Taxation

All you need to know about selling of property in India by NRIs: Tax Implications

People tend to get confused when they are planning to buy or sell property in India as they don’t have a complete idea about the tax implications of selling property. This holds true especially in the case of a Non-resident Indian. In this article we have discussed the tax liability of NRIs on selling of property in India.

Taxation of Property sold by NRIs

Those NRIs who wish to sell house property in India are required to pay tax on the capital gains. Capital gains refers to the net profit made by an investor after selling of a capital asset exceeding the price of purchase. Property is considered a capital asset. The total value earned from the sale of capital asset is considered as taxable income. The tax payable on the capital gains is based on the fact whether it is long term or short term gain. Tax implication is also applicable to NRIs^[1] in case where the property was inherited. If the property was inherited then consider the date of purchase by the original owner in order to calculate whether it is a long term capital gain or short term capital gain. In such a scenario the cost of the property will be the cost to the previous owner.

How to know whether it was a short term gain or a long term gain?

When a house property is sold, after 2 years period from the date it was bought/owned, there is a long term capital gain however if the house property is held for 2 years or less then there is short term capital gain.

Tax Payable and TDS deductible

In case of the long term capital gains, it shall be taxed at the rate of 20% whereas short term gains will be taxed at the income slab rates applicable for NRIs based on the total income taxable in India for the NRI.

The buyer can deduct TDS at the rate of 20% in case where an NRI sells the property but in case where the property has been sold before 2 years, a TDS at the rate of 30% will be applicable.

Exemptions

Now NRIs can save tax on capital gains as they are permitted to claim exemptions under different sections of the income tax act. Let’s discuss these exemptions under the act for NRIs.

Exemption under Section 54 of the Income Tax Act

The exemption can be availed when there is long term capital gain on the sale of house property of NRI. Such property can be self-occupied or let out. One doesn’t require investing the entire sale receipt but the amount of capital gains. It may be noted that exemption will be limited to the total capital gain on the sale. You may buy the property either one year before the sale or two years after the sale of your property. You may invest the gains in the construction of the property but the construction of the property should be finished within 3 years of sale.

Exemption under Section 54F of the Income Tax Act

The exemption under this section can be availed in case of a long term capital gain on the sale of capital asset other than a residential house property. The exemption can be claimed in case where the NRI has bought one house property within a year before the transfer or 2 years following the date of transfer or construct a house property within period of 3 years after the date of capital asset transfer.

Few other conditions to avail this exemption is that the NRI should not have more than one house property and the NRI should not buy within 2 years period or construct any house property within 3 years.

Exemption under Section 54EC

Tax can be saved on the long term capital gains if it is invested in certain bonds such as the bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC), that can be redeemed after 5 year period and should not be sold before 5 years from the date of the sale of the house property.

This investment cannot be claimed under any other deduction. 6 months period is given to invest in these bonds however in order to claim the exemption investment should be made before the return filing date.

How can the process of selling of property in India be carried out?

A property of NRI can be sold in the following manner:

• Firstly determine the value of the property. Hiring a brokerage company who would conduct a comprehensive valuation can be a good option;
• Perform all the necessary paperwork required to sell the property;
• Understand the tax implications and liabilities;
• TDS shall be deducted at the time of making payment to the NRI and the amount can only be received in a FCNR or NRE/NRO account;
• An NRI would require numerous documents in order to sell the property such as Passport, PAN, Tax returns, address proof, sale deed, encumbrance certificate etc.

Conclusion

In the case of performing any real estate transaction, several taxes are imposed on selling of property in India. Both buyer and seller borne taxes on the sale of property. Further, there are certain taxes on the sale of property which are levied countrywide and some taxes on sale of property are levied on specific states only. Hence it is hereby advised to consult a tax expert.

Read Our Article: NRIs & OCIs don’t need RBI approval to buy/sell Immovable Property in India: RBI