Taxation

Tax Implications of Sale of Immovable Property by Non-Resident Seller

Because of the extensive provisions of the Income Tax Act of 1961 regulating the taxation of non-residents, most NRIs are confused by the legal rules governing the taxability of their income in India. The majority of NRIs hold immovable assets in India and are concerned about the taxation on the sale of immovable property.

Because managing a home property from another country might be problematic, an NRI may consider selling such a house property located in India. In such circumstances, in addition to finding a buyer, it is critical to understand the tax implications of an NRI when he/she sells a property in India, notably TDS (Tax deduction at source) laws. Otherwise, a significant percentage of the sales consideration may be blocked in the form of TDS for months, if not more than a year.

Aside from the seller, the buyer, who is a resident, is also unsure about the compliances that he must do in order to purchase an immovable property from an NRI. This article discusses how much tax is owed and how much TDS is deducted in the case of NRIs selling property in India.

Long-term and short-term capital gains on the sale of Immovable Property

The holding duration of the property is a crucial factor of the taxes that an NRI seller would have to pay on a real estate transaction. The rate of tax on capital gains is lower if the property is kept for a long length of time, but the rate is greater if the property is held for a short amount of time.

When a non-resident Indian transfers a piece of property in India, the Income Tax Act imposes a tax on capital gains obtained on the sale of the immovable property. If the NRI sells the property two years after purchasing it, the profit will constitute a long-term capital gain. Otherwise, there will be a capital gain on a short-term basis, i.e., short-term capital gain. When a property is inherited, the original owner’s purchase date is used to determine whether the capital gains are long-term or short-term. In such a circumstance, the cost of the immovable property must be the cost to the previous owner.

Long-term capital gains are chargeable to tax at a rate of 20%, while short-term capital gains are taxed at the relevant or applicable income tax slab rates for NRIs depending on their total income taxable in India.

Deduction of tax on Immovable Property

In order to combat tax avoidance by NRI investors, the government has made buyers accountable for deducting different taxes on property acquisitions from NRI. This is done so that the buyers, who are most likely Indian residents, can be easily tracked down in the event of any misconduct. Tracking down the NRI seller may prove challenging for a variety of reasons.

When a resident buyer acquires any immovable property from a non-resident seller, the buyer is obligated to deduct TDS from the proceeds of the sale and pay the remainder of the amount to the seller. The amount of TDS that is to be deducted is determined by whether the gain is long-term or short-term in the hands of the seller.

If the gain represents a long-term capital gain for the seller, the buyer must deduct 20% of the capital gain in taxes (after taking indexation benefit). On the other hand, if the gain represents a short-term capital gain for the seller, the buyer must deduct the capital gain at a rate of 30%.

However, it is very impracticable to obtain all transaction-related information from the seller in order to calculate capital gains or determine the right amount of capital gains. In addition, the buyer may encounter difficulties in ascertaining the residential status of the seller. As a result, in order to avoid incorrect computations, buyers deduct TDS on the entire amount of the sale proceeds rather than capital gains.

Exemptions from Income Tax

The non-resident seller of the property may be eligible for an exemption on long-term capital gains under Section 54, which allows for the acquisition of another residential property, and Section 54EC, which allows for the purchase of some specified capital gain bonds. Another exemption is also available under Section 54F.

Exemption under Section 54:

If the NRI invests an identical amount in the acquisition of another property, the whole sum paid as LTCG might be claimed as a refund under Section 54 of the Income Tax Act. It is important to note that just your capital gains, not the full sale proceeds, must be invested in the new property. To be eligible for the benefit or exemption, this investment must be made within a certain time frame, i.e., one year before or two years after the sale of the former property. If you plan to build a house with the earnings from the sale, the construction of the building must be finished within three years of the sale to qualify for the refund.

It is worth noting that the LTCG exemption under this clause is capped at the full amount of the LTCG. Any additional funds you put into your new investment will not result in any additional exemption.

Since the assessment year 2014-15, only one residential property can be acquired or constructed with the capital gains to qualify for claiming an exemption under Section 54. Moreover, effective from the assessment year 2015-16, the government emphasized that the new house property must be located in India for the non-resident seller to receive the rebate under this section. To claim this exemption, NRIs are not permitted to invest the profits derived from the sale of Indian property in the acquisition of a foreign property. In addition, If the new property is sold within three years of its acquisition, the refund or exemption will be withdrawn.

Exemption under Section 54EC:

By virtue of an exemption under Section 54EC, a non-resident seller can save the tax on his/her long-term capital gains by investing them in certain bonds. Bonds which are issued by the National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC) have been prescribed for this section. These bonds shall not be sold before the lapse of 5 years from the date of sale of the house property and are redeemable after a period of 5 years (prior to 2018, it was 3 years).

It is important to note that you can’t use this investment to offset any other deduction under any other section. You have a 6-month window (from the date of sale of the property) in which to invest in these bonds, but you must do it before the return filing deadline to qualify for the exemption.

According to the 2014 Budget, you can invest a maximum of rupees 50 lakhs in these bonds in a single financial year. To ensure that TDS is not deducted on capital gains, the NRI must make these investments and present the necessary documents to the Buyer. Any excess TDS deducted at the time of return filing can also be claimed and refunded to an NRI.

Exemption under Section 54F:

If the non-resident has derived long-term gains on any asset other than a residential house property, they can reduce taxes by investing in a residential property in India. This might be accomplished by purchasing one house/ property a year before or two years after the profit is earned. In the event of construction, the NRI taxpayer has three years from the date of transfer of the capital asset to avail of the deductions under this section. Also, if the residential property is disposed of within a period of three years of its acquisition or construction, the refund would be withdrawn.

In this case, the full sale receipts must be invested. If the entire sale receipt is invested, then the capital gains will be totally exempt; otherwise, the exemption is proportionally granted.

Further, the NRI should not purchase any property other than the one he has already acquired. He should also refrain from making any additional purchases within two years of purchasing or within three years of constructing the new house property.

Lower deduction of TDS

The non-resident seller might request (or make an application to) the income tax authorities to get the sale proceeds without any TDS deduction in order to reduce his or her tax burden. For example, if an NRI seeks to claim exemption by making specific investments under Section 54 or 54EC, he or she might apply to the income tax department for receiving the payment without TDS deduction. The NRI, on the other hand, must fill out Form No. 13 to apply for this.

The income tax department will establish the rate at which the buyer of the property will deduct tax on the basis of an application from the seller of the immovable property in this regard. The tax is deducted by the buyer of the property based on such a certificate. The buyer can also request or apply for this certificate to avoid being charged a penalty if the TDS is not deducted properly or is deducted short.

Remittance of sale proceeds

The buyer of the property who is remitting funds to the non-resident seller must provide an undertaking in Form 15CA. In addition, Form 15CA should also be supported by a Chartered Accountant’s Certificate in Form 15CB^[1].

Avoidance of double taxation

When a person lives in one nation but earns money in another, he may be required to pay taxes in both countries. While some nations offer partial or complete exemptions on the income generated in foreign countries, others do not.

It is entirely dependent on the DTAA agreement between two nations (Double Taxation Avoidance Agreement). As a result, it’s critical to understand the current legislation in your country of residency, as well as whether or not it has a tax treaty with India.

Conclusion

The taxes and laws governing the sale of residential property in India vary for NRIs and Indian residents. The sale of immovable property by an NRI is subjected to capital gains tax, tax deduction at source, and other laws.

Where there is a transfer of immovable property by a non-resident in India, both the buyer and seller are needed to comply with the income tax laws. According to the amended laws in India, if a property is sold after two years of its acquisition, it would be subject to long-term capital gains (LTCG) tax. A property sold prior to that time would be subject to short-term capital gains (STCG) tax.

Read our article:Can Commercial Property in India be purchased by an NRI?