If you’re a Non-Resident Indian (NRI) considering selling property in India, it’s essential to have a clear understanding of how capital gains tax applies. This simplified guide outlines the taxation rules, how much you’re expected to pay, and the legal ways to reduce your tax burden.

What is Capital Gains Tax?

When a property is sold in India, the profit earned from the sale is treated as capital gains, and this profit is subject to tax under Indian law. The duration for which you have held the property plays a key role in determining the type and rate of tax you will owe.

1. Short-Term Capital Gains (STCG) –
   If the property is sold within 2 years from the date of purchase, the resulting profit is considered short-term. This amount is added to your total income and taxed at your applicable income tax slab rate.

2. Long-Term Capital Gains (LTCG) –
   If the property is sold after holding it for more than 2 years, the profit is treated as long-term. For NRIs, the tax rate depends on when the sale occurs:

   • On or after 23rd July 2024: LTCG will be taxed at 12.5% without indexation.

   • Before 23rd July 2024: LTCG is taxed at 20% with indexation.

These revised tax rates are applicable exclusively for NRIs.
However, if you are a Resident Indian and the property is sold on or after 23rd July 2024, you have the choice between paying 12.5% without indexation or 20% with indexation, depending on which is more favorable.

What is Considered the Purchase Date of Your Immovable Property?

The purchase date of an immovable property is a key element in determining tax implications, capital gains computations, and compliance with various legal statutes. However, it’s important to note that this date is not always the same as the one mentioned in your sale agreement. It may be established based on the following important factors:

• Possession Date – The actual date when you take physical possession of the property can significantly impact capital gains tax calculations.

• Final Payment Date – If you’ve paid in instalments, the date when the final payment is made may be regarded as the purchase date.

• Execution and Registration of Sale Deed – In most legal contexts, the registration date of the sale deed is treated as the official purchase date.

• Allotment Date for Under-Construction Properties – For properties bought under construction-linked plans, the builder’s allotment date may be accepted as the purchase date for taxation.

Each of these situations can influence how the purchase date is determined under the Income Tax Act, 1961, FEMA, and other applicable laws, impacting capital gains tax, indexation eligibility, and legal compliance.

What is Considered the Purchase Date for Properties Bought Before 01-04-2001 or Inherited?

When dealing with properties either purchased before April 1, 2001, or acquired through inheritance, determining the correct purchase date is crucial for tax computation purposes.

Inherited Properties:

In cases of inheritance, the purchase date isn’t when you inherited the property, but rather when the original owner first acquired it. This date is vital in establishing the holding period, which helps classify the gains as either short-term or long-term.

While receiving a property through inheritance isn’t taxable, any sale of that property is subject to capital gains tax.

Properties Purchased Before April 1, 2001:

If the property was acquired before this date, you’re allowed to choose between the actual purchase price or the fair market value as of April 1, 2001, for calculating capital gains. This choice can have a substantial effect on your taxable gains.

Points to Remember:

• For inherited assets, determine the original acquisition date.

• For older properties, evaluate the benefit of using FMV as of 01-04-2001.

• Tax laws in this area can be intricate, so seeking advice from a tax expert is recommended.

• Being informed helps in managing capital gains tax more effectively on inherited or long-held properties.

TDS on Property Sales by NRIs

When a Non-Resident Indian (NRI) sells property in India, the buyer is legally required to deduct TDS before releasing payment.

• Long-term capital gains (property held for more than 2 years) attract 12.5% TDS, plus surcharge and cess.

• Short-term capital gains (property held for less than 2 years) are subject to 30% TDS, plus surcharge and cess.

If the actual tax payable is lower than the TDS deducted, NRIs can request a lower deduction certificate from the Income Tax Department to avoid excess deduction at the source.

How to Compute Capital Gains Tax?

Long-Term Capital Gains (Holding Period: Over 2 Years)

LTCG = Sale Consideration − Purchase Cost − Cost of Improvements − Transfer Charges

Short-Term Capital Gains (Holding Period: Under 2 Years)

STCG = Sale Consideration − Purchase Cost − Transfer Charges − Cost of Improvements

• Purchase Cost: The amount paid when acquiring the property.

• Cost of Improvements: Any investment made towards renovations or upgrades.

• Transfer Charges: Includes costs such as brokerage, legal fees, and related transaction expenses.

How NRIs Can Reduce or Avoid Capital Gains Tax

Under the Income Tax Act, 1961, NRIs have several options to legally minimize their capital gains tax liability:

1. Purchase Another Residential Property (Section 54)
   If you sell a residential house and reinvest the capital gains into another residential property within 2 years (or build one within 3 years), you may claim an exemption.

2. Invest in Capital Gains Bonds (Section 54EC)
   By investing your capital gains into bonds issued by NHAI or REC within 6 months of sale, you can avail of tax exemption.

3. Reinvest Entire Sale Proceeds in a Residential House (Section 54F)
   If the asset sold is land or a non-residential property, and the entire sale amount is used to purchase a house, you may avoid paying tax on the gains.

Step-by-Step Guide for NRIs to Sell Property in India

1. Determine Holding Period – Identify whether the capital gains are classified as short-term or long-term based on your ownership duration.

2. Estimate Tax Liability – Compute the tax applicable on your capital gains.

3. Request a Lower TDS Certificate – If the tax deducted at source (TDS) exceeds your actual liability, apply for a lower TDS certificate by submitting Form 13 to the Income Tax Department. Connect with our NRI Expert for guidance.

4. File Income Tax Return (ITR) – If TDS was over-deducted, you can recover the excess by filing your income tax return on time.

Sending Sale Proceeds Abroad (Repatriation)

NRIs selling property in India must comply with RBI regulations to repatriate funds:

• A maximum of $1 million per financial year can be remitted from the NRO account after tax clearance.

• You’ll need a Form 15CB certificate from a Chartered Accountant and must submit Form 15CA to the Income Tax Department. Need help? Speak with our NRI Expert.

Buyer’s Duties When Purchasing Property from an NRI

The buyer is legally responsible for:

• Deducting TDS before payment.

• Depositing the TDS with the Income Tax Department on time.

• Filing Form 27Q (TDS return) before the due date.

• Issuing Form 16A as proof of TDS to the NRI seller.

Conclusion

For NRIs, understanding tax implications, TDS rules, and exemption options is crucial when selling property in India. With strategic planning and expert advice, you can reduce your tax outgo and manage the transaction efficiently.

Disclaimer: The content on this website is for informational purposes only and does not constitute legal, financial, or professional advice. Please consult qualified experts before acting on any information. K M GATECHA & CO LLP accepts no liability for errors, omissions, or outcomes from the use of this content. This site is not an advertisement or solicitation.