Real estate transactions in India are often challenging for non-resident Indians (NRIs). Knowledge about how the capital gains tax works is critical to avoid unnecessary deductions or problems with regulations. Be it remitting the funds back to your resident country through your NRI account or reinvesting in India, awareness of the tax implications can help you sail through. This blog explains the taxation rules and exemptions available under Indian law.
TDS on Sale of Property by NRIs
The tax on property sales for NRIs is based on how long the property has been held. If the ownership period exceeds two years, the profit is categorised as a long-term capital gain. If sold within two years, it becomes a short-term capital gain. These rules also apply to inherited properties, where the duration of ownership is calculated from the original owner's purchase date.
For long-term capital gains, NRIs are taxed at a flat rate of 20%. In contrast, short-term capital gains are taxed according to the NRI’s income tax slab in India. During a sale, the buyer must deduct Tax Deducted at Source (TDS). The standard TDS rate is 20% for long-term capital gains, while it increases to 30% if the property is sold before completing two years.
When transferring the sale proceeds, the NRI can credit the amount to their NRE account after paying the due taxes, depending on repatriation needs and regulatory permissions.
Tax Savings on Capital Gains for NRIs
India’s Income Tax Act provides relief options that help NRIs reduce their capital gains tax burden when reinvesting in real estate.
Exemption under Section 54
Under Section 54, NRIs can claim an exemption if they sell a house property and reinvest the long-term capital gains in another residential property in India.
- The exemption applies only to the amount of capital gain, not the full sale value.
- The new property must be purchased within one year before or two years after the sale or constructed within three years.
- Only one property can be purchased or built for this exemption, and it must be located in India.
- Selling it before three years nullifies the benefit.
Capital gains can be deposited by the NRI via a Capital Gains Account Scheme with a PSU or in a designated bank if they are unable to invest prior to filing the tax return. The amount deposited can then be claimed as an exemption, ensuring compliance and deferral of tax liability.
Exemption under Section 54F
This applies if the NRI sells any long-term asset (except a residential house) and invests the sale proceeds in a residential property situated in India.
- To qualify, the new home must be purchased within one year before or after the sale of the old home or be constructed within three years.
- The newly purchased or constructed house must be located in India and retained for at least three years. Selling it before this period would nullify the exemption.
- The NRI must not own more than one residential property before making this investment and should not purchase or construct another property within the specified time frame.
If the entire sale amount is reinvested, the capital gain is fully exempt; otherwise, it is exempt proportionately. The funds used for the new purchase may be transferred through an NRE account for ease of compliance and repatriation.
To Conclude
For NRIs, selling property in India comes with tax implications and legal considerations. You will save your hard-earned money by knowing how capital gains tax is calculated. Prudently managing the funds via your NRI account ensures both regulatory adherence and convenience in cross-border transactions.
No VCCircle journalist was involved in the creation/production of this content.
