Important Keyword: Income Tax for NRI, Tax on sale of property by NRI.
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Tax on sale of property by NRI in India
Selling a house property in India involves different tax and regulatory implications for Non-Resident Indians (NRIs) compared to Indian residents. When an NRI sells property in India, several factors such as Capital Gains Tax, Tax Deduction at Source (TDS), and other regulations come into play.
Tax on Capital Gains from Sale of Property by NRI
Absolutely, you’ve captured the essence of the tax implications for NRIs selling house property in India quite succinctly.
For short-term gains, the tax rate is based on the applicable income tax slab rate of the NRI, while long-term gains are taxed at a flat rate of 20%. This understanding helps NRIs plan their property transactions more effectively and ensures compliance with tax regulations.
Example
Suppose, Mr Y bought a property for INR 1 crore in 2010-11 which was later sold in 2019-20 for INR 2 crore. Capital gain will be calculated as follows:
| Particulars | Amount |
|---|---|
| Take full value of Consideration | 3,00,00,000 |
| Less: Index* Cost of Acquisition. Index* Cost of Improvement. | (1,73,00,000) (0) |
| Less: exemption under section 54, 54EC, 54F, 54B | (0) |
| Long Term Capital Gain | 1,27,00,000 |
Mr. Y’s situation aligns with the criteria for long-term capital gains taxation since he held the property for over two years. Moreover, to account for inflation’s impact, he adjusts the property’s purchase cost using indexation. In this case, the indexed cost of acquisition amounts to approximately INR 1.73 crore, factoring in the relevant Cost Inflation Index values for the year of sale and the year of acquisition. This adjustment ensures a fair assessment of capital gains and enables Mr. Y to comply with tax regulations effectively.
TDS on Sale of Property
When purchasing an immovable property valued at INR 50 lakhs or more, individuals or Hindu Undivided Families (HUFs) are required to deduct Tax Deducted at Source (TDS). If the seller is a resident, TDS is governed by section 194IA of the Income Tax Act, at a rate of 1% of the sale consideration paid to the resident seller. However, if the seller is a non-resident, the TDS rate increases to 30%.
In cases where the property is sold after a holding period of two years, Long-Term Capital Gains (LTCG) TDS rates apply, set at 20%. Additionally, surcharge and education & health cess are applicable, varying based on the gains from the property. These regulations ensure proper tax compliance and withholding mechanisms in property transactions, promoting transparency and adherence to tax laws.
| Surcharge Slab if taxable income | Rate |
| INR 50,00,000 to INR 1,00,00,000 | 10% |
| Above INR 1,00,00,000 | 15% |
| Health & Education Cess | 4% on total of income tax+surcharge |
So we can conclude that following are effective rates of TDS in case of Long Term Capital Gains (LTCG) on property sold by NRI Individual/HUF :
| Particulars | LTCG is less than INR 50 Lakhs | LTC Gain is from INR 50 Lakhs to INR 1 Cr | LTCG is more than INR 1 Cr |
| Capital Gain Tax Rate | 20% | 20 % | 20% |
| Add: Surcharge | NIL | 10% of the above tax rate | 15% of the above tax rate |
| Total Tax Rate | 20% | 22% | 23% |
| Add: Health & Education Cess (w.e.f. 01/04/2018) | 4% of the total tax rate | 4 % of the total tax rate | 4% of the total tax rate |
| Effective TDS Rate | 20.8% | 22.88% | 23.92% |
In similar manner, effective rates of TDS in case of STCG on property can be calculated at 30%
Tax Saving on Capital Gains from Sale of Property by NRI
NRIs are entitled to claim exemptions on capital gains earned from the sale of house property in India under specific sections of the Income Tax Act. These exemptions are designed to facilitate investment in a new capital asset within a stipulated timeframe, thereby alleviating the tax burden on the taxpayer. To ensure that Tax Deducted at Source (TDS) is not deducted on the capital gains, NRIs must make these investments and provide relevant evidence to the buyer.
The exemptions on Long-Term Capital Gains (LTCG) from the sale of house property in India can be claimed by NRIs under the following sections of the Income Tax Act:
| Section | Description | Applicability | Deduction Amount |
| Section 54 | Sale of House Property (LTCA) by Individual/HUF | Purchase/Construction of New House Property. | Lower of Cost of New House Property OR Capital Gains |
| Purchased 1 year before or 2 years after the sale of a property. | |||
| Constructed within 3 years from the sale of a property. | |||
| Section 54EC | Sale of Land or Building or both (LTCA) by any taxpayer | Investment in NHAI/REC Bonds. | Lower of Cost of Investment OR Capital Gains |
| An investment made within 6 months from the sale of an asset. | |||
| The investment amount can not be more than INR 50 lakhs. | |||
| Section 54E, 54EA, 54EB | Sale of any LTCA by any taxpayer | Investment in Specified Securities. | Cost of new asset * Capital Gains / Net Consideration |
| Specified securities include Government Securities, Savings Certificates, Units of UTI, Specified Debentures, etc. | |||
| An investment made within 6 months from the sale of an asset. | |||
| 54EE | Sale of any LTCA by any taxpayer | Investment in units of a specified fund. The investment amount can not be more than INR 50 lakhs. | Cost of new asset * Capital Gains / Net Consideration |
| Specified fund include units notified by the central government | |||
| An investment made within 6 months from the sale of an asset. |
Double Taxation on Income Earned by NRIs
When an individual resides in one country but earns income in another, they may face the prospect of being taxed in both jurisdictions. However, some countries offer partial or total exemptions on income earned from foreign sources. This hinges on the existence of a Double Taxation Avoidance Agreement (DTAA) between the two countries involved. Therefore, it’s crucial to understand the prevailing regulations in the country of residence and whether it has a DTAA with the source country.
For instance, let’s consider Mr. Arjun, an Indian national residing in the UK. As a Non-Resident Indian (NRI), he earns Long-Term Capital Gains (LTCG) in India from the sale of property. This income could potentially be subject to taxation in both India and the UK. However, thanks to the DTAA, Mr. Arjun is spared from being taxed on the same income in both countries.
Nevertheless, if Mr. Arjun avails exemptions in India by reinvesting his capital gains as per the options available, he becomes liable to pay taxes on the income in the UK.
Read More: DTAA between India and USA
Web Stories: DTAA between India and USA
Official Income Tax Return filing website: https://incometaxindia.gov.in/
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