There is a fair amount of confusion about NRI Taxation while Selling Property in India. It’s always challenging to manage a house property, especially when you are not around. As an NRI, you might have stayed abroad for many years and are now contemplating selling your house property in India.
While finding a buyer back home is an enormous task, the greater challenge is also to be on top of tax-related matters.
Tax and regulations relating to the selling of house property in India are different for NRIs as compared to that of an Indian resident.
Whom to sell to?
First of all, NRIs cannot sell their agricultural land, plantation property or farmhouse to another NRI or Person of Indian Origin (PIO). However, residential or commercial property can be sold to a person residing in India, another NRI or a PIO.
How much tax is payable?
NRIs have to pay taxes on the capital gains made from selling house property. If they sell their property within two years of its date of purchase, Short-Term Capital Gain tax (STCG) rates are applicable. STCG rate is as per the applicable income tax slab rate of the NRI based on his taxable income in India.
And if they sell it after two years, Long-Term Capital Gains (LTCG) taxes @20% become applicable.
If an NRI has inherited property, the cost (and date of its purchase) of property for the previous owner becomes the basis for the calculation of capital gains taxes.
Mr Raj bought a property for Rs 1 crore in 2010-11 which was later sold in 2019-20 for Rs 2 crore. In this case, the cost of the property is adjusted for inflation by using the cost inflation index. The inflation-adjusted cost of the property is calculated by using the formula - Cost of acquisition x Cost Inflation Index in the year of sale / Cost Inflation Index in the year of acquisition.
In this case, it is Rs 1 crore*(289/167) which works out to about Rs 1.73 crore. Finally, you subtract the latter amount from the sale price to calculate the capital gain, which in this case is Rs 27 lakh (Rs 2 crore minus Rs 1.73 crore). An LTCG @20% will be levied on the capital gain which works out to Rs 5.4 lakh.
Remember, that the date of inheritance doesn’t matter for the purpose of making these calculations.
What about Tax Deducted at Source (TDS)?
TDS rate for Indian residents selling house property is 1% of its sale value. However, for NRIs selling property within two years of purchase, STCG TDS rates of 30 per cent become applicable. If the property is sold after two years, LTCG TDS rates at the rate of 20% become applicable. Moreover, there is a surcharge as well as education & health cess that varies based on the sale value of the property.
If the sale value of the property is above Rs 50 lakh and less than Rs 1 crore, 10% surcharge is applicable along with 4% health and education cess. It takes the effective TDS rate to 22.88%. Surcharge rate increases with the rise in the property value which in turn augments the overall TDS rates (see table).
TDS rates are calculated on the sale value of the property and not on the capital gains. For instance, if you sold your property for Rs 75 lakh which had an indexed cost of Rs 50 lakh, there is an LTCG TDS of Rs 17.16 lakh (22.88% of Rs 75 lakh) despite the fact that capital gain was only Rs 25 lakh (See case 2 in the table).
Apply for a certificate to reduce TDS
If TDS amount is more than your tax liability, you will get a tax refund after filing your taxes. However, if you want to avoid the refund process altogether, you can apply for a certificate for deducting TDS at a lower rate with the Jurisdictional Assessing Officer of the Income Tax department.
The latter will determine the TDS after calculating the capital gains. A certificate is issued usually within 30 working days of the application. After this certificate is received by the NRI seller, the buyer can deduct TDS at the agreed rates and deposit the same against the NRI’s PAN.
However, it needs to be noted that the application for such a certificate has to be made before executing the sales agreement. Any advance or token money received before making such an application will continue to attract higher TDS rates (as per the table above).
How to save tax on capital gains?
Invest in bonds
NRIs can invest the capital gains into bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) that are redeemable after five years. However, there is a maximum limit of Rs 50 lakh. In order to claim exemption, you have to invest within six months of the sale of property and before the return filing date.
How to avoid Double taxes?
Many countries tax the income of their residents regardless of where it originates from. While some provide partial or total exemption on capital gains arising from the sale of residential houses, others do not.
So, you need to be aware of incumbent rules in your country of residence and whether it has a Double Taxation Avoidance Agreement (DTAA) with India. For instance, if you are an NRI based in the US, you might need to declare capital gains or losses on the sale of property in India under Sec D of Form 1040. And you can deduct the taxes paid in India while calculating the capital gains taxes owed to the US Government since the latter has a DTAA with India.
However, if you did not pay any capital taxes in India because of reinvesting your capital gains (using above-mentioned options), you will still be liable to pay the taxes in the US.
Where to receive sales proceeds?
NRIs will receive the sales proceeds, net of TDS. Ensure you collect Form 16A (TDS certificate) from the buyer and cross-check the TDS figures with that of tax credit received under Form 26AS.
The sales proceeds can be received only in an FCNR or NRE/NRO bank account.
How to repatriate money abroad?
If you had purchased the property as an NRI and through inward remittance of foreign currency into an NRE account, then you can seek remittance to the extent of the property cost. And if you had taken a home loan, then the repatriation amount cannot exceed the loan repayment amount. Capital gains, if any, may however be credited to the NRO account from where the NRI can repatriate an amount upto $ 1 million in a financial year.
Furthermore, if you have purchased it from NRO account (using rupee) or inherited it from a resident Indian, it will be subject to the repatriation limit of $ 1 mn in a financial year. If you want to remit more, you need to seek permission from the RBI.
As per FEMA rules, repatriation is restricted to sale of up to two residential properties by the NRIs.
Once you sell the property, you need to get two certificates from a Chartered Accountant – Form 15A (Declaration of remitter) and Form 15CB - if the money has to be repatriated abroad. It is to verify that your money is from a legal source and all necessary taxes have been paid. Some banks might also ask for your sales agreement or the will in case of inheritance of property.
Also refer this article for more broader coversation about NRI Taxation