, the cost of the property shall be the cost to the previous owner.
How much Tax will be Payable?
LTCG is taxed at 12.5%, and STCG is taxed at the applicable income tax slab rates for NRIs based on the total income taxable in India for NRIs.
Note: As per Budget 2024, the indexation benefit will not be available on the acquisition cost for NRI for any capital asset from FY 2024-25.
How to Save Tax on Capital Gains
NRIs can also claim exemptions under Section 54 and Section 54EC on long-term capital gains from the sale of house property in India.
Exemption under Section 54
This exemption is available when there is a long-term capital gain on the sale of house property of the NRI. To avail yourself of this exemption, you must invest in house property in India. Please note – you do not have to invest the entire sale proceeds; only by investing up to the amount of capital gains could the whole capital gains be claimed as exempt. Of course, your purchase price of the new property may be higher than the amount of capital gains. However, your exemption shall be limited to the total capital gain on sale.
Also, you can purchase this property either one year before the sale or two years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within three years from the date of sale.
This new house property must be situated in India. The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. (Remember that this exemption can be withdrawn if you sell this new property within three years of its purchase). The maximum LTCG claimed as exempt under this Section shall be Rs 10 crores.
Suppose you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the next financial year in which you have sold your property. In that case, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. In your return, claim this as an exemption from your capital gains; you don’t have to pay tax on it and will utilise the same amount for the investment in the future.
Exemption under Section 54 EC
You can save taxes on your LTCG by investing them in certain bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC), which have been specified for this purpose. These bonds are redeemable after five years and must not be sold before the completion of 5 years from the date of sale of the house property.
Note that you cannot claim this investment under any other deduction. You are allowed six months to invest in these bonds – though to claim this exemption, you must invest before the return filing date.
Budget 2014 specified that you are allowed to invest a maximum of Rs 50 lakhs in these bonds in a financial year.
Exemption under section 54F
The benefit of this exemption is available when there is a LTCG on the sale of any capital asset other than a residential house property. To claim this exemption, the NRI has to purchase one house property within one year before or two years after the date of transfer or construct one house property within three years after the date of transfer. This new house property must be situated in India and should not be sold within three years of its purchase or construction.
Also, the NRI should not own more than one house property (besides the new house), nor should the NRI purchase or construct any other residential house within two years or three years.
Here, the entire sale proceeds must be invested. If the entire sale proceeds are invested, then the capital gains are fully exempt; otherwise, the exemption is allowed proportionately.
The benefit of depositing money under CGAS is also available under this section.
TDS Deductible
When an NRI sells property in India, the buyer is liable to deduct TDS @ 20%. If the property is sold before completion of 2 years from the date of purchase, the buyer is liable to deduct TDS @ 30%.
How to Deduct TDS Amount?
The property buyer is responsible for deducting the TDS amount from the sale proceeds while transferring the sale proceeds to the NRI seller. The property buyer should obtain a TAN (Tax Deduction Account Number) in his/her name to deduct TDS. If two or more persons purchase the property jointly and invest money from their own sources or through joint loans, all the persons must obtain TAN. The buyer must deduct TDS once the TAN is obtained on every occasion of making payment to the NRI seller.
The buyer must deposit the deducted TDS amount with the Income Tax Department through e-challan by the 7th day of the next month, on which the payment was made to the seller. The buyer should file the TDS return in the next quarter of depositing the TDS amount. After the TDS return is filed, the buyer can download Form 16A and provide it to the NRI seller.
How to Save on TDS Deduction?
The buyer has to deduct TDS before transferring the sale proceeds to the NRI seller at the rates mentioned above. However, the NRI seller can obtain the NIL/lower deduction certificate from the Income Tax Department. If a certificate is granted by the department, the buyer will deduct the TDS at the lower rate prescribed in the NIL/lower deduction certificate.
The NRI seller can apply for a NIL/lower deduction certificate to the Income Tax Department when the TDS is more than the seller’s tax liability. However, the seller must obtain the NIL/lower deduction certificate before executing the property sale agreement. The assessing officer will determine the TDS after calculating the capital gains. The seller can also claim a refund on the TDS deducted when the TDS is more than the tax liability when he/she has not obtained the NIL/lower deduction certificate.
Consequences of Not Deducting TDS
Sometimes, the buyer may deduct the TDS at the rate applicable to residents instead of NRI or may not deduct TDS for some reason. In such cases, the buyer will have to face adverse consequences. The buyer is legally responsible for deducting and depositing the TDS as per the prescribed TDS rate for the NRI seller or the prescribed rate in the NIL/lower deduction certificate issued by the Income Tax Department.
When the buyer does not deduct the TDS as per the prescribed rates, he/she is liable for a penalty equal to the amount of TDS not deducted. The buyer is also liable to pay interest on the amount of default. Plus, when TDS is not deducted correctly, the seller cannot repatriate the sale consideration amount or sale proceeds received to his/her foreign bank account/NRE account.
Repatriation of Sale Proceeds by NRI outside India
The NRI seller must submit Form 15CA and 15CB to repatriate the sale proceeds of a property with the authorised dealer bank. The Form 15CB must be signed and submitted by a chartered accountant. An NRI seller can repatriate up to USD 1 million in a year outside India.
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