Capital Gains Tax on Sale of Property by NRIs – A Simple Guide

If you are an NRI (Non-Resident Indian) and are planning to sell property in India, it’s important to understand the capital gains tax rules. This guide will help you understand how the tax works, how much you need to pay, and how to save tax legally.

When you sell a property in India, the profit you make is called capital gains. The government taxes this profit, which is known as capital gains tax in India. The amount of tax you pay depends on how long you have owned the property before selling it.

1. Short-Term Capital Gains (STCG) – If you sell the property within 2 years from the purchase date, the profit is added to your total income and taxed according to your income tax slab rate.

2. Long-Term Capital Gains (LTCG) – If you sell the property after 2 years from the purchase date, the profit was previously taxed at 20% (with indexation), but this has changed. If the property is sold on or after 23rd July 2024, the gain will be taxed at 12.5% (without indexation). If the property is sold before 23rd July 2024, the gain will be taxed at 20% (with indexation). These rates are only applicable for Non Resident Indian. If you are Resident Indian and you have sold property on or after 23rd July 2024, you have an option to choose between 12.5% (without indexation) or 20% (with indexation) whichever is beneficial for you.

The purchase date of your immovable property is a crucial factor in determining tax liabilities, capital gains calculations, and compliance with legal provisions. However, it is essential to understand that the purchase date may not always be the date mentioned in the sale agreement. Instead, it can be determined based on the following key aspects:

Date of Possession – The date you physically take possession of the property plays a significant role, particularly in capital gains taxation.

Date of Final Payment – If payments are made in instalments, the purchase date can be considered as the date of the final payment.

Date of Sale Deed Execution & Registration – In most legal interpretations, the date of registration of the sale deed is taken as the purchase date.

Allotment Date in Case of Under-Construction Property – If the property was booked under a construction-linked plan, the allotment date by the builder might be considered as the purchase date for tax purposes.

Each scenario can have different implications under the Income Tax Act, 1961, FEMA, and other legal frameworks, affecting capital gains tax, indexation benefits, and compliance requirements.

When addressing the “date of purchase” for properties acquired before April 1, 2001, or through inheritance, it’s essential to understand the tax implications.

Inherited Property:
For capital gains tax calculations, the “date of purchase” of an inherited property is traced back to when the original owner acquired it. This determines the property’s holding period, which is crucial for distinguishing between long-term and short-term capital gains.

While inheriting the property itself is generally not taxed, selling it triggers capital gains tax.

If Property Acquired Before April 1, 2001:
Taxpayers have the option to use either the actual purchase cost or the fair market value of the property as of April 1, 2001, as the cost of acquisition. This provision significantly impacts the calculation of capital gains.

Key Takeaways:
• For inherited properties, prioritize establishing the original acquisition date.
• For properties pre-dating April 1, 2001, consider the fair market value option.
• Due to the complexities of tax laws, consulting a tax professional is strongly advised.
• By understanding these nuances, individuals can navigate the tax implications of selling older or inherited properties more effectively.

TDS (Tax Deducted at Source) When NRIs Sell Property
When an NRI is selling property in India, the buyer is required to deduct TDS (Tax Deducted at Source) before making the payment.

• For long-term capital gains (if you held the property for more than 2 years), TDS is 12.5%, plus surcharge and cess.
• For short-term capital gains (if you held the property for less than 2 years), TDS is 30%, plus surcharge and cess.

If the actual tax liability is less than the TDS deducted, you can apply for a lower TDS certificate with the Income Tax Department to reduce the amount deducted upfront.

For Long-Term Capital Gains (Holding Period: More than 2 Years)
LTCG = Sale Price (–) Purchase Price (–) Improvement Cost (–) Transfer Expenses

For Short-Term Capital Gains (Holding Period: Less than 2 Years)
STCG = Sale Price (–) Purchase Price (–) Transfer Expenses (–) Improvement Cost

• Purchase Price: The price at which the property was originally purchased.
• Improvement Cost: The cost of any improvements made to the property (e.g., renovations).
• Transfer Expenses: Includes brokerage fees, legal charges, etc.

NRIs can reduce or avoid capital gains tax by using tax exemptions under the Income Tax Act, 1961.

1. Reinvest in a New House (Section 54) – If you sell a residential house property and buy another residential house property within 2 years (or construct one within 3 years), you don’t have to pay tax on capital gains.

2. Invest in Government-Approved Bonds (Section 54EC) – Instead of buying another property, you can invest in Capital Gains Bonds issued by NHAI or REC within 6 months of selling your property.

3. Use the Entire Sale Amount to Buy a New House (Section 54F) – If you sell land or any other non-residential property, you can avoid tax on the capital gains by investing the entire sale amount in a new house.

1. Check the Holding Period – Determine whether your gains are short-term or long term.

2. Calculate Tax – Calculate your tax liability.

3. Apply for a Lower TDS Certificate – If your actual tax liability is lower than the TDS deducted, apply for Form 13 with the Income Tax Department. To apply, click here to connect with our NRI Expert.

4. File Income Tax Returns – If excess TDS was deducted, you can claim a refund by filing an ITR before the due date.

After selling property, NRIs must follow RBI (Reserve Bank of India) rules to transfer the money abroad:

• NRIs can send up to $1 million per financial year from an NRO account after paying taxes.
• They need a Certificate of Tax Compliance (Form 15CB) from a Chartered Accountant and must submit Form 15CA to the Income Tax Department. To get assistance in filing Form 15CA and Form 15CB, click here to get in touch with an NRI Expert.

When an NRI sells property in India, the buyer must:

• Deduct TDS before making the payment.
• Deposit the TDS with the Income Tax Department before the due date.
• File a TDS return with the Income Tax Department using Form 27Q before the due date.
• Provide Form 16A (TDS certificate) to the NRI seller as proof of tax deduction.

If you are an NRI selling property in India, you must understand the capital gains tax rules, TDS deductions, and ways to save tax. Proper planning and taking advantage of exemptions can help you reduce your tax burden. Consulting a tax expert can ensure a smooth property sale and help with tax refunds if needed.