Computation of Long-Term Capital Gains (LTCG) on Immovable Property for Non-Residents in India
Introduction: Long-Term Capital Gains (LTCG) arise when a capital asset, such as immovable property (land, buildings, or residential properties), is sold after being held for more than 24 months, as defined under Section 2(42A) of the Income Tax Act, 1961. For Non-Residents, including Non-Resident Indians (NRIs) and foreign companies, selling immovable property in India triggers LTCG tax under the Indian Income Tax Act. This article explores the computation of LTCG for Non-Residents, detailing tax rates, indexation benefits, recent amendments introduced in the Union Budget 2024, and available exemptions to optimize tax liability.
Definition of Non-Resident : A Non-Resident, as per the Income Tax Act, is an individual or entity not meeting the residency criteria, typically based on the number of days spent in India (less than 182 days in a financial year for individuals). For NRIs, only income earned or accrued in India, such as capital gains from property sales, is taxable. This distinction is crucial for understanding tax obligations.
Tax Rates for LTCG on Immovable Property
The tax rate applicable to LTCG on immovable property for Non-Residents depends on the date of transfer, as outlined in Section 112(1)(c) of the Income Tax Act. The rates are:
Transfer Date Tax Rate Indexation Benefit
Before July 23, 2024 20% Available
On or after July 23, 2024 12.5% Not Available
Unlike resident taxpayers, who may choose between 20% with indexation or 12.5% without for properties acquired before July 23, 2024, Non-Residents must adhere to the prescribed rate based on the transfer date, with no option to select, as clarified in Budget 2024 amendments.
Tax Deducted at Source (TDS)
When a Non-Resident sells immovable property, the buyer is required to deduct TDS under Section 195 of the Income Tax Act:
Before July 23, 2024: TDS at 20% of the sale value.
On or after July 23, 2024: TDS at 12.5% of the sale value. TDS is calculated on the entire sale consideration, not just the capital gain. Non-Residents can apply for a lower or nil TDS certificate if eligible.
Indexation Benefits
Indexation adjusts the cost of acquisition and improvement of the property for inflation, reducing the taxable capital gain. The Cost Inflation Index (CII), notified annually by the government, is used to compute the indexed cost. The formula is:
Indexed Cost of Acquisition} = Cost of Acquisition/CII of the Year of Acquisition X CII of the Year of Transfer
For example, a property bought in 2010-11 (CII: 167) for INR 50 lakhs and sold in 2023-24 (CII: 348, assumed) would have an indexed cost of:[ 50,00,000/167 X 348= 1,04,19,161 ]
Indexation is available for transfers before July 23, 2024, but not for transfers on or after this date, as per amendments to Section 48 of the Income Tax Act.
Computation of LTCG
The LTCG is calculated as follows:
LTCG = Full Value of Consideration – Cost of Acquisition (Indexed, if applicable)} Less {Cost of Improvement (Indexed, if applicable)} Less Expenses on Transfer
Full Value of Consideration: The sale price of the property, as per Section 50C, which may adopt the stamp duty value if higher than the actual sale price.
Cost of Acquisition: The purchase price, adjusted for indexation if the sale is before July 23, 2024.
Cost of Improvement: Expenses on property enhancements, also indexed if applicable.
Expenses on Transfer: Costs like brokerage or legal fees incurred during the sale.
For Non-Residents, unlike for shares or debentures (where the first proviso to Section 48 allows computation in foreign currency), immovable property transactions are typically in Indian Rupees, so no currency conversion applies.
Example Calculation
Consider a Non-Resident who purchased a property in 2010 for INR 50 lakhs and sold it for INR 1.5 crores. Assume no improvements or transfer expenses for simplicity.
Scenario 1: Sale on June 1, 2024 (Before July 23, 2024)
CII: 2010-11 (167), 2023-24 (348, assumed).
Indexed Cost of Acquisition: ( 50,00,000/167 X 348 = 1,04,19,161 ).
LTCG: ( 1,50,00,000 – 1,04,19,161 = 45,80,839 ).
Tax at 20%: ( 45,80,839 X20/100 = 9,16,168 ).
Scenario 2: Sale on August 1, 2024 (On or After July 23, 2024)
Cost of Acquisition: INR 50,00,000 (no indexation).
LTCG: ( 1,50,00,000 – 50,00,000 = 1,00,00,000 ).
Tax at 12.5%: ( 1,00,00,000 X 12.5/100 = 12,50,000 ).
In this case, selling before July 23, 2024, results in a lower tax due to indexation, but the outcome depends on the holding period and appreciation.
Recent Amendments in Budget 2024
The Finance (No. 2) Bill, 2024, introduced significant changes to LTCG taxation on immovable property, effective from July 23, 2024:
Tax Rate Reduction: The LTCG tax rate was reduced from 20% to 12.5% for all long-term capital assets, including immovable property, for transfers on or after July 23, 2024, as amended in Section 112.
Removal of Indexation: Indexation benefits were eliminated for transfers on or after July 23, 2024, under Section 48, increasing taxable gains for properties held longer.
No Choice for Non-Residents: A proviso in Section 112 allows resident individuals and HUFs to compute tax at 20% with indexation or 12.5% without for properties acquired before July 23, 2024, if the former is lower. This option is not extended to Non-Residents, who must follow the transfer date-based rates.
These changes aim to simplify the tax regime but may increase tax liabilities for Non-Residents with long-held properties due to the loss of indexation.
Exemptions to Reduce LTCG Tax Liability
Non-Residents can leverage exemptions to minimize or eliminate LTCG tax, subject to conditions:
Section 54: Reinvestment in Residential Property
Eligibility: Applies to LTCG from the sale of a residential property.
Condition: Reinvest the capital gain (not the entire sale proceeds) in one residential property in India, purchased one year before or two years after the sale, or constructed within three years.
Limit: Exemption capped at INR 10 crores.
Restriction: The new property cannot be sold within three years, or the exemption is revoked.
Section 54EC: Investment in Specified Bonds
Eligibility: Applies to LTCG from any long-term capital asset, including immovable property.
Condition: Invest the capital gain in bonds issued by NHAI or REC within six months of the sale.
Limit: Maximum investment of INR 50 lakhs per financial year.
Restriction: Bonds are redeemable after five years.
Section 54F: Reinvestment of Sale Proceeds
Eligibility: Applies to LTCG from any long-term capital asset other than a residential property (e.g., land).
Condition: Invest the entire sale proceeds (not just the gain) in one residential property in India, purchased one year before or two years after the sale, or constructed within three years.
Restriction: The Non-Resident must not own more than one residential property (besides the new one) at the time of purchase or within the specified periods, and the new property cannot be sold within three years.
Capital Gains Account Scheme (CGAS):
If the capital gain is not reinvested before filing the tax return, it can be deposited in a CGAS account with a bank to claim exemptions under Sections 54 or 54F, provided the funds are used within the stipulated period.
Additional Compliance for Non-Residents
Repatriation: Non-Residents can repatriate up to USD 1 million per year from property sale proceeds, subject to submitting Form 15CA and 15CB
Foreign Exchange Management Act (FEMA): Compliance with FEMA is required for remitting proceeds outside India.
Tax Filing: Non-Residents must file an Income Tax Return in India to report capital gains, even if exemptions reduce the tax to zero.
Practical Considerations
The choice of sale timing can significantly impact tax liability. For properties held for long periods, selling before July 23, 2024, leverages indexation to reduce taxable gains. For recently acquired properties with lower appreciation, the 12.5% rate without indexation may be more beneficial due to the lower rate. Non-Residents should consult tax professionals to evaluate exemptions and ensure compliance with TDS and repatriation rules.
Conclusion
Non-Residents selling immovable property in India face a straightforward yet impactful tax regime. The Budget 2024 amendments have simplified LTCG taxation by reducing the tax rate to 12.5% and removing indexation for transfers on or after July 23, 2024, while maintaining a 20% rate with indexation for earlier sales. By understanding tax rates, indexation benefits, and exemptions under Sections 54, 54EC, and 54F, Non-Residents can strategically plan property sales to minimize tax liabilities. Proper documentation and compliance with TDS and FEMA regulations are essential for a seamless transaction.
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Disclaimer: This article is for educational purposes only. Please consult a qualified tax expert before applying any information provided.
Author: CA Chandan Shahi | cachandanshahi@gmail.com | 9999-361-351
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