This article outlines the tax implications for Non-Resident Indians (NRIs) selling immovable property in India. It clarifies capital gains classification (short-term vs. long-term) based on a two-year holding period, with inherited property referencing the original owner’s purchase date for classification and cost basis. Effective July 23, 2024, the Long-Term Capital Gains (LTCG) tax rate on property sales is reduced to 12.5%, while Short-Term Capital Gains (STCG) are taxed at slab rates. Notably, indexation benefits for adjusting purchase price for inflation are removed from FY 2024-25. Double Taxation Avoidance Agreements (DTAAs) typically do not offer relief for capital gains on real property in India. A significant aspect is Tax Deducted at Source (TDS), which for NRIs is 12.5% (plus surcharge and cess) on the entire agreement value for LTCG, and 30% for STCG, impacting cash flow. Buyers are responsible for deducting and remitting this TDS. NRIs can apply for a lower TDS certificate if the actual tax liability is significantly less. Finally, repatriating sale proceeds requires submitting Form 15CA and Form 15CB to an authorized dealer.
1. Understanding Basics
What is Capital Gains?
Capital Gains is described as Gains on transfer of a capital asset. An immovable property is a capital asset and hence sale of it is described as capital gains.
Classification of Capital Gains: STCG vs. LTCG
- Long-Term Capital Gains (LTCG): If a property is sold after holding it for more than two years, the gains are classified as LTCG. This qualifies for lower income taxes
- Short-Term Capital Gains (STCG): If a property is sold within two years of acquiring it, the gains are treated as STCG. This results in standard income taxes.
When dealing with inherited property, it’s crucial to consider the original owner’s purchase date to classify the capital gain as short-term or long-term. The cost of the property and the holding period will be based on the original owner’s purchase price and purchase date respectively, and this helps calculate the capital gains more accurately.
Ensuring correct classification and valuation will ensure that the taxes are paid a optimum value.
Example: When the property was purchased by the NRI before 01 April 2000, the cost can be substituted by fair value – valuation to be done by the registered owner. This clause can be taken advantage by the
2. Rate of Taxation
Under income Tax Laws of India:
Recent tax changes have significantly altered the tax landscape for NRIs selling property in India:
- LTCG Tax Rate: The tax rate on LTCG from the sale of immovable property has been reduced from 20% to 12.5% for any property sold after 23 July 2024.
- STCG Tax Rate: STCG is taxed according to the applicable income tax slab for NRIs based on their total income taxable in India.
- No Indexation Benefits: Starting from FY 2024-25, indexation benefits (which adjusted the purchase price for inflation) have been removed. Hence, the gains from the sale of any property will now be taxed without indexation.
If Double taxation Avoidance Agreements (DTAA) can help NRI to save taxes?
The answer is No. Usually all DTAA mention that capital gains on alienation of real property situated in a country will be taxed in that country. Hence the DTAA basically refer to the income tax laws of India and NRI cannot get any benefit from the same.
3. TDS (Tax Deducted at Source) on Property Sale and impact on cash flow
This is a very important section as it impacts the cash flow on sale of property. Unlike property sale by residents where TDS rate is only 1%, in case of Non-Residents, the TDS rate is 12.5% on the entire agreement value plus applicable surcharge and cess.
Example: For property of Rs. 60 lakhs, the actual TDS rate is 14.3 % which is Rs. 8,58,000/- . This is a substantial sum which is locked up until the NRI can get a refund based on actual computation and gains.
The buyer must deduct the TDS from the sale proceeds and transfer it to the government.
- In Case of STCG: When the property is sold within 24 months (STCG), the TDS rate is 30%, and for LTCG (after 24 months), the rate is 12.5%. These TDS rates apply before any surcharge or cess is added.
- Tax Filing by the Buyer: After deducting the TDS, the buyer must apply for a Tax Deduction Account Number (TAN), deposit the TDS before 7th of next month and submit the TDS payment details via Form 27Q.
- Form 16A: Once the TDS return is filed, the buyer provides Form 16A to the NRI seller, which reflects the tax deducted.
Can TDS rates be reduced?
Sometimes the actual tax as computed would be very low but the TDS rate is very high.
Example: In above example of sale agreement of Rs. 60 lakhs, if the property purchase value is Rs. 24 lakhs, then actual Tax will be Rs. 5.14 Lakhs but TDS will be Rs. 8.58 Lakhs since TDS is on entire sale value and not actual gains. Hence a huge amount – Rs. 3.43 Lakhs (8.85 – 5.14) shall be stuck with the government.
Hence if the difference is huge and the NRI does not wish to tie up huge cash flow, then the option is to approach the income tax officer, present the calculations and request a lower TDS rate order from the officer.
Repatriation of Sale Proceeds
The NRI selling property in India needs to submit Form 15CA and Form 15CB to the authorized dealer for repatriating the sale proceeds. Form 15CB (Part C) is a certification by a Chartered Accountant. On basis of Form 15CB, the Form 15CA is prepared by using the income tax login credentials of the NRI and shall be submitted to the bank.
Also Read: Tax on Sale of Property by Non Resident Indian (NRI)
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