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Under the Indian income tax (IT) laws, an owner is liable to pay taxes to the government, on the sale of their immovable property, based on the holding period and profit earned (known as capital gains). The same rule applies to property sale by non-resident Indians (NRIs). Discussed in detail are the tax implications on property sale by NRIs in India.
Holding period: Long-term vs short-term
A key determinant of the taxes that an NRI seller will have to pay on a realty transaction, is the holding period of the said property. The rate of tax on the capital gains is lower, if the holding period of the property is considered as long term, while the rate is higher for a property held for a short term. Under the revised rules in India, if a property is sold after two years from its acquisition, it would attract long-term capital gains (LTCG) tax. A property sold before that period would attract short-term capital gains (STCG) tax.
It is pertinent to note here that before changes in this regard were announced in Budget 2017, the holding period for a long-term asset was three years. It was reduced by a year in Budget 2017, to make sales and purchases more attractive for investors.
In case an NRI is selling an inherited property, the holding period would be calculated from the period when the original owner acquired the immovable asset. Also, if the property was inherited, the cost paid by the original owner to acquire the property would be used as the benchmark for calculating the tax liability.
TDS on property sold by NRI
With an aim to put a stop to tax evasion by NRI investors, the government has made buyers responsible for deducting various taxes on property purchases from NRI. This is done for the reason that the buyers, who are likely to be Indian residents, are easy to track in case of any wrongdoing. Tracking the NRI seller might become a difficult task, for various reasons.
If you are buying a property from a resident Indian, you are responsible for deducting 1% of the deal value as TDS (tax deducted at source), if the overall cost of the property is more than Rs 50 lakhs, and submitting it to the Income-Tax Department.
In case the seller is an NRI, the buyer has to deduct and submit to the authorities an amount that includes both, TDS and LTCG or STCG. Also, they have to do this even if the property is worth less than Rs 50 lakhs.
Capital gains tax for property sold by NRI
In case the transaction qualifies to attract long-term capital gains (LTCG), a tax rate of 20% will be applicable on the sale. Do note here that the NRI seller will have to pay 21% tax on the sale amount and not the profit money as LTCG. They have to undergo a lengthy process to claim refund.
If the transaction is considered as a STCG, 30% of the money earned as profit will have to be paid in taxes. If an NRI was to sell a property for Rs 1 crore that he bought for Rs 75 lakhs within one-and-a-half-years of its purchase, he will have to pay 30% or Rs 7.50 lakhs of the Rs 25-lakh profit, as STCG.
There is a common misconception that the tax rate in case of STCG would depend on the tax slab the NRI falls under, based on his total income in India. This is a wrongly held notion.
NRI income tax in India
An NRI’s income in India is taxed under various heads, including income from salary, income from house property, rental income, income from other sources, business income, etc.
Indian income tax slabs
|Taxable income slab||Standard rate||Optional rate applicable since FY20-21*|
|Rs 0-2.5 lakhs||Exempt||Exempt|
|Rs 2.50-5 lakhs||5%||5%|
|Rs 5-7.5 lakhs||20%||10%|
|Rs 7.5-10 lakhs||20%||15%|
|Rs 10-12.5 lakhs||30%||20%|
|Rs 12.5-15 lakhs||30%||25%|
|Rs 15 lakhs and above||30%||30%|
Note: The Budget 2020 introduced an option where the tax payer can pay lower taxes but cannot claim exemptions.
Tax benefits for NRIs selling property
While exemptions are available to NRI sellers under various sections of the IT law, they can claim rebates only on their LTCG liability.
Tax deduction under Section 54
The entire amount the NRI pays as LTCG could be claimed as refund under Section 54 of the Income Tax Act, if he invests an equal amount in the purchase of another property. Note that only the profits made by you have to be invested and not the entire sale proceeds. This investment must be made in a time-bound manner – one year before or two years after the sale of the previous property – to claim the benefit. In case you buy a land parcel using the profits and are planning to build a house, the construction must be completed within three years of the sale, to claim the rebate.
Note here that the exemption under this section is capped at the entire LTCG amount. Any excess money you put in your new investment will not get you any additional rebate.
Terms and conditions
- From the assessment year 2014-15, it was put forth that only one house property can be purchased or constructed from the capital gains, to claim exemption under Section 54.
- From the assessment year 2015-16, the government clarified that the new house property must be situated in India, for the NRI seller to claim the rebate. NRIs cannot invest the proceeds on the sale of a property in India, in a foreign property.
- The rebate would stand retracted if the new property is sold within three years of its purchase.
Tax deduction under Section 54EC
Under this section, if an NRI sells a long-term asset and invests the amount of capital gains in bonds of the NHAI and REC, within six months of the date of sale, they will be exempt from capital gains tax. The bonds will remain locked in for a period of three years.
Terms and conditions
- You cannot claim this investment under any other deduction.
- To claim this rebate, you will have to invest before the due date for filing the tax returns.
- The Budget 2013-14 has capped an upper limit of Rs 50 lakhs in a financial year, in these bonds.
Tax deduction under Section 54F
In case the NRI has generated long-term gains on any asset other than a residential property, they would be able to save taxes by investing in a residential property in India. This could be done by way of buying one house/property one year before or two years after the profit was generated. In case of construction, the NRI tax payer has three years’ time, after the date of transfer of the capital asset, to claim the deductions. The rebate would stand retracted if the house property is sold within three years of its purchase or construction.
Terms and conditions
- The entire sale proceeds and not just the profit amount must be invested. If only a part of the proceeds is invested, the tax liability would arise in proportion to the non-invested part.
- The NRI should not buy any property, except the one he has purchased. He also should not make any new purchases within two years of buying or three years of constructing the new house.
Is TDS of 1% under section 194IA applicable if the seller is an NRI?
TDS of 1% under section 194IA is not applicable if the seller is an NRI. TDS under section 194IA is only applicable for resident Indian sellers.
Under which section TDS is deducted on sale of property by NRIs?
TDS is deducted under section 195 on sale of property by NRIs.