Sale of Property by NRIs- Legal & Tax implications

Advocate Nazaqat Lal & CA Radha Sampath Kumar

Over the years, many Indians have settled overseas. As a result, they have assets in India and abroad. Having assets in multiple jurisdictions can become difficult to manage and therefore, many prefer to streamline their assets by gradually disposing off their assets situated in India, over time. Sale of immovable property in India has legal and tax implications and sale by Non Resident Indians (‘NRIs’) is no exception.

Some legal aspects and tax implications to be kept in mind –

a) Execution of a Power of Attorney – If the NRI owner is unable to travel to India for the purpose of negotiation, execution and/or registration, he may appoint an attorney to do any or all of the above acts on his behalf.

Drafting of the power of attorney is important because the nature of powers given to the attorney and the place where such power of attorney is to be used will determine the stamp duty applicable to such power of attorney and whether or not such Power of Attorney needs to be registered.

Usually, one of three situations arise – (i) the attorney is given the power to sell, execute and register the sale deed, (ii) the attorney is given the power to execute and register the sale deed after the negotiations have been completed by the seller or (iii) the attorney is only given the power to register the sale deed.

The power of attorney executed outside India will have to be notarized before the Indian consulate of such country or a local notary of such country. When received in India, appropriate stamp duty will have to be paid and it will have to be presented for registration before the Sub-Registrar if registration of such power of attorney is required by the State in which it is received.

b) Execution of the Sale Deed – In most aspects, a sale deed executed by an NRI seller is similar to a sale deed executed by an Indian seller. However, in certain aspects, there is a divergence and certain additional laws apply. The following aspects will have to be considered when the seller is an NRI.

i. Tax deduction at source (TDS)

Tax will have to be withheld by the Resident purchaser of immovable property from each payment made to the NRI without any benefit of minimum threshold value as is available to an Indian seller.

a. In case of long term capital gains, TDS will have to deducted at 20% plus applicable surcharge and cess.

b. In case of short term capital gains, TDS will have to be deducted as per slab rates plus applicable surcharge and cess.

c. If the TDS deducted is higher than the total tax liability of the NRI for the year, then the NRI can claim refund of the excess taxes paid while filing his income tax return.

d. While Section 195 of the Income Tax Act, 1961 requires TDS to be deducted on the income arising to the NRI which would be the capital gains amount in the instant case, there is no certainty for the purchaser to confirm the exact amount of capital gains accruing to the NRI. Accordingly, it is advisable to deduct TDS on the entire sale consideration to avoid lesser deduction of TDS, interest and penalties thereon.

e. However, in case the NRI estimates a lower tax liability than the TDS that may be withheld, he can approach the Income Tax department for determining lower TDS rate u/s. 197 of the Income Tax Act, 1961. The certificate issued u/s. 197 can then be given to the purchaser to deduct TDS as per rates specified therein. Similarly, even the buyer can approach the tax department to determine the TDS to be deducted u/s. 195(2).

f. Compliances by the purchaser towards TDS-

The purchaser will have to obtain a tax deduction and collection Account Number (TAN) in case the seller is an NRI. This is different from PAN number of the purchaser. TDS deducted should be paid to the Government under appropriate challan by the monthly due date as specified in the income tax rules. Thereafter, a TDS return needs to be filed for every quarter in which TDS is deducted and a TDS certificate is required to be issued to the NRI Seller within the due dates as specified under the Income Tax rules. There are interest and penalty consequences for late payment/non payment of TDS, late filing of TDS returns, etc.

The following may not form part of the Sale Deed but are factors that will have to be considered while entering into the sale transaction. It is advisable to take a covenant from the purchaser that the purchaser shall extend full co-operation to the NRI seller for the statutory filings required to be made by the NRI seller under FEMA, the Income Tax Act, 1961, etc.

ii. Applicability of FEMA guidelines

If the purchaser is Indian, payment by the purchaser to the seller will be by way of foreign remittance. FEMA guidelines will have to be referred to, to ascertain the manner in which the sale consideration can be transferred by the Indian purchaser to the NRI seller.

a. An NRI is allowed to remit up to USD 1 million per financial year out of sale proceeds of assets.

b. The Income tax Act also prescribes that the remitter is required to submit Forms 15CA and/or 15CB. Form 15CA is to be filled by the remitter, whereas Form 15CB is to be filled by the remitter’s chartered accountant.

iii. Capital gains implications

For an NRI, the capital gains on sale of immovable property would be taxable in India. Such tax payable would depend on the period of holding of the immovable property –

a. If the property has been held by the NRI for more than 24 months immediately preceding the date of sale, the property is considered a long term capital asset in the hands of the seller, and taxable at 20% plus applicable surcharge and cess.

In case of a long term capital asset, the benefit of indexation is available wherein the indexed purchase cost and indexed improvement cost are deducted from the sale consideration to compute capital gains. Such indexed costs are computed by applying Cost Inflation Index notified by the Government.

b. If the property has been held for 24 months or less immediately preceding the date of sale, it is considered a short term capital asset which is taxed as per slab rates plus applicable surcharge and cess.

c. In case the property was inherited by the NRI, the purchase cost for the purpose of calculating the capital gains will be the cost of acquisition borne by the person from whom such NRI inherited the property. Similarly, the period of holding of the NRI and the person from whom such NRI inherited the property will be considered for determining short term or long term capital asset.

d. In case there is a Double Taxation Avoidance Agreement (DTAA) between the country of residence of the NRI and India, the rates as specified in such DTAA or the Indian Income tax Act, whichever is more beneficial to the NRI will be applicable for taxing the capital gains.

Exemption from capital gains –

1. Sale of residential property and investment in another residential property

a. If the residential property is sold and the NRI purchases a residential house (within 1 year before or 2 years after transfer) or constructs a residential house in India (within 3 years), then the long term capital gain can be treated as exempt partially or fully, as below.

b. Here the capital gains amount needs to be invested for purchase or construction of new residential house to claim exemption.

c. If the cost of the new residential house is more than the capital gains, then the entire capital gain will be exempt. However, if the cost of the new residential house is lower than the capital gains amount, then the balance is taxable as capital gain.

d. Also, if the capital gains is upto 2 crores, the NRI may purchase/ construct two residential houses in India. However, this option can only be availed once in a lifetime of the NRI, all other conditions are same.

e. In all the above cases, the residential house needs to be held for 3 years after purchase/construction, else the capital gain exemption will be withdrawn.

2. Long term capital asset sold is other than residential property

a. Exemption from capital gains is available if any long term capital asset other than residential property is sold and the NRI purchases one residential house (within 1 year before or 2 years after transfer) or constructs one residential house in India (within 3 years).

b. Here the entire sale consideration is required to be invested in the new house. If the entire sale receipt is invested, then the capital gains are fully exempt, otherwise the exemption is allowed proportionately.

c. NRI should not already own more than one residential property.

d. In all the above cases, the residential house needs to be held for 3 years after purchase/construction, else the capital gain exemption will be withdrawn.

3. Investment in specified bonds

If the long term capital asset is land and/or building, then exemption upto 50 lakhs from capital gain is available if investment is made in notified bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months and must be held for 5 years thereafter.

i) If entire capital gain upto Rs. 50 lakhs is invested in notified bonds, entire long term capital gain is exempt.

ii) If amount invested in notified bonds is less than amount of capital gain, then proportionate exemption will be granted.

Disclaimer: This article seeks to give a broad overview of the legal and tax aspects involved and is by no means exhaustive. Legal and tax advice will have to be taken specific to each transaction.

(This article has been co-authored with Radha Sampath Kumar, Chartered Accountant, who can be reached on radha.sampath.k@gmail.com)