Property Sales by NRIs: Experts Explain Tax Rules and Life Without Indexation
The latest tax changes have resulted in higher tax liabilities and larger TDS deductions for NRIs selling property in India. Experts outline what’s new and how to plan effectively.
For many Non-Resident Indians (NRIs), real estate has long been a popular investment in their home country. However, selling these properties has become more complicated following the updates introduced under the Finance Act, 2024.
While the government has streamlined long-term capital gains (LTCG) taxation by introducing a flat rate, the removal of indexation benefits and the requirement for TDS on the full sale value have created fresh hurdles for sellers.
What Are the Current Tax Rules?
The tax liability for NRIs selling property in India depends on the duration of ownership.
“If the property has been held for 24 months or less, the profit is treated as Short-Term Capital Gains (STCG) and taxed according to the applicable income tax slab, which may go up to 30%,” explains Ritika Nayyar, Partner at Singhania & Co.
“For properties held for more than 24 months, the gains qualify as Long-Term Capital Gains (LTCG) and are taxed at a flat 12.5% rate from July 23, 2024, onward — without indexation benefits,” she adds.
“Properties owned beyond 24 months now attract a 12.5% flat LTCG tax, along with surcharge and cess. The major change is the elimination of indexation, meaning inflation will no longer adjust the purchase cost,” explains Sudeep Bhatt, Director of Strategy at Whiteland Corporation.
“Additionally, the buyer must deduct TDS at the time of sale and issue a TDS certificate to the seller. However, exemptions can be claimed if the capital gains are reinvested in another property or eligible bonds,” he notes.
SR Patnaik, Partner and Head of Taxation at Cyril Amarchand Mangaldas, highlights, “Earlier, NRIs could opt for a 20% tax rate after factoring inflation through indexation. With that option removed, those who’ve owned property for many years may face higher taxable gains, even though the nominal tax rate has been reduced.”
Why Is TDS Deducted on the Full Sale Value?
One of the biggest challenges for NRIs selling property in India is Tax Deduction at Source (TDS). Under Section 195 of the Income Tax Act, the buyer must deduct TDS on the entire sale amount, not just on the capital gains or profit earned.
“The TDS rate is 12.5% (plus surcharge and cess) for long-term capital gains (LTCG) and can go up to **30% for short-term capital gains (STCG),” explains Ritika Nayyar, Partner at Singhania & Co.
This often creates cash flow problems for NRIs, as the TDS deducted can be much higher than their actual tax liability.
“To avoid excessive deduction, NRIs can apply in advance for a certificate of lower or nil TDS from the Income Tax Department,” advises Adil Altaf, Managing Director at Trinity, a real estate developer.
Real-Life Example
To illustrate, Altaf shares a practical example:
If an NRI sells a property in India in August 2025 for ₹3 crore, which was purchased in 2010 for ₹1 crore:
- Capital Gain: ₹2 crore
- Tax Rate: 12.5% (without indexation)
- Base Tax: ₹25 lakh
- After 10% surcharge and 4% cess, the total tax liability becomes approximately ₹29 lakh.
However, under Section 195, the buyer must deduct TDS on the full sale price of ₹3 crore, not on the ₹2 crore gain.
- The effective TDS rate, including surcharge and cess, is around 14.95%.
- Therefore, the TDS amount deducted would be roughly ₹44.85 lakh.
“The NRI can later claim a refund of the excess TDS by filing an income tax return, or avoid such a high deduction by applying for a lower TDS certificate in advance,” Altaf explains.
How Can NRIs Reduce Their Tax Liability?
NRIs can adopt certain strategies to minimize their tax outgo:
“Under Section 54, long-term capital gains are exempt if the proceeds are reinvested in another residential property in India within the specified period,” says Nayyar.
“Similarly, Section 54EC allows exemption if the gains are invested in specified bonds within six months, up to a limit of ₹50 lakh.”
SR Patnaik, Partner and Head of Taxation at Cyril Amarchand Mangaldas, cautions, “The exemption rules are strict, and NRIs must plan their reinvestment carefully, keeping all documents and proofs ready to prevent rejection of exemption claims.”
The Indexation Blow
The removal of indexation benefits has come as a major setback for NRIs who purchased property many years ago or inherited it.
“Without indexation, the original purchase cost cannot be adjusted for inflation, resulting in significantly higher taxable capital gains,” explains Adil Altaf.
Ritika Nayyar advises that NRIs should “assess their potential tax liability before finalizing a property sale and consider available exemptions or applying for a lower TDS certificate to prevent unnecessary cash flow issues.”
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Frequently Asked Questions (FAQs)
1. What are the new tax rules for NRIs selling property in India?
1. What are the new tax rules for NRIs selling property in India?
From July 23, 2024, long-term capital gains (LTCG) on property sales are taxed at a flat rate of 12.5%, without indexation benefits. Short-term capital gains (STCG) continue to be taxed at the applicable income slab rate, up to 30%.
2. What is indexation, and why was it important?
Indexation adjusts the original purchase price of an asset for inflation, reducing the taxable capital gains. With indexation removed, NRIs now pay tax on unadjusted gains, which can significantly increase their tax burden.
3. How is TDS applied when an NRI sells property in India?
Under Section 195 of the Income Tax Act, the buyer must deduct TDS on the full sale value, not just on the profit. The TDS rate is 12.5% (plus surcharge and cess) for LTCG and up to 30% for STCG.
4. Why is TDS deducted on the full sale value instead of the gain?
The law mandates TDS on the entire consideration amount to ensure tax collection at the source. However, this often results in higher deductions than the actual tax due. NRIs can apply for a lower or nil TDS certificate to avoid excess deduction.
5. Can NRIs claim a refund if too much TDS is deducted?
Yes. If the deducted TDS exceeds the actual tax liability, NRIs can claim a refund by filing their income tax return in India.
6. How can NRIs reduce their tax liability on property sale?
NRIs can claim exemptions under Section 54 by reinvesting the capital gains in another residential property or under Section 54EC by investing in specified bonds within six months, up to ₹50 lakh.
7. What is a lower TDS certificate and how can NRIs get it?
A lower or nil TDS certificate can be obtained by filing Form 13 with the Income Tax Department. This allows NRIs to reduce or eliminate TDS deduction at the time of sale.
8. What impact does the removal of indexation have on inherited properties?
Inherited or old properties are most affected since their purchase price was much lower, and without indexation, inflation adjustments are lost, resulting in much higher taxable gains.
9. When must the buyer deposit the TDS with the Income Tax Department?
The buyer must deposit the deducted TDS within seven days from the end of the month in which the deduction was made.
10. What should NRIs do before selling property in India?
NRIs should calculate potential tax liability, consider available exemptions, and apply for a lower TDS certificate in advance to manage cash flow efficiently and avoid excess deductions.
