Tax Implications for NRIs Who Want to Sell Property in India
In India, you have to pay TDS (Tax Deducted at Source) whenever you receive goods or services from a provider. This TDS is on the overall transfer amount. While it is fairly straightforward with domestic transactions, people often get confused when an NRI is either hte provider or receiver (i.e. the buyer or the seller).
The most common instance is the sale of NRI properties in India, and how to deduct taxes on such property sales. In this article, we will explain how TDS is applicable on the sale of property by NRI, and how you can use it to your advantage.
TDS on purchase of property from NRI
According to Indian law, any person who buys a property from an NRI must pay tax. Any person who pays an NRI any money which otherwise would have been chargeable to tax, at the time of such payment must deduct income tax thereon at the applicable rates.
The NRI sellers will pay taxes within India as per the applicable sections on capital gains. As a result, the resident Indian who is the purchaser of property must also calculate the TDS liabilities as per the capital gains structure of the NRI seller.
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What are capital gains on property sold by NRI?
As an NRI, the property you hold is considered a ‘Capital Asset’, which can either be a 'Long-Term Capital Asset' or a 'Short-Term Capital Asset'.
If you have owned the property for more than 24 months, it is considered ‘Long-Term Capital Asset’, and will therefore be applicable for ‘Long Term Capital Gains’ tax. Alternatively, if you have owned the property for less than 24 months, it will be ‘Short-Term Capital Asset’, and thus liable for ‘Short Term Capital Gains’ tax.
The Long Term Capital Gains tax rate is 20% on the capital gains amount or sale value.
The Short Term Capital Gains is calculated at regular tax bracket rates, and this usually means approximately 30% on the capital gains amount or sale value.
Capital gains amount for NRIs selling property
To calculate the capital gains amount that you will be taxed on, use the following equation:
Capital Gains Amount = Sale Amount (-) Cost of Acquisition (purchase cost to NRI)
NRIs who sell property will have their capital gains amount computed by their Income Tax Officer (Assessing Officer). Once you get this report from your Assessing Officer,you have to provide the report to the buyer who can then deduct the 20% on the capital gains amount.
Sale value for NRIs selling property
If you don’t have a report from the Assessing Officer, ensure that the buyer deducts the 20% on the entire sale value (and not the capital gains component).
How NRIs can lower TDS on property sale
NRIs are eligible for many exemptions that allow them to reduce their TDS on their property sale. You can reinvest your capital gains amount and thus gain the exemption benefits (section 54 for residential properties, and section 54F for commercial properties). If you, as an NRI, choose to invest in bonds issued by select companies, you can reduce the capital gains amount to be taxed by another 50,00,000 INR, or investment amount if lesser than 50 Lakh INR.
To note, this information is for purely informational purposes and should not be taken as tax advice. Please consult a tax advisor.
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