Tax implications for NRI property sellers

Real estate is one of the preferred investment options in India for Non-Resident Indians (NRIs). Owning a residential or commercial property in a bustling metro city locality fetches attractive rental yields for a property owner. Further, there is scope for capital appreciation, which makes the investment more profitable. Besides, there are several tax benefits for an NRI investor, such as exemptions on principal repayment and interest paid on home loans under Sections 80C and 24 of the Income Tax Act. At the same time, there are tax implications if an NRI property owner plans to sell their house in India. In this guide, we discuss the various tax obligations of an NRI property seller and the applicable TDS.

Who is an NRI as per the Income Tax Act?

A non-resident individual (NRI) refers to an individual who is not a resident of India for taxation purposes. A person will be treated as a resident in India in any previous year if they were in India for a period of 182 days or more during the previous year or if they were in India for a 60-day period or more during the previous year and 365 days or more during four years immediately preceding the previous year. Any individual who does not fulfil these conditions is treated as a non-resident in the previous year.

Taxation on gains from the sale of property in India

To understand the tax aspects of selling property by an NRI in India, it is essential to consider whether the gains are short-term or long-term, which will determine the tax amount payable. When selling a property in India after holding it for over one year, the tax levied on the profits earned is known as long-term capital gains (LTCG). On the other hand, if one sells the property within a year of purchasing it, the tax levied is known as short-term capital gains (LTCG).

One should note that taxation also applies if the property is inherited. In the case of an inherited property, the date of purchase of the original owner must be considered when calculating the LTCG or STCG. The cost of the property will be the cost of the previous owner in this case.

How does the residential status of a person impact taxation on property sale?

It is crucial to understand that the tax implications of property transactions differ based on the person’s residential status. As per income tax laws, a tax rate of 20% is applicable on profits from property sales exceeding two years of ownership, with the additional indexation benefit. The short-term gains (properties held for two years or less) attract tax as per the applicable slab rates. In the case of resident sellers with property transactions exceeding Rs 50 lakh, buyers must deduct Tax Deducted at Source (TDS) at 1% from the sale consideration before paying the seller. On the other hand, for non-resident property sellers, buyers must deduct a higher TDS rate of 20% with applicable surcharge and cess of the sale consideration.

New income tax regulations for NRIs selling property in India   

According to the Union Budget 2024-25, the government has reduced the long-term capital gains tax (LTCG) rate on the sale of immovable property from 20% to 12.5% and the indexation benefit was withdrawn. However, after seeing the response to this announcement, the government offered two options for taxpayers. All individuals who purchased houses before July 23, 2024, were allowed to choose between the two tax rates of LTCG – 20% with indexation or 12.5% without indexation. The tax rate of 12.5% is applicable if the LTCG exceeds Rs 1,25,000. On the other hand, the tax rate for short-term capital gains will remain unchanged at 30%.

TDS on property sale by NRI in India

The TDS on the sale of property by NRI in India refers to a tax levied at the time of property transfer deducted by the buyer from the sale proceeds. The buyer is required to deposit the amount with the income tax department within the time prescribed and file deduction and payment details in Form 27Q. The TDS deducted will be based on the seller’s residential status.

According to Section 195 of the Income Tax Act, the TDS deduction has no minimum limit. The tax should be deducted from any payment made to the NRI property owner if it is taxable in India. The tax should be deducted at the time of payment or when the amount is credited to the payee’s account, whichever is earlier. However, TDS is not deducted if the payment is specifically exempt from tax under the Income Tax Act.

In the case of a property sale in India by NRI, the buyer can deduct TDS at 20%. However, if the property is sold before completion two years from the date of purchase, the buyer is allowed to deduct TDS at 30%.

What happens in case TDS is not deducted?

It could happen that the property buyer fails to deduct TDS or deducts the TDS at the applicable rate for residents instead of NRI. In such a case, the buyer will have to face legal consequences and pay a penalty equal to the TDS amount not deducted. The buyer will also be required to pay interest on the default amount. One should note that when incorrect TDS is deducted, the property seller is not allowed to repatriate the sale proceeds received to their foreign bank account or NRE account.

Furthermore, in case the transaction comes under the scrutiny of the Income Tax Department and it is proved that TDS was not deducted appropriately, the seller is likely to face prosecution for misrepresenting their tax residency status. Thus, it is crucial for the buyer to check the seller’s tax residency status before proceeding with a property transaction. In case the seller is a non-resident, they should deduct the TDS at the prescribed rates on each payment made to the seller. However, if the seller provides a nil/lower deduction certificate, the TDS must be deducted at the rate specified in the certificate. One can approach a tax expert to understand the TDS deduction to avoid any legal or financial issues when proceeding with the transaction.

Repatriation of sale proceeds by NRIs outside India

The NRI property seller is required to submit the Form 15CA and 15CB to repatriate the sale proceeds of a property with the authorised dealer bank. The Form 15CB should be duly signed and submitted by a chartered accountant. An NRI property seller can repatriate up to $1 million in a year outside India.

Tax exemptions for NRI property sellers

NRIs are eligible for tax exemptions on long-term capital gains from the sale of a house in India under Section 54 and Section 54EC of the Income Tax Act.

Exemption under Section 54

Tax is exempted on long-term capital gain on the sale of house property in India owned by an NRI by reinvesting in another residential property or constructing a property within the specified period. One should note that only the capital gains can be invested to claim the tax exemption.

Here are some important points to consider:

• A maximum LTCG of up to Rs 10 crore can be claimed as exempt under this Section.
• One may buy a new property that is at a higher price. However, the exemption is limited to the total capital gains earned.
• The NRI can purchase a new house one year before or two years after the sale. However, if they are investing the capital gains in constructing a property, it must be completed within three years from the sale date.
• Properties bought outside India are not eligible for this tax exemption. The new property should be located in India to claim this benefit.
• In case the new property is sold within three years, the exemption may be revoked.
• Only one residential property can be bought or constructed using the capital gains to avail the tax exemption.
• In case the NRI cannot invest the capital gains by the tax return filing date (usually July 31^st of the financial year), they can deposit the gains in a Public Sector Bank (PSU bank) or designated banks under the Capital Gains Account Scheme, 1988. Tax exemption from capital gains can be claimed on this amount, deferring immediate tax liability.

Exemption under Section 54F

According to Section 54F of the Income Tax Act, NRI property sellers are allowed to claim tax exemption on long-term capital gain from selling any capital asset except a residential property. The NRI can claim the exemption by buying a residential property within one year before the transfer date or two years after the transfer date. Alternatively, they can construct a residential property within three years after the transfer.

The new house should be situated in India and must not be sold within three years of its purchase or construction. Another important consideration is that the NRI must not own more than one residential property besides the new house and should not buy or construct any other residential property within two or three years, respectively.

One crucial point to note here is that the entire sale proceeds should be invested for the capital gains to be fully exempted. Otherwise, the tax exemption is allowed proportionately, depending on the investment made.

Exemption under Section 54 EC

NRIs can save tax on LTCG by investing the amount in certain bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) that are allowed for this purpose. These bonds are redeemable after five years and should not be sold before the completion of five years from the date of sale of the house property. The individual is provided six months to invest in these bonds, but they must invest before the return filing date to claim the tax exemption.

How to file TDS on sale of property by NRIs?

• Verify TDS: Check the transaction value to find out if TDS is applicable. The buyer must deduct TDS in property sales by NRIs.
• Calculate TDS: Calculate the TDS to be deducted, which is usually 20% of the total sale value.
• Get TAN: The buyer should obtain the Tax Deduction and Collection Account Number (TAN) by submitting Form 49B to the Income Tax Department.
• Pay TDS amount: The buyer should deposit the TDS by the specified due date, online, or at authorised banks.
• File TDS return: File the TDS return (Form 26QB) within the specified due date by including details of the property buyer, seller, property, transaction value and TDS amount deducted.
• Get TDS certificate: Submit the TDS certificate (Form 16B) to the NRI property seller within 15 days from the return filing due date.

Housing.com News Viewpoint

NRI property owners planning to sell their property in India must be aware of the various tax implications, including the exemptions allowed, so that they can plan their finances better. While the property buyer is responsible for deducting TDS, the seller, on their part, should ensure they disclose complete details, including their residency status to avoid penalties or legal consequences. One can consult a tax expert for more information.

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