How is NRI Property Sale Taxed? Short vs Long-Term Gains Explained
NRIs who are selling property that is situated in India have to pay tax on the capital gains. The capital gain tax is divided in two based on the gains, if they are short term capital gain or long term capital gain.
- LTCG: When a property is sold after holding it for more than two years, the gains arising from such property will be treated as LTCG.
- STCG: Whereas in a case where a property is sold within two years of acquiring it - the gains arising on such property will be treated as STCG.
When dealing with inherited property, it is essential to take into account the original owner's purchase date to determine whether the capital gain is classified as long-term or short-term. In this scenario, the cost of the property should be assessed based on the expenses incurred by the previous owner. This consideration ensures a more accurate calculation of capital gains and aligns with the specific circumstances associated with inherited properties.
How much tax will be payable?
As per the Budget 2024 updates, there have been significant changes to the taxation of gains from property sales for NRIs (Non-Resident Indians). Here are the key updates:
- Long-Term Capital Gains (LTCG): The long-term capital gains (LTCG) tax rate on the sale of immovable property has been reduced from 20% to 12.5%.
- Short-Term Capital Gains (STCG): STCG is taxed at the applicable income tax slab rates for NRIs based on the total income taxable in India for NRIs.
- No Indexation Benefits: The benefit of indexation, which allowed for adjusting the purchase price for inflation, has been withdrawn for any capital asset from FY 2024-25. . This means that the actual gains realized upon sale will be fully taxable.
Who has to Pay TDS While Selling Property?
The responsibility of deducting the Tax Deducted at Source (TDS) amount from the sale proceeds and transferring it to the Non-Resident Indian (NRI) seller lies with the property buyer. After deducting the TDS, the buyer is required to file deduction and payment details in Form 27Q.
To facilitate this process, the buyer is required to apply for and obtain a Tax Deduction Account Number (TAN) in their name. In cases where two or more individuals jointly purchase the property, investing funds from their personal sources or through joint loans, each person involved must acquire a TAN.
Once the TAN is secured, the buyer is obligated to deduct the TDS amount during each transaction of transferring payment to the NRI seller. The deducted TDS amount must then be deposited with the Income Tax Department through an e-challan by the 7th day of the subsequent month in which the payment was made to the seller.
To fulfill their regulatory obligations, the buyer must file the TDS return in the following quarter after depositing the TDS amount. Upon successful filing of the TDS return, the buyer can obtain Form 16A, which is then provided to the NRI seller.
By adhering to these procedures, both the buyer and the NRI seller ensure compliance with tax regulations, fostering a transparent and legal property transaction process.
Documents Needed for NRI Property Sale & Tax Compliance
- Title Deed: Proof of ownership of the property.
- PAN Card: Mandatory for tax purposes.
- Passport and Visa: Proof of the seller’s NRI status.
- Power of Attorney (PoA): For NRIs selling through a representative in India. The PoA must be notarized and apostilled in the seller’s country of residence.
- Sale Agreement: Includes terms of sale, payment details, and tax obligations.
- Utility Bill Receipts: Proof of ownership and maintenance.
- No Objection Certificate (NOC): Issued by the housing society or relevant authority.
Return of Sale Proceeds by NRI outside India
An NRI selling property in India must submit Form 15CA and Form 15CB to the authorized dealer bank for repatriating the sale proceeds. While Form 15CB requires certification from a Chartered Accountant, the seller can repatriate up to USD 1 million per financial year outside India.
What is the TDS on Sale of Property by NRI in India?
NRI who sells a house in India is required to pay capital gain tax. TDS (Tax Deducted at Source) on the sale of property by NRI in India is a mechanism implemented by the Indian tax authorities to collect taxes at the time of property transfer. The buyer of the property is responsible for deducting TDS from the sale proceeds and depositing it with the income tax department within the time prescribed. After deducting the TDS, the buyer is required to file deduction and payment details in Form 27Q. The amount of TDS to be deducted depends on the residential status of the seller.
As an NRI, if you sell a property in India, the buyer deducts 20% as Tax Deducted at Source (TDS) as Long Term Capital Gains Tax for properties sold after two years. For properties sold before 2 years, the TDS rate is 30%, deducted as Short Term Capital Gains Tax.
| Nature of Capital Gains |
Description |
TDS Rate on Sale of Property by NRI |
| Long Term Capital Gains |
Property held for more than 2 years |
20% |
| Short Term Capital Gains |
Property held for less than 2 years |
Income Tax Slab Rates of Seller |
TDS Rates on NRI Property Sales: LTCG & STCG Explained
Under Section 194IA of the Income Tax Act, the TDS rate on the sale of immovable property is 1% of the total transaction value, provided the seller furnishes their Permanent Account Number (PAN). It is the buyer's responsibility to deduct this TDS, not the seller's.
If the seller fails to provide their PAN, the TDS rate increases sharply to 20%, emphasizing the importance of quoting the PAN during the transaction. Also, if the property is sold within 24 months, a 30% TDS is deducted, and if it is sold after 24 months, a 20% TDS is deducted. This rate applies without including additional charges such as surcharge or cess, making it a straightforward deduction from the transaction value. The TDS must be deducted at the time of payment to the seller.
| Particulars |
LTCG |
STCG |
| Total income is less than ₹50 lakh |
Total income is between ₹50 lakh and ₹1 crore |
Total income is more than ₹1 crore |
| Capital gain tax |
20% |
20% |
20% |
As per the applicable IT slab rate |
| Add: Surcharge |
Nil |
10% of the above tax |
15% of the above tax |
As per the applicable IT slab rate |
| Total tax rate |
20% |
22% |
23% |
|
| Add: Health and Education cess |
4% of the total tax rate |
4% of the total tax rate |
4% of the total tax rate |
4% of the total tax rate |
| Effective TDS rate |
20.80% |
22.88% |
23.92% |
To be ascertained as above |
How can NRI Save Taxes on Capital Gains While Selling a Property?
NRI can save taxes as per income tax rules for NRI while selling a property under Section 54 , Section 54EC, and Section 54F.
Exemption under Section 54
This section provides an exemption from long-term capital gains tax on the sale of a residential property of the NRI if the proceeds are reinvested in another residential property. The key points to note are:
- Eligibility: The exemption is available to both residents and NRIs.
- Applicability: The exemption applies to long-term capital gains arising from the sale of a residential property held for a minimum of 24 months.
- Reinvestment: The taxpayer must utilize the proceeds from the sale to purchase another residential property within the specified timeframes.
-
Conditions:
- The exemption is available for one residential property only.
- The new property should be purchased within one year before or two years after the date of sale or constructed within three years from the date of sale.it is mandatory that this new house property be situated in India. The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. (Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase).
- Exemption Amount: The amount of exemption is the lower of the long-term capital gains or the cost of the new residential property.
Exemption under Section 54EC
This section allows an exemption from long-term capital gains tax if the gains are invested in specified bonds. The key points to note here are
- Eligibility: The exemption is available to both residents and NRIs.
- Applicability: The exemption applies to long-term capital gains arising from the sale of any asset, including residential and non-residential properties.
- Investment in Bonds: The taxpayer can invest the capital gains in specified bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months from the date of sale.
- Exemption Amount: The exemption amount is limited to the investment made in the specified bonds subject to a maximum of INR 50 lakhs in a financial year.
- Lock-in Period: The specified bonds have a lock-in period of five years.
Exemption under section 54F
Section 54F provides an exemption from long-term capital gains tax on the sale of any asset other than a residential property if the proceeds are invested in a residential property. Here are the key points to note:
- Eligibility: The exemption under Section 54F is available to individuals and Hindu Undivided Families (HUFs), including NRIs.
- Applicability: The exemption applies to long-term capital gains arising from the sale of any asset, such as land, building, or other capital assets, except for a residential property.
- Reinvestment: To avail of the exemption, the taxpayer must invest the net sale proceeds in purchasing or constructing a residential property.
- Timeframes for Investment: a. Purchase: The new residential property should be purchased within one year before or two years after the date of the sale of the original asset. b. Construction: If the taxpayer chooses to construct a new residential property, it should be completed within three years from the date of the sale. This new house property must be situated in India
- Conditions: a. Ownership: The taxpayer should not own more than one residential house, other than the new property, on the date of sale of the original asset. b. Lock-in Period: The new residential property must be held for at least three years from the date of its acquisition. If it is transferred within three years, the exemption claimed under Section 54F will be revoked, and the capital gains will be taxed.
- Exemption Amount: The exemption amount is determined based on the proportion of the investment made in the new residential property compared to the net sale proceeds. The long-term capital gains will be tax exempted if the entire net sale proceeds are invested. If only a portion is invested, the exemption will be calculated proportionally.
Note:- The NRI seller must submit Form 15CA and 15CB to repatriate the sale proceeds of a property. The form should be signed and submitted by a chartered accountant.
As an NRI looking for ways to save your income tax while selling property in India, connect with our experts and get solutions to all your tax queries. Hire an Online CA.
Consequences of Not Deducting TDS
In situations where the buyer fails to adhere to the prescribed TDS (Tax Deducted at Source) rates applicable to Non-Resident Indians (NRIs) or neglects to deduct TDS for any reason, they expose themselves to significant legal consequences. It is crucial for buyers to recognize their legal responsibility in deducting and depositing TDS according to the specified rates for NRI sellers or as per the rates mentioned in the NIL/lower deduction certificate issued by the Income Tax Department.
When a buyer neglects to deduct TDS at the designated rates, they become liable for penalties equal to the TDS amount not deducted. Moreover, interest accrues on the defaulted sum. Non-deduction of TDS also impedes the seller's ability to repatriate the sale proceeds to their foreign bank account or NRE (Non-Resident External) account. Additionally, if the transaction comes under the scrutiny of the Income Tax Department and it is revealed that TDS was not deducted appropriately, the seller may face prosecution for misrepresenting their tax residency status.
Therefore, Buyers must ensure the seller's tax residency status before proceeding with a property transaction. If the seller is a non-resident, TDS must be deducted at the prescribed rates on each payment made to the seller. However, if the seller provides a Nil/Lower Deduction Certificate, the TDS should be deducted at the rate specified in the certificate.
How Tax2win’s NRI Tax Experts Help You
- Lower TDS Certificate Filing – Reduce or eliminate TDS deductions before the sale
- Capital Gains Tax Planning – Utilize exemptions under Section 54, 54EC, and 54F
- Repatriation Assistance – Guidance on transferring sale proceeds abroad legally
- Complete ITR Filing Support – Ensure compliance while maximizing tax savings
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