Capital Gains Tax On Property For NRIs

The sale of your investment property in India could result in capital gains tax, and the buyer is obligated to deduct TDS as per the Income Tax Department's directives. However, you can claim an exemption or deduction by reinvesting your capital gains and meeting specific conditions. This blog helps you understand how TDS is applied on selling your investment property and the significance of Sec 54, 54 EC, or 54 F in securing tax exemption.

July 4, 2024
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6 mins
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The Indian real estate sector is presently booming. Indian real estate has always been a popular investment option amongst NRIs,  and residential real estate projects are attracting investments by NRIs to buy properties in India and the urge to be those early investors cashing in on the booming Indian market. 

When dealing in real estate, you must be aware of the taxes. The capital gains tax plays a crucial role in determining your overall returns. Effective tax planning can help you minimize the tax outflow. 

Types of Real Estate Properties in India

Real Estate Property in India is mainly categorized into four types, namely,

  • Residential  Property
  • Commercial Property
  • Industrial Property
  • Investment in Land

What Specific Real Estate Properties Can NRIs Invest In?

As an NRI, you can invest in residential and commercial property

However, you are not allowed to invest in agricultural land, farmhouses or plantation properties, any real estate business dealing in immovable property like land with an intention of earning income or profit. 

You can refer to the Master Circular on Foreign Investment in India for a better knowledge on the allowable NRI investments in India. 

Taxes On NRIs Real Estate Investments

When you plan to sell your real estate investment property in India and if there is any realized capital gain on it then the property shall attract capital gains tax based on the period of holdings.

Long Term Capital Gains (LTCG) on Real Estate Investment

LTCG is the payment of capital gains tax on the sale of property held by you for a period of more than two years from the date of purchase.  

Short Term Capital Gains (STCG) on Real Estate Investment

STCG is the payment of capital gains tax on the sale of property held by you for a period of less than two years from the date of purchase.

  

Note: If you consider selling an inherited property then the date of purchase is the date of purchase made by the original owner and the cost of property is the price at which the original owner bought the house. 

Applicability of Tax Deducted at Source (TDS) on Selling of Real Estate Property

Applicability of TDS on the sale of the property depends on the holding period of the property.

  • In case the age of the property held by you is less than or equal to 24 months (from  then the buyer of your property shall deduct a TDS of 30%
  • However, if the property is held for more than 24 months then your buyer shall deduct a TDS of 20%.

TDS on Rental Income

In India, when you let out the property to any Indian resident, it is the responsibility of the tenant to have a copy of your PAN, tax deducted at source before transferring the rent to your account and share Form 16A to you stating that the rent is duly paid and tax got deducted at source before making the payment

Your tenant has to deduct 31.2% (including CESS & surcharge, maximum capped at 39%) TDS, fill out the Form 15 CA and submit it to the Income Tax Department of India before making the payment. Also, the tenant has to obtain Form 15 CB  from a Chartered Accountant if the rental amount or aggregate of the rental amount for the financial year is in excess of INR 5,00,000.

How to Save on TDS Deduction?

You can submit Form 13 which is a lower deduction certificate that assists you in claiming lower or non-deduction of TDS from your income to the Income Tax Department of India asking the Income Tax Department of India to calculate your capital gains. The IT Department will calculate your capital gains and issue a certificate for a nil or lower TDS deduction (if there is any) thereby reducing the deduction of TDS. 

Given the intricacies involved in this process you might need the help of a tax-expert to ease your work a bit.

Threshold Limit to Deduct TDS u/s 195

According to Sec 195 of the Indian Income Tax Act, there is no specified minimum limit for the deduction of TDS.

If a particular payment remains exempt from the tax in India then no TDS shall be applicable. Also, the other party involved can deduct tax only if the payment made to an NRI is taxable in India. 

How to File TDS on the Sale of Property by NRI?

Filing of TDS is the duty of the property buyer. Here, the buyer has to fill out the Form 27Q

Form 27Q is a TDS return or statement having the details of TDS deducted on the payments other than the salary made to NRIs. 

The buyer has to obtain a TAN (Tax Deduction Account Number) and deduct the TDS accordingly. Once the buyer deducts the TDS, the next step is to deposit the amount with the Income Tax Department and obtain an e-challan before the 7th of the subsequent month. 

On doing so the buyer is also responsible for filing the quarterly TDS return and obtaining Form 16A (acknowledgement from the government for the TDS deducted other than salary income).

Finally, the buyer is supposed to submit the Form 16A to you thereby confirming the successful deduction of TDS.

Tax Exemptions & Tax Deductions For NRIs

As an NRI, you can claim exemption from TDS or avail of any deduction against the capital gains tax on the sale of property subject to fulfillment of certain specific conditions according to the applicable Section.

Exemption under Section 54:

The exemption is applicable on LTCG on the sale of the residential property bought in India which is older than 24 months from the date of purchase.

As an NRI, when you sell residential property in India, you can confidently remain eligible to claim an exemption under this section, provided you meet the specific criteria.

  • You can set off against any property bought in India within one year before the sale of the old property or
  • Buy a new property within two years from the date of sale of the old property or
  • If you are constructing a new property, the time limit for the construction is 3 years from the date of sale of the old property.

You cannot claim the exemption on properties bought or sold outside India.

Important points to note -

➡️ The exemption limit is lower of the capital gains or the cost of your new residential property. 

➡️ It is essential to note that the exemption is available only for one residential property.

➡️ The exemption can be revoked from the IT Department’s end if you sell the new property within three years from the purchase date.

Exemption Under Section 54 EC

The Sec 54 EC is applicable on the LTCG derived from the sale of residential or non-residential property bought by you and held for more than 24 months.

You can avail of the exemption under Sec 54 EC by investing the gains earned on the sale of the property into specified bonds from the NHAI (National Highways Authority of India) or REC (Rural Electrification Corporation).

Points to note -

➡️ Lock-in period is five years

➡️ Invest up to INR 50 Lakhs into these bonds in a particular financial year

➡️ The investment is to be made within six months from the date of sale.

Exemption Under Section 54F

The exemption is applicable on LTCG derived on the sale of capital asset such as land or building other than a residential property bought in India and held for more than 24 months from the date of purchase.

The proceeds of any capital gains derived from the sale is to be reinvested for buying a residential property or constructing a residential property.

You can claim an exemption under Sec 54F by following the below-mentioned guidelines,

  • You can set off against any property bought in India within one year before the sale of the old capital asset (other than residential property) or 
  • Buy a new property within two years after the date of sale of the old capital asset (other than residential property) or,
  • If you are constructing a new property, the time limit for the construction is 3 years from the date of sale of the capital asset (not being a residential property).

You cannot claim the exemption on properties bought or sold outside India.

It is essential to note that the exemption is available only when you have no other residential property except for the one you bought as on the date of sale of the old capital asset (not being a residential property).

The exemption can be revoked if you sell the new residential property within three years of the purchase date and also attract tax on the capital gains that remained exempted earlier.

The amount of exemption depends on the portion of your net sale proceeds you are willing to reinvest in purchasing or constructing your new residential property.

Repatriation of Sale Proceeds 

In order to repatriate your sale proceeds to your NRE or foreign account, you may have to request the buyer to file Form 15 CA and CB which ensures smooth transfer of the sale proceeds. 

You can refer to our blog on NRI repatriation for better understanding of the rules and procedures along with the restrictions involved.

Conclusion

As an NRI, receipt of capital gains on the sale of your property held in India attracts capital gains tax and the property buyer shall deduct TDS before transferring the sale proceeds. 

The property buyer is supposed to obtain and share Form 16A with you which is helpful in claiming refund on deducted TDS. You can avail of tax exemption or claim any deduction against the capital gains tax by reinvesting the capital gains proceeds.

While all this may be hectic to navigate and file. You can hire our NRI tax experts who will help you with tax filings, availing deductions/exemptions and lower the TDS. 

Link Button Hire a Tax Expert👉

Capital Gains Tax On Property For NRIs: Frequently Asked Questions (FAQs) 

Is there any tax on NRI’s sale of gift or inherited property?

Yes, the capital gains tax is levied on sale of gifts or inherited property. However, for calculating the asset holding period the date of purchase made by the original owner is essential and the property’s purchase cost is the cost incurred by the original owner before passing the property to you.

Can an NRI sell property in India without having a PAN?

No, it is necessary that you have an active PAN (Permanent Account Number) to successfully process the TDS from the buyer’s end. You can directly apply for a PAN on the iNRI portal. A 100% digital process. 

Who is supposed to deduct the TDS on the sale of NRIs property?

The buyer is the one responsible for deducting the TDS before transferring the sale proceeds and submitting Form 16A obtained from the Income Tax Department of India on the sale of property.

Why does an NRI need to file an ITR if the TDS is deducted on the sale of property held in India?

When you sell property to a resident of India, the TDS is often deducted at the highest possible rate. You can always file an ITR to claim a refund if the tax was levied at a higher rate and avoid paying higher taxes. To do so smoothly, it is worth considering taking the help of a tax professional in India.

Do NRIs require Aadhaar to sell their property in India?

No, Aadhaar is not mandatory while selling your property held in India. 

However, having one can help you seamlessly invest in other investments, like mutual funds. 

Is there any tax advantage in reinvesting the sale proceeds into a new residential property?

Yes, as an NRI, you shall become eligible to claim exemption on capital gains tax deduction if you reinvest the amount into a residential property subject to fulfillment of certain conditions specified above.

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