NRIs have always invested heavily in properties in India. Even in the current times of low domestic demand, whatever demand is left is primarily coming from NRIs based abroad.
However, many NRIs I have interacted as part of my professional work have been completely clueless about tax implications in India, on their property transactions. Some NRIs are also under the mistaken notion that since they’re an NRI as per Income Tax Act (living > 182 days in a year outside India), there is no income tax liability on them in India – this assumption is grossly incorrect and proves especially painful when one day, out of the blue, the NRI gets an income tax notice.
In this post, I am trying to create some basic awareness of capital gains taxation and associated implications for NRI while buying/selling property in India.
Please try to understand that this is a topic on which entire books have been written – I have tried to capture the highlights here. I advise you in your interest to contact a professional CA and pay a small fee before embarking on a transaction which is your life’s biggest investment.
Please also note that apart from income tax law, NRI should also be aware of the FEMA provisions before purchasing property in India – for this, please check below posts:
FEMA Implications on acquisition of property in India
Remittance facilities to NRI & Expats under FEMA
How NRI can calculate capital gains from immovable property
There is a simple three step process for calculating the capital gains
Sale consideration (A) : xx
Less:
Cost of acquisition: xx
Cost of Improvement: xx
Cost of Transfer: xx
Total (B):
Net Capital Gain (A) – (B)
Some points to note in this regard are follows. Please note that some amongst these points are decisions by various courts as on date – the legal position may change with time so check the exact legal position when you’re transferring your property instead of blindly relying on the below:
- In case sale consideration as per agreement value is less than stamp duty value, the stamp duty value will be taken as the sale consideration – effective 1/4/2017, a further clarification has been given that the stamp duty value as on the date of agreement will be considered, for property where payment has been made by account payee cheque/NEFT before the date of agreement.
- Stamp duty valuation may also be applicable after the date of transfer if the assessment by Stamp Valuation Authority has been made after the date of transfer.
- In case the capital gain is long term, you can claim indexed value of cost of acquisition and improvement. The CII values are available here Link.
- In case of property has been received under gift/will/inheritance, it will not be counted as a “transfer” – only when the recipient sells that property, it will be counted as a sale for capital gains purposes and even there, the cost to the previous owner (i.e. donor) will be taken as cost of acquisition
- Repayment of loan cannot be counted as a cost so as to arrive at capital gain
- Expenses like brokerage, society NOC and transfer charges, any litigation expenses, expenses for vacating tenants can generally be claimed as a cost of transfer – just ensure you have in place proper proof and preferably, should have paid by way of cheque to the concerned parties.
- Conversion of land from agricultural to non-agricultural is considered as cost of acquisition.
- While the date of registration can be construed as date of acquisition for purpose of resale property, there is a lot of confusion around date of acquisition in case of under construction property and there are differing court judgements around it – in my view, date of receipt of allotment letter from builder can be construed as cost of acquisition in such cases.
Tax Rate for Immovable property Transaction for NRI
The tax rates for NRI are as follows:
- Short term capital gain: Amount will be added to the total income of the NRI for the financial year and taxed as per the applicable tax slabs
- Long term: 20.60%
Some points to note as regards tax rates:
- These rates are applicable even if TDS is deducted or no TDS is deducted basis a nil tax deduction certificate from AO.
- NRI need to be also mindful about advance tax implications. The tax that accrues to you need to be paid by you in instalments at set dates during the financial year itself – if it is delayed till date of filing tax return, interest u/s ABC will apply and increase your tax liability.
- These rates are the same for all age group of non resident assessee.
- In case of non-resident, the provision of adjusting long term capital gain to the extent of unused qualifying exemption limit is not available – so please be mindful of that.
- There are basically two main exemptions available on long term residential house -property capital gain i.e. Section 54 or Section 54EC (purchase of REC bonds). For long term commercial property, you can check out Section 54 EC or Section 54F.
- In case you’re planning to claim an exemption and have not been able to fully invest by the time of filing your tax return, you need to deposit the unused amount in the Capital Gain Deposit Scheme (CGDS) scheme of a bank which is essentially a fixed deposit. Such amount will be considered as exempt for purpose of calculating and paying tax in your tax return.
- If you’re a tax resident of a country which has a DTAA with India and prescribes a lower rate, you can take benefit of a lower rate, provided you obtain a tax residency certificate (TRC) and submit necessary information to ITD in Form 10F.
Tax Pointers for NRI buyers and sellers of immovable property in India
- Tax liability in form of capital gain will arise to you depending on the holding period of property.
- Agricultural land situated in rural area is excluded from definition of “capital asset” – so if NRI sells an agricultural land, there is no capital gains tax on it. To find out whether your property qualifies as agricultural land, check this link
- If you are selling the property within 3 years from the date of purchase, it will be treated as “short term capital gain” – and the gain will be added to your income.
- If you are selling the property after 3 years from the date of purchase, it will be treated as “long term capital gain” – in that case, the tax rate will be 20% and you can claim indexation benefit.
- The purchaser will have to deduct TDS on you at 30% (in case of short term capital gain) or 20% (in case of long term capital gain) – please bear in mind that this TDS has to be deducted on the full sale consideration (and not only the capital gain amount) and to do this is the responsibility of the buyer.
- Seller has the option to apply to the AO for a NIL/lower rate of deduction – if seller gets this certificate, he can provide it to the buyer and then buyer can deduct tax at a lower rate as per order of AO.
- Once the buyer deducts TDS, it is not over for seller. Seller will have to file a tax return in India, disclose this capital gain and also claim the credit for TDS – balance will be payable/refundable as the case may be. In short, deducting of TDS by buyer does not absolve seller from your tax filing responsibility.
- If NRI purchaser is purchasing property from a resident, he has to deduct TDS @1% & deposit to government account by 7th of next month.
- While payment of money, it is advisable to pay everything in cheque. Even if paying say token money by cheque, as per Section 269SS of Income Tax Act, payment > INR 20,000 cannot be made in cash. If you do it, it will be a violation of The Income Tax Act.
- As a buyer, you must check the ratio of ownership of the existing owners – if it is not specified, instead of assuming it as 50:50, you should seek specific confirmation on stamp paper.
- In case PAN is not available, it is advisable to apply and obtain PAN before undertaking property transaction. Also, as per Rule 114B of Income Tax Act, effective Jan 1, 2016, it is required to be quoted in all property transactions exceeding INR 10 lacs – check this link
- In case you have sold multiple properties in a year, it is advisable to compute the capital gain separately.
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