Non-resident Indians (NRIs) who are outside of India and seek to sell or buy a house, land, or other types of residential property in India must pay Capital Gains Tax. The amount of the tax would, of course, depend on whether the gains were long-term capital or short-term capital.
Most private NRI taxation service providers in India would offer mediation to individuals who are unable to travel to India, and a thorough property appraisal and determination of value, along with having clarity of the appraisal, is a good start to getting things right in place.
Understanding Long-Term Capital Gains and Short Term Capital Gains
Long term capital gains, or LTCG, are investments that offer profits over a longer period. It applies to all kinds of assets that provide profits in the timeframe of 1 to 3 years. In the case that the property is held for 2 years or less, there is a short term capital gain. The same tax implications would apply to property inheritance.
How Much Tax Do NRIs Have to Pay When Selling Property in India?
Long-term capital gains are taxed at 20%, while short-term profits are taxed at the applicable NRI income tax slab rates based on total taxable income in India.
Meanwhile, the buyer, when purchasing a house sold by an NRI, would be entitled to pay TDS at a rate of 20%. A TDS of 30% is required if the property is sold within two years (reduced from the date of acquisition).
The Typical Procedure for an NRI to Sell an Asset Property in India.
In a nutshell, the sale of any Indian property within 2 years of purchase attracts a short-term capital gains tax, and selling after 2 years makes the long term capital gains tax applicable. Short-term capital gains are taxed based on an individual’s income bracket. A tax rate of 20% is levied on long-term capital gains.
When a resident Indian purchases a property from an NRI, the buyer is liable to deduct TDS at 20% on long-term capital gains (LTCG). If the property is sold before 2 years, 30% TDS will be deducted. Before deducting TDS, the buyer must get a Tax Deduction and Collection Amount Number (TAN). An NRI tax consultant can come up with the most adept resolution to this rather cumbersome stage of the process.
For all inherited properties, the date of acquisition by the original owner is used to determine whether the capital gain is long-term or short-term. In this situation, the cost of the property will be the cost incurred by the prior owner on the specific property.
The Tax Exemptions Under Sections 54F and 54EC
In the recent past, two tax exemptions have been introduced by the Indian Government, which would apply under the 54F and 54 EC Sections. Below is an overview of the policy.
● Property Sale Tax Exemption under Section 54F
This rule applies to long-term capital gains from the sale of any capital asset other than a home. The NRI has two choices for claiming this exemption.
- Purchase a dwelling property within one year of the transfer date or two years after the transfer date.
- Build a residential property within three years of the capital asset’s transfer.
Remember that the new house property must be located in India and cannot be sold within three years of acquisition or construction. Furthermore, the NRI should not own more than one house property (apart from the new house), nor should he or she purchase or construct another house during the next two years.
● Tax Exemption Under Section 54 EC
Aside from buying or building a residence or depositing capital gains with a bank, the NRI can use the money to invest in specified bonds issued by the Rural Electrification Corporation (REC) or the National Highway Authority of India (NHAI).
An NRI can invest up to Rs 50 lakh in these bonds in a fiscal year. This rule is there to ensure that the buyer does not withhold TDS.
As of 2022, such bonds can be redeemed after five years and cannot be sold before five years from the date of sale of the house property. This investment is not deductible in any other way. The NRI has six months to invest in these bonds, but you must invest before the return filing date to get this exemption.
Also read: New Rules For NRI Taxes In India
What NRIs Need to Sell Property in India
Aside from address proof, identity proof, and a sale deed, two other important documents are required: the Documents From The Society, which declares that the seller has no outstanding payments to the society with an attachment of an occupation certificate to justify that the apartment flat has been occupied, and the allotment letter, which bestows official authority on the owner of the property or flat. The Encumbrance Certificate is the second document required to ensure that the property has no outstanding debts to any legal authority.