Are you an NRI who has just sold property or who has plans to do so in the future? If you answered “yes,” you should be informed of the implications for your income tax. When selling your residence in India as an NRI, you must adhere to certain income tax regulations and rates. We’ll go over all the information you need to know about income tax on non-resident Indians who sell real estate there in this article.
What is the tax obligation?
When a non-resident Indian (NRI) sells a residence in India, all earnings or gains are considered capital gains. The Income Tax Act regulates capital gains taxes, and NRIs are subject to various tax rates depending on some factors.
When NRIs sell their private property, a capital gains tax is computed as follows:
Tax on Long-Term Capital Gains
When non-resident Indians (NRIs) sell a residential property in India that they have owned for longer than two years, they are making long-term capital gains. The process used to calculate the long-term capital gains tax that NRIs are liable for on such property transactions is as follows:
The profits are taxed at a fixed rate of 20%. As a result, taxes will be due on 20% of the sale’s proceeds.
However, NRIs may be able to reduce their tax liability by looking at the Sections 54 and 54F exemptions of the Income Tax Act. These sections give provisions that allow NRIs to ask for particular exemptions if they fulfill certain criteria and conditions.
Tax on Short-Term Capital Gains
A short-term gain is a profit from the sale of personal or investment property that has been owned for at least a year. These profits are taxed at your usual income tax rate. The formula is as follows:
- The gains increase the NRI’s annual income total
- The NRI income tax slab rates are then applied to the full income.
How to save tax on capital gains?
In India, long-term capital gains from the sale of property are excluded from taxation for NRIs under sections 54 54F, and 54EC.
1. Under section 54, exemption
It is accessible when the sale of an NRI’s residential property results in a long-term capital gain. The residence may be used for personal use or rented out. Please be aware that only the amount of capital gains, not the total selling receipt, must be reinvested. Of course, the cost of the new property you purchased may be larger than the proceeds from capital gains. Your exemption, however, will only cover the total capital gain on the sale.
Additionally, you have the option to buy this residence either one year before or two years after the sale of your current property. The construction of a property may be financed with the gains as well, but it must be finished within three years of the sale date.
It was made clear in the Budget for 2014–15 that just ONE residential property can be purchased or built from capital gains to claim this deduction.
A location for this new residing property must be in India as of the assessment year 2015–16 (or financial year 2014–15). Properties purchased or built outside of India are not eligible to receive the exemption under section 54. (Keep in mind that if you sell this new home within three years of buying it, this exemption may be canceled).
According to the Capital Gains Account Scheme, 1988, you may deposit your profits in a PSU bank or other banks if you are unable to invest them before the date of filing your return, which is typically the 31st of July of the fiscal year in which you sold your property. You don’t have to pay tax on it if you declare it on your return as an exemption from your capital gains.
2. Section 54F exemption
If a capital asset other than a residential property is sold for a long-term gain, it may be eligible. To qualify for this exemption, an NRI must buy one residential property within one year of the capital asset’s transfer date, within two years of the transfer date, or within three years of the transfer date. This new property must be located in India and cannot be sold for three years after being bought or built.
In addition, the NRI should not own more than one residential property (apart from the new home), nor should they buy or build another residential home within 2 years.
In this case, the entire sale receipt must be invested. The capital gains are exempt if the entire selling receipt is invested; otherwise, a partial exemption is permitted.
3. Section 54EC offers an exemption as well
If you can invest your long-term capital gains in specific bonds, you may be able to avoid paying taxes on them. For this use, bonds issued by the Rural Electrification Corporation (REC) or the National Highway Authority of India (NHAI) have been designated. These must not be sold before the lapse of 5 years (before in 2018, it was 3 years) from the date of sale of the house property and are redeemable after 5 years (before in 2018, it was 3 years).
Please be aware that you cannot deduct this investment under any other circumstances. You have six months to invest in these bonds, but you must do so before the due date for your tax return to qualify for the exemption.
You are only permitted to invest a maximum of Rs 50 lakhs in these bonds throughout a fiscal year, according to the Union budget for 2014. To ensure that TDS is not withheld from the capital gains, the NRI must make these investments and provide the buyer with the necessary documentation. The NRI may also request a refund for any excess TDS that was taken at the time of filing their return.
Documentation Needed to Sell an NRI-Owned Property in India
When an NRI sells a property in India, a significant amount of paperwork must be submitted to the appropriate authorities. These documents are required to confirm the validity and legality of the transaction. The following is a list of some of the paperwork needed to sell an NRI-owned property in India:
The parties to the transaction are identified by this legal document.
2. PAN card
If you want to file for a tax-exempt status certificate after buying a residence, you will need your PAN card. NRIs from a select few nations are granted PAN numbers that include their overseas residence’s address.
3. Tax Returns
The NRI seller is required to declare the sale of the property and file income tax returns for the applicable fiscal years. Income tax returns should be filed by the deadlines to avoid fines.
4. Address Verification
Supporting documents are needed for both Indian and international addresses. This category includes papers such as ration cards, phone and energy bills, life insurance policy statements, Aadhar cards, and others.
5. Sale Agreement
The sale agreement, which is a legal document outlining the terms and conditions of the property’s sale, is a legal document. Both the NRI seller and the NRI buyer must sign the sale agreement before it is filed with the Sub-Registrar of Assurances.
6. Occupancy Certificate
Documentation from the organization serves as proof that the seller has made all payments as it is required. An allocation letter gives the building or apartment official ownership status, whereas an occupancy certificate attests to the apartment’s ownership.
7. Title Deed
A title deed is a legal document that establishes property ownership. A recent, legitimate title deed that is clear of any ambiguity must be used to lawfully transfer ownership of the property to the NRI seller.
8. Encumbrance Certificate
A certificate of encumbrance attests to the absence of any liens, mortgages, or other legal liabilities that might be related to the property. The NRI seller needs to get an encumbrance certificate from the relevant authorities to ensure the property is legitimate.
9. Power of Attorney
A power of attorney (POA) can be used to appoint a reliable individual to represent an NRI seller who is unable to attend the property transaction in India. The Indian embassy in the country of residence of the NRI seller must certify the POA.
10. Account Number for Tax Deduction and Collection (TAN)
The NRI seller must obtain a TAN, which is a 10-digit alphanumeric number, to pay the required taxes on the sale of property in India. To obtain the TAN, get in touch with the Indian Income Tax Department.
Tax Deducted at Source, or TDS is a method used by taxing authorities to collect taxes at the point where revenue is generated. To put it simply, it involves deducting a certain proportion of tax from payments made by a person or corporation before the receiver gets the money. On behalf of the payee, the government receives the tax amount that was deducted.
The purchaser of property sold by an NRI is required to pay TDS at 20%. A TDS of 30% will be applied if the property has been sold earlier than two years (reduced from the date of acquisition). The buyer, on behalf of the NRI seller, then submits this TDS to the Income Tax Department.
How TDS Amount is deducted?
When transferring the sale gains to the NRI seller, it is the responsibility of the buyer of the property to deduct the tax at the time of transfer from the total selling proceeds. The buyer of a property is the one who is responsible for applying for and obtaining a Tax Deduction Account (TAN) in his or her name for TDS to be deducted.
If two or more people acquire a property together and invest money from their sources or through joint loans, then each of those people is required to obtain a TAN. On each instance of making a payment to the NRI seller, the buyer is obligated to deduct TDS after they have gotten the TAN.
By the 7th day of the month following the one in which payment was made to the seller, the buyer is required to submit the TDS amount that was deducted to the Income Tax Department through the use of an e-challan.
The TDS return needs to be submitted by the buyer within the next quarter after the TDS sum has been deposited. Following the submission of the TDS return, the buyer can download Form 16A and then hand it over to the NRI seller.
How can You reduce the amount You pay in TDS?
Before transferring the money to the NRI seller, the buyer is responsible for deducting tax at the required rates and submitting it. On the other hand, the seller can get a certificate from the Income Tax Department stating that they are eligible for a smaller or zero deduction. In this scenario, the buyer will be responsible for deducting tax at the lower rate that is specified in the NIL or reduced deduction certificate.
When the TDS is higher than the seller’s tax due, the NRI seller has the option of submitting an application to the Income Tax Department for a NIL or lesser deduction certificate. However, before the completion of the selling agreement of the property, the seller is required to get a certificate stating that there would be no or a smaller deduction.
Following the completion of the calculation of the capital gains, the assessing officer will decide the TDS. Even if the seller does not have the NIL or lower deduction certificate, he or she can still file a claim for a refund on the TDS that was deducted from the transaction if the TDS was higher than the tax due.
The consequences of failing to make a TDS payment
Sometimes the buyer will pay the TDS at the rate that applies to residents rather than the rate that applies to NRI, or the buyer might not deduct TDS for any reason. When this occurs, the buyer will be forced to deal with the negative effects of the situation.
The buyer is legally liable for deducting and submitting the TDS according to the required TDS rate for the NRI seller or the stipulated rate in the NIL/lower deduction certificate given by the Income Tax Department. This responsibility applies even if the buyer received a NIL/lower deduction certificate from the Income Tax Department.
If the buyer does not deduct the correct amount of tax according to the established rates, then the buyer will be responsible for paying a penalty that is equivalent to the amount of tax that was not deducted. Additionally, the buyer would be responsible for paying interest on the amount that was past due.
In addition, if the TDS is not deducted, the seller is unable to transfer the amount of selling consideration or sale proceeds received into either his or her foreign bank account or his or her NRE account. In addition, if the transaction in issue is brought to the attention of the Income Tax Department, the seller may be subject to legal action for making false statements on the facts concerning his or her tax residency.
The Repatriation of sale earnings by a non-resident Indian living outside of India
When an NRI sells the property, they are required to submit Forms 15CA and 15CB to repatriate the profits of the transaction. A chartered accountant needs to sign and submit Form 15CB for it to be valid. An NRI buyer is permitted to repatriate up to 1 million US dollars per calendar year from India.
Things About the Income Tax Rules for NRI
The following is important information to keep in mind if you are a non-resident Indian who owns property in India:
1. When the value of the immovable property is more than Rs 50 lakh, a tax known as tax deducted at source (TDS) is required to be paid.
2. The purchaser is responsible for ensuring that the TDS is deducted from the total amount paid for the property. When registering a property, you must show evidence that the required taxes have been paid.
3. Those who acquire property from non-resident Indians (NRIs) need to take into account this TDS amount, or else they risk being responsible for paying it themselves in the case that the seller leaves the country.
4. Those individuals who have a Tax Deduction Account Number (TAN) are eligible to receive a TDS receipt. In practice, this means that the party will have to submit an application to the tax department and receive a TAN before they can send a TDS receipt to the person whose taxes have been withheld.
5. When selling property in India, non-resident Indians (NRIs) need to make sure they acquire a TDS receipt. In case the buyer fails to deposit the TDS that was deducted from the Indian tax authorities, the fact that the NRI possesses a TDS receipt will be sufficient proof for the NRI about the tax payment.
6. When selling immovable property in India, non-resident Indians are required to pay a long-term capital gains tax of 20%. If the property has been owned for a longer period of time, the indexation process will result in a lower amount of capital gains.
7. It is not possible for non-resident Indians to put the proceeds from the sale of property they own in India into NRE accounts. As a result, the only choice available is to put the money in a non-resident ordinary account (NRO account). It is possible to transfer any amount to an NRO account; however, doing so requires compliance with certain regulations, such as the provision of a CA certificate attesting to the payment of taxes and evidence that the funds being transferred are solely derived from the sale of the specified property in India.
This article looks at the income tax rates and rules that are applicable to non-resident Indians (NRIs) who sell property in India. NRI stands for “non-resident Indian.” The earnings made from the sale of properties are subject to the capital gains tax, the rates of which vary according to the length of time (more than or less than two years) that the property has been owned by the seller.
If the property is sold less than three years after the buyer acquired it, the TDS must be deducted at a rate of 20%. If it is sold more than three years after the buyer purchased it, the rate must be increased to 30%.
NRIs have the ability to reduce their capital gains tax liability by making use of the exemptions provided in Sections 54, 54F, and 54EC of the tax law, reinvesting in new properties, purchasing capital gains bonds, deducting expenditures that they have paid, documenting the costs of any improvements made to their properties, transferring assets to family members, and deducting capital losses.
The article includes a list of the paperwork that must be submitted in order to sell a property in India that is owned by a non-resident Indian (NRI).
1. As a non-resident Indian, am I required to pay income tax on the sale of the property that I own at an Indian reservation?
Yes. When you sell a property in India, you are subject to a capital gains tax that you must pay. Furthermore, the buyer is responsible for paying taxes on any gains you make. If the gain was from a short-term capital asset, the tax can be deducted according to the slab rates, but the tax deduction rate is still 20%.
2. How is long-term capital gains tax calculated for non-resident Indians who sell property in India?
When determining the amount of capital gains tax that non-resident Indians who sell a house in India are required to pay, the sale price and the indexed cost of purchase are both taken into consideration. When calculating the indexed cost of acquisition, the initial purchase price is adjusted upward so that it accounts for the effects of inflation. A long-term capital gains tax of 20% applies to real estate that has been owned for more than two years. A short-term capital gains tax of 30% applies to real estate that has been owned for less than two years.
3. Do non-resident Indians who own property in India qualify for a tax break when they sell that property?
It is possible for NRIs to make requests for tax exemptions on occasion. For instance, the profits from the sale of one piece of property are exempt from taxation if they are invested in the purchase or construction of another piece of property within the next two or three years. NRIs have the right to request a wide variety of additional laws, such as the power to invest in specified bonds or maintain modest savings accounts.