For years, Non-Resident Indians (NRIs) have been favored by real estate developers in India due to their strong purchasing power and faster deal closures. While purchasing property in India is relatively simple for NRIs, selling property often brings confusion—especially regarding the applicable taxes. This article explains the tax obligations and TDS deductions involved when an NRI sells a house property in India.

NRIs who sell residential property located in India are liable to pay tax on the capital gains. The applicable tax rate depends on whether the gain is classified as short-term or long-term.

If the property is sold after holding it for more than 2 years (a period revised from 3 years to 2 years in Budget 2017), the profit is considered a long-term capital gain. If the holding period is 2 years or less, it qualifies as a short-term capital gain.

Tax rules also apply when the property is inherited. In such situations, the holding period is determined by the original owner’s date of purchase, and the acquisition cost will also be that of the previous owner.

Tax Rates Applicable:
Long-term capital gains are taxed at 20%, while short-term gains are taxed as per the NRI’s applicable income tax slab based on their total taxable income in India.

TDS on Sale:
On sale of the property by an NRI, the buyer must deduct TDS at 20%. If the property is sold within 2 years of purchase, TDS at 30% is applicable.

How Can NRIs Save Tax on Capital Gains?

Non-Resident Indians (NRIs) can reduce their tax liability on long-term capital gains from the sale of residential property in India by availing exemptions under Section 54 and Section 54EC of the Income Tax Act.

Section 54 Exemption

This benefit applies when an NRI earns long-term capital gains from selling a residential property in India—whether it’s self-occupied or rented out. It’s important to note that you don’t need to reinvest the entire sale amount—only the capital gain portion qualifies for exemption. While your new property’s cost may exceed the capital gains, the exemption is capped at the gain amount.

You can claim this exemption if the new property is purchased within 1 year before or 2 years after the sale, or if it’s constructed within 3 years from the date of sale.

As per the Budget 2014-15, only one residential property can be acquired or constructed for claiming this benefit. Moreover, from Assessment Year 2015-16 onwards, the new property must be located within India. Properties acquired outside India will not qualify. Also, if the new property is sold within 3 years, the exemption will be reversed.

If you haven’t reinvested your gains before filing your tax return (usually by 31st July), you can deposit the amount under the Capital Gains Account Scheme, 1988 in a public sector or specified bank and still claim the exemption.

Section 54F Exemption

This applies to long-term capital gains from the sale of any capital asset other than a residential property. To claim this, the NRI must purchase one residential house within 1 year before or 2 years after the sale, or construct one within 3 years after the sale. The new property must also be located in India and should not be transferred within 3 years.

Additionally, to qualify, the NRI must not own more than one house (besides the new one) and should not acquire or build another residential house within 2 or 3 years respectively. Here, the entire sale consideration must be invested to get full exemption; otherwise, the exemption is allowed in proportion to the investment.

Exemption Under Section 54EC

NRIs can also reduce their tax liability on long-term capital gains by investing the gains in specified bonds under Section 54EC. Eligible bonds include those issued by the National Highway Authority of India (NHAI) and the Rural Electrification Corporation (REC). These bonds have a lock-in period of 3 years, and they must not be sold before this period ends from the date of the original property sale.

Keep in mind, this investment is exclusively for claiming exemption under Section 54EC and cannot be used for claiming deductions under any other section. The investment must be made within 6 months from the date of sale of the property. However, to be eligible for the exemption, the investment must be completed before the date of filing your income tax return.

As per the Budget 2014 provisions, the maximum limit for investing in these bonds is ₹50 lakhs per financial year.

NRIs should present the investment proofs to the buyer of the property to avoid TDS deduction on the capital gains. If TDS has already been deducted in excess, the NRI can claim a refund by reporting the investment while filing the income tax return.

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