The Finance Act, 2024, brought significant changes to the long-term capital gains (LTCG) tax on real estate sales. Notably, the LTCG tax rate on the sale of immovable property has been reduced from 20% to 12.5%, but the indexation benefits have been withdrawn. This change has a direct impact on Non-Resident Indians (NRIs) who are planning to sell property in India.
Understanding the New Tax Implications for NRIs
1. Reduced Tax Rate but No Indexation Benefits:
The LTCG tax rate on property sales is now 12.5% without indexation, compared to the earlier 20% with indexation benefits.
This means that lower tax rate is applicable on the long term capital gain arising on the sale of property. However, the benefit of adjusting the purchase price for inflation is no longer available.
2. Grandfathering Provisions:
The amendment includes a grandfathering clause, which states that for properties acquired before July 23, 2024, and sold on or after this date, LTCG tax will be calculated based on lower of: 20% with indexation or 12.5% without indexation. This provision provides some flexibility and protection against increased tax liabilities for properties acquired before the cutoff date.
However, it is important to note here that grandfathering provision has been included only for computation of tax amount. If there is any loss on calculating capital gain with indexation, that loss is not allowed to be claimed.
3. TDS on Sale Consideration:
Typically, when NRIs sell property in India, the buyer deducts TDS at a rate of 20% on the sale consideration amount. However, with the new amendments, NRIs now have the option to benefit from a lower TDS rate of 12.5%.
This reduction in the TDS rate can be beneficial for NRIs as it decreases the immediate tax outflow and potentially avoids having a significant amount of the sale proceeds blocked as TDS.
4. Obtaining Lower Withholding Tax Certificates:
NRIs can still apply for a lower TDS certificate from the Income Tax Department to ensure that TDS is deducted only on the actual capital gains rather than the total sale consideration. This process involves filing Form 13 and obtaining a certificate specifying the reduced TDS rate, which can prevent excess tax deduction and the need to claim a significant amount of refund later.
Benefits of the New Amendments for NRIs
While the lower tax rate may simplify the process and be beneficial in certain situations, there are mixed sentiments about this amendment. The new provision does not account for the increase in property valuation due to inflation and instead taxes the difference between the sale consideration and the original cost.
However, one advantage of the new amendment for NRIs is the reduced immediate cash outflow, particularly when a lower TDS certificate is not obtained from the tax authorities. For sales involving significant amount, it is still advisable to obtain a lower TDS certificate. However, there have been instances (though limited) where demands are pending against NRIs due to some past notices which are under appeals/corrections. In such cases, the likelihood of obtaining a lower TDS certificate from the Income Tax authorities reduces. The new amendment could be especially beneficial in these situations.
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*Note that the applicable surcharge and cess will be in addition to the tax rates mentioned above.
The author is a Partner at Mohit Vijay and Associates, Chartered Accountant and can be reached at [email protected].
Disclaimer: This article is for general information purpose only and does not constitute any advice. Please get in touch with your consultant before taking any step(s). We shall not be responsible for any loss incurred due to step(s) taken basis the information shared in this article.
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