Tax Implications of Selling Property in India by NRIs| North Loop Official Blog
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02 Sep 2020

Tax Implications of Selling Property in India by NRIs

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Holding on to real estate in India can become inconvenient if you live abroad. There are a variety of tasks that need to get carried out, and it can get burdensome to manage them when you are not living in the country. The most feasible thing to do in that case is to liquidate the asset and invest the capital value of your property.

That way, the effort and expense on paying property tax or maintenance dues can get redirected into other areas of your investment. However, when selling properties that you possess in this country, you also have to remember the implications of capital gain tax on property in India.

Since NRI tax on property sale in India is a subject of great concern for many, we have created a guideline for you to understand the effect of selling real estate on property tax in India.

To begin with, it is imperative to clear the confusion about the category of individuals you can sell your property to in India. As an NRI, you are allowed to sell residential or commercial property to a person residing in India, another NRI or even a person of Indian origin (PIO).

You can also mortgage your property to an authorised real estate dealer or a financial institution that deals with home loans. However, there is one thing you must keep in mind, which is that if it is agricultural land or farming development, then it can only be sold to a resident Indian citizen.

Moreover, if the property that you intend to sell is an inherited one, you need to take special permissions from the concerned authorities before you can sell it. So let us say, if you have inherited a property from someone who is not of Indian origin, then you must seek permission from the Central Bank to become eligible to sell that property.

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Capital Gain Tax on a property in India and TDS –

The NRI tax on property sale in India depends primarily on how long you have held the property. The gains on your sale are computed as the difference between the sale value of your property and the indexed cost of acquisition (COA).

The indexed COA is the cost of purchase along with expenses incurred on construction or renovation, all adjusted to inflation. You can calculate your indexed cost of acquisition with the help of online capital gain calculators or even take the assistance of a chartered accountant. The percentage of capital gain TDS (tax deducted at source) at 20% for long term capital gains and 30% for short-term capital gain tax on property in India.

Tax Exemptions –

There are certain instances where you can avoid tax getting deducted at source when selling your property. One of the most common ways to do so is to reinvest the capital gains received on the sale in buying a new property or by investing in tax-exempt bonds.

On showing your proof of investment to the income tax authorities, you can apply for a tax exemption certificate under section 195 of the Income Tax Act. The evidence of reinvestment of your capital gain can be an allotment letter for the new house or even a payment receipt.

If you chose to invest in bonds, you may provide an affidavit as proof of your investment. The crucial point to remember here is that to avoid tax getting deducted on the capital gains received when you sell the property, you must reinvest the income within two years from the date of sale. This condition applies if you intend to buy a new property, while if you plan to invest in bonds you must do so within six months of the sale.

Some relevant sections under the IT Act to avail exemption on your capital gain taxes are as follows –

Section 54 –

The exemption on this section is available only for residential or house property and not commercial ones. This section specifies that if you earn long term capital gain on the sale of house property in India, and purchase a new residential property one year before the sale or within two years from the sale, then your capital gain amount becomes tax exempted.

A point to note here is that you don't need to invest the entire sale proceed to avail this exemption. Only reinvestment of your capital gain amount is sufficient.

Moreover, you can fund the gains in the construction of a property as well, but it must get completed within three years from the date of sale. Lastly, the most important thing to remember is that the exemption on your property tax in India under this section can get withdrawn if you sell your new house property within three years of its purchase.

Section 54EC –

This section of the IT Act states that if you sell a residential property in India after three years from the date of its purchase and invest its gain into bonds issued by the NHAI (National Highway Authority of India) or REC (Rural Electrification Corporation), you can avoid paying long term capital gain tax on it.

This section also stipulates that to avail exemption, you have to invest in these bonds before the return filing date and within six months from the date of sale of your property. Moreover, the bonds issued are redeemable after five years and cannot be sold before a lapse of five years from the investment. Failure to hold it for at least five years will lead to a withdrawal of your capital gain exemption, and it will become mandatory for you to pay tax on that amount.

Repatriation –

The conditions for the repatriation of funds received on sale of property are the same as for other income and should not exceed $1 million if you have an NRO account. Funds in NRE account mostly do not have any limit for repatriation to India.

Also, the sale should be done through authorized dealers, along with necessary documents and evidence of ownership such as property inheritance papers, purchase receipts and other requisite proofs. A certificate from a chartered accountant in the format requested by the authorities is also a necessity.

Moreover, you should also be aware of the Double Tax Avoidance Agreement entered by India with your current country of residence to ensure that there is no incidence of double taxation on your income earned from the sale of property in India.
You can also read about ways to apply for home loans in India by clicking here.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.