TDS on Sale of Property by NRI - Tax Implications for NRIs Who Want to Sell Property in India

What is the TDS on sale of property by NRI in India?

TDS (Tax Deducted at Source) on the sale of property by Non-Resident Indians (NRIs) 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.

How are gains from a property sale taxed for NRI in India?

NRIs who are selling property that is situated in India have to pay tax on the capital gains. When an NRI sells property in India, the buyer must deduct TDS under Section 195 of the Income Tax Act 1961. The tax deduction rate is not fixed at 1%, unlike Section 194IA in this case.

The income tax rules for Non-Resident Indians (NRIs) regarding capital gains in India are as follows:

1. Taxation of Short-term Capital Gains (STCG):
   • If an NRI sells or transfers a capital asset, such as stocks, securities, or immovable property, held for less than 24 months, any resulting gain is considered a short-term capital gain.
   • Short-term capital gains are taxed at applicable slab rates as per the income tax brackets for NRIs.
2. Taxation of Long-term Capital Gains (LTCG):
   • If an NRI sells or transfers a capital asset held for 24 months or more, any resulting gain is considered a long-term capital gain.
   • For listed securities (like stocks and equity-oriented mutual funds), long-term capital gains tax is applicable at a rate of 10% without indexation benefit if the gains exceed INR 1 lakh in a financial year.
   • For immovable property and other assets, long-term capital gains tax is generally applicable at a rate of 20% with an indexation benefit. However, the specific rates and rules may vary depending on the asset type.
3. Indexation Benefit:
   • Indexation benefit allows adjusting the purchase price of an asset for inflation over the holding period, which helps reduce the taxable capital gains.
   • For long-term capital gains on assets other than listed securities, the indexed acquisition cost is calculated by applying the Cost Inflation Index (CII) published by the Income Tax Department.
4. Exemptions and Deductions:
   • Certain exemptions and deductions may be available to NRIs on capital gains, such as
     • Exemption under Section 54, which provides relief when selling a residential property and investing the gains in another property.
     • Exemption under Section 54F, which allows exemption from capital gains tax on the sale of any asset other than a residential property if the proceeds are invested in a residential property.
     • Deduction under Section 54EC permits investment in specified bonds within a specified period to avail of the exemption from capital gains tax.
5. Tax Deducted at Source (TDS):
   • If an NRI sells immovable property in India, the buyer must deduct TDS on the sale proceeds at the applicable rates. The TDS rates for NRIs can vary depending on the type of property and the sale amount.

Income Tax Rules for NRI on TDS Deductible

As an NRI (Non-Resident Indian), there are specific income tax rules related to TDS (Tax Deducted at Source) that you need to be aware of. Here are some key points regarding TDS deductions for NRIs:

TDS on Income:

• TDS is applicable to various types of income earned by NRIs in India, including salary, rent, interest, capital gains, etc.
• The TDS rates can vary depending on the nature of income and the applicable tax rates.
• NRIs are required to provide their Permanent Account Number (PAN) to the deductor for proper TDS deduction.

TDS on Interest Income:

• For interest income earned by NRIs on fixed deposits, savings accounts, or any other interest-bearing instruments, TDS is deducted at a flat rate of 30% (plus applicable surcharge and education cess) by the payer.
• However, if the NRI qualifies for any lower tax rates or exemptions under the Double Taxation Avoidance Agreement (DTAA) between India and their resident country, they can submit the necessary documents, such as Tax Residency Certificate (TRC), to avail of the lower TDS rate.

TDS on Capital Gains:

• NRIs are subject to TDS on capital gains arising from the sale of property, shares, or any other capital assets in India.
• The TDS rates for capital gains can vary depending on the type of asset and the holding period.
• NRIs can claim a refund for any excess TDS deducted by filing their income tax returns.

TDS Exemptions:

• NRIs can apply for lower TDS rates or claim exemptions by obtaining a Certificate of Lower Deduction or No Deduction from a chartered accountant.
• This certificate is required for specific transactions and helps in reducing the TDS liability for NRIs.

In India, when a buyer buys a property from an NRI, he is liable to deduct TDS (Tax Deductible at Source) at 20%. If a property is sold before two years, a TDS of 30% is applicable.

How can NRI save taxes on capital gains while selling a property?

An NRI can save taxes as per income tax rules for NRI while selling a property under Section 54 and Section 54EC and 54F

NRIs can potentially save taxes on capital gains while selling a property in India by utilizing the provisions of Section 54 and Section 54EC of the Income Tax Act. Let's understand these sections in more detail:

1. 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:
   a. Eligibility: The exemption is available to both residents and NRIs.
   b. Applicability: The exemption applies to long-term capital gains arising from the sale of a residential property held for a minimum of 24 months.
   c. Reinvestment: The taxpayer must utilize the proceeds from the sale to purchase another residential property within the specified timeframes.
   d. 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 must 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).
   e. Exemption Amount: The amount of exemption is the lower of the long-term capital gains or the cost of the new residential property.
2. 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
   a. Eligibility: The exemption is available to both residents and NRIs.
   b. Applicability: The exemption applies to long-term capital gains arising from the sale of any asset, including residential and non-residential properties.
   c. 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.
   d. 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.
   e. Lock-in Period: The specified bonds have a lock-in period of five years.

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 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 amount of exemption is determined based on the proportion of the investment made in the new residential property compared to the net sale proceeds. If the entire net sale proceeds are invested, the long-term capital gains will be tax exempted. If only a portion is invested, the exemption will be calculated proportionally.

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