NRI Property Sales: Understanding Indian Tax Implications

NRI Property Sales

Selling property in India as a Non-Resident Indian (NRI) involves understanding the complexities of Indian tax laws to ensure compliance and optimal tax planning. This detailed blog breaks down the key aspects NRIs need to consider when selling property in India.

Table of Contents

Understanding Residential Status

The Income Tax Act, of 1961 defines an NRI as an individual who is not a resident of India. Your residential status affects how your income, including capital gains from property sales, is taxed. An individual qualifies as an NRI if they meet the following criteria:

  • They have spent less than 182 days in India during the relevant financial year.
  • They have spent less than 60 days in India during the financial year and less than 365 days during the preceding four years.

Suggested read: Purchasing Property from NRI

Capital Gains Tax

1. Short-Term Capital Gains (STCG)

  • Definition: Property held for less than two years.
    Tax Rate: STCG is added to the NRI’s total income and taxed at the applicable slab rates. For NRIs, this rate is generally higher due to higher income brackets.

2. Long-Term Capital Gains (LTCG)

  • Definition: Property held for more than two years.
  • Tax Rate: LTCG is taxed at 20% with indexation benefits, which adjusts the purchase price for inflation.

3. Tax Deducted at Source (TDS)

When an NRI sells property in India, the buyer must deduct TDS:

  • For LTCG: TDS is 20% of the sale consideration.
  • For STCG: TDS is 30% of the sale consideration or 

This TDS must be deposited with the Income Tax Department and a TDS certificate (Form 16A) should be provided to the NRI seller. The NRI can claim a refund if the TDS exceeds the actual tax liability by filing income tax returns.

Suggested read: NRI Home Loan

Filing Income Tax Returns

NRIs must file income tax returns in India if their total income, including capital gains from property sales, exceeds the basic exemption limit:
Exemption Limit for NRIs: ₹2.5 lakhs (for individuals below 60 years of age).
Filing returns ensures that any excess TDS deducted can be claimed as a refund and helps maintain compliance with Indian tax laws.

Claiming Exemptions on Capital Gains

NRIs can reduce their tax liability on LTCG by claiming exemptions under specific sections of the Income Tax Act:

1. Section 54

Eligibility:

  • Available if the LTCG is invested in purchasing or constructing another residential property within specified timelines.

Conditions:

  • The new property must be purchased within one year before or two years after the sale of the original property or constructed within three years.

3. Section 54EC

Eligibility:

  • Available if the LTCG is invested in specified bonds (e.g., National Highways Authority of India (NHAI), Rural Electrification Corporation (REC)) within six months of the sale.

Conditions: 

  • The maximum investment allowed is ₹50 lakhs in a financial year, and the bonds must be held for at least five years.

3. Section 54F

Eligibility:

  • Long-Term Asset: Sale of any long-term capital asset except a residential house.
  • Reinvestment: Purchase a residential property within 1 year before or 2 years after the sale, or construct a residential property within 3 years from the sale.

Conditions:

  • Single Residential House: The NRI must not own more than one residential house (excluding the new property) on the date of the asset sale.
  • Completion: In the case of construction, it must be completed within 3 years from the sale date.
  • No Sale Within 3 Years: The new residential property should not be sold within 3 years from the purchase or construction date, or the exemption will be reversed.
  • Capital Gains Account Scheme (CGAS): If the gains are not utilized by the return filing due date, they must be deposited in CGAS to qualify for the exemption.

Repatriation of Sale Proceeds

NRIs can repatriate the sale proceeds to their country of residence, subject to certain conditions:

  • Limit: Up to USD 1 million per financial year can be repatriated, provided applicable taxes are paid.
  • Documentation: Necessary documents include Form 15CA and 15CB, certified by a Chartered Accountant, and submission of relevant proof of sale and tax payment.

Double Taxation Avoidance Agreement (DTAA)

India has DTAA with several countries to avoid double taxation. NRIs should check if their country has a DTAA with India to benefit from reduced tax rates or tax credits. This ensures they are not taxed twice on the same income.

1. Property Valuation

Accurate property valuation is crucial for determining the correct amount of capital gains. The fair market value of the property as of April 1, 2001, can be considered if the property was acquired before this date. This value, adjusted for inflation, helps in calculating the indexed cost of acquisition.

2. Professional Advice

Given the complexities involved in tax laws and property transactions, NRIs should seek advice from tax advisors or Chartered Accountants who specialize in NRI taxation. Professional guidance ensures compliance, accurate tax filing, and maximization of benefits.

Selling property in India as an NRI requires careful planning and a thorough understanding of the tax implications. By being aware of the capital gains tax, TDS requirements, available exemptions, and repatriation rules, NRIs can ensure a smooth and tax-efficient transaction. Consulting with a professional advisor is highly recommended to navigate the complexities and make informed decisions.
For further insights and updates on property transactions and tax implications for NRIs, stay tuned to our blog. We strive to provide you with the most accurate and up-to-date information to help you manage your investments efficiently.

FAQs about Income Tax Rule for NRI

NRIs cannot completely avoid TDS on the sale of property, but they can lower the rate by obtaining a lower TDS certificate from the Income Tax Department if their actual tax liability is lower than the standard TDS rate.

Yes, NRIs can claim a TDS refund if the TDS deducted exceeds their actual tax liability by filing an income tax return in India.

As of recent updates, NRIs must spend less than 120 days in India (reduced from 182 days) during a financial year to maintain their NRI status if their total taxable Indian income exceeds ₹15 lakhs.

The 4-year rule states that an individual is considered an NRI if they have spent less than 365 days in India during the four preceding financial years and less than 60 days in the relevant financial year.

To obtain a lower TDS certificate, NRIs need to apply to the Income Tax Department using Form 13, demonstrating that their actual tax liability is lower than the prescribed TDS rate. Once approved, the certificate allows the buyer to deduct TDS at a reduced rate.

Published on 13th June 2024