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Tax on sale of property by NRI in India

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Laxmi Navlani

Income Tax for NRI
Tax on sale of property by NRI

Tax and regulations relating to the selling of house property in India are different for NRIs from that of an Indian resident. Sale of property by NRI is a transaction which attracts tax on the Capital Gains, tax deduction at source and other rules.

Tax on Capital Gains from Sale of Property by NRI

NRIs have to pay taxes on the capital gains made from selling house property. Tax to be paid depends upon the holding period of the property. If they sell their property within two years of its date of purchase, short-term rates are applicable. However, if they sell it after two years, long-Term Capital Gains taxes become applicable. 

The short term rate is as per the applicable income tax slab rate of the NRI based on his taxable income in India. However, Long term gains are taxable at the rate of 20%.

If an NRI has inherited property, the cost and date of its purchase of property for the previous owner becomes the basis for the calculation of capital gains taxes for NRI.
Tip
If an NRI has inherited property, the cost and date of its purchase of property for the previous owner becomes the basis for the calculation of capital gains taxes for NRI.

Example

Suppose, Mr Y bought a property for INR 1 crore in 2010-11 which was later sold in 2019-20 for INR 2 crore. Capital gain will be calculated as follows:

Particulars Amount
Take full value of Consideration 3,00,00,000
Less:​

Index* Cost of Acquisition.
Index* Cost of Improvement.


(1,73,00,000)
​(0)
Less: exemption under section 54, 54EC, 54F, 54B (0)
Long Term Capital Gain 1,27,00,000

Since, Mr Y had held the property for more than 2 years, we will consider it as a long term asset. Also, he needs to adjust the cost of purchase using indexation to adjust inflation effect. The inflation-adjusted cost of the property is calculated by using below formula:

Cost of acquisition x (Cost Inflation Index in the year of sale / Cost Inflation Index in the year of acquisition)

*In this case, it is INR 1 crore​​*Index Cost of Acquisition is INR 1 crore​​*(289/167) which works out to about INR 1.73 crore

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TDS on Sale of Property

Any individual/HUF buying an immovable property worth INR 50 lakhs or more needs to deduct TDS. If seller is a resident, TDS is applicable as per section 194IA of the Income Tax Act i.e at the rate of 1% from the sale consideration paid to resident seller. However in case seller is a non-resident, then, the TDS rates of 30 per cent become applicable. But if the property is sold after two years, LTCG TDS rates at the rate of 20% become applicable.

Moreover, there is applicability of surcharge as well as education & health cess that varies based on the gains from the property. 

Surcharge Slab if taxable income

Rate

INR 50,00,000 to INR 1,00,00,000

10%

Above INR 1,00,00,000

15%

Health & Education Cess

4% on total of income tax+surcharge

So we can conclude that following are effective rates of TDS in case of Long Term Capital Gains (LTCG) on property sold by NRI Individual/HUF :

Particulars LTCG is less than INR 50 Lakhs LTC Gain is from INR 50 Lakhs to INR 1 Cr LTCG is more than INR 1 Cr
Capital Gain Tax Rate 20% 20 % 20%
Add: Surcharge NIL 10% of the above tax rate 15% of the above tax rate
Total Tax Rate 20% 22% 23%
Add: Health & Education Cess (w.e.f. 01/04/2018) 4% of the total tax rate 4 % of the total tax rate 4% of the total tax rate

Effective TDS Rate 20.8% 22.88% 23.92%

In similar manner, effective rates of TDS in case of STCG on property can be calculated at 30%

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Tax Saving on Capital Gains from Sale of Property by NRI

The Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. The intention of the exemption is to allow the taxpayer to invest in a new capital asset within a specified time limit without any tax burden.

The NRI must make these investments and show relevant proofs to the Buyer – to make sure TDS is not deducted on the capital gains.

NRIs are allowed to claim capital gains exemptions under section the below mentioned sections of LTCG from sale of house property in India.

Section Description Applicability Deduction Amount
Section 54 Sale of House Property (LTCA) by Individual/HUF Purchase/Construction of New House Property. Lower of
Cost of New House Property
OR
Capital Gains
Purchased 1 year before or 2 years after the sale of a property.
Constructed within 3 years from the sale of a property.
Section 54EC Sale of Land or Building or both (LTCA) by any taxpayer Investment in NHAI/REC Bonds.  Lower of
Cost of Investment 
OR
Capital Gains
An investment made within 6 months from the sale of an asset. 
The investment amount can not be more than INR 50 lakhs. 
Section 54E, 54EA, 54EB Sale of any LTCA by any taxpayer Investment in Specified Securities.  Cost of new asset * Capital Gains / Net Consideration
Specified securities include Government Securities, Savings Certificates, Units of UTI,  Specified Debentures, etc. 
An investment made within 6 months from the sale of an asset. 
54EE Sale of any LTCA by any taxpayer Investment in units of a specified fund. The investment amount can not be more than INR 50 lakhs.  Cost of new asset * Capital Gains / Net Consideration
Specified fund include units notified by the central government 
An investment made within 6 months from the sale of an asset.

 

Double Taxation on Income Earned by NRIs

When a person is residing in one country and earning income in some other country he might need to pay taxes in both the countries.
However, some countries provide partial or total exemption on income earned from other countries. It totally depends upon the agreement between two countries which is called DTAA (Double Taxation Avoidance Agreement). So, it is important to be aware of incumbent rules in country of residence and whether it has a tax avoidance agreement with India. 

For example, Mr. Arjun is an Indian residing in the UK. He is an NRI and has earned LTCG in India on sale of property. Now, this Income can be taxable in both India and the UK. But because of DTAA, Mr. Arjun will not be taxed in both countries for the same income.

However, if Arjun does not pay any taxes in India because of reinvesting capital gains (using above-mentioned options), he will be liable to pay the taxes in the UK.

FAQS

Can NRIs sell their agricultural land?

NRIs cannot sell their agricultural land, plantation property or farmhouse to another NRI or Person of Indian Origin (PIO). However, residential or commercial property can be sold to a person residing in India, another NRI or a PIO. 

How can NRI receive sales proceeds?

NRIs will receive the sales proceeds, net of TDS. 
The sales proceeds can be received only in an FCNR or NRE/NRO bank account.

What are the documents required as proof of investment while claiming exemption?

While filing ITR, taxpayer only needs to enter the exemption section, required details of purchased asset and amount of exemption claimed. However, it is important to keep the purchased assets documents on record for future use.

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