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Tax Planning – Sale of Residential Property in India by Non- Resident Indian

By gkkedia Dt. June 15th, 2020

Thinking to sell Residential Property in India? In this blog we have explained the procedure to be adopted by Non-Resident Indians while selling/ transferring the residential property in India and utilize the complete benefits available in the tax laws.

As an NRI, it is already a bit difficult to sell a property in India while residing in another country and the tax implications might increase the troubles. In this column we, as a reliable CA Firm in India, would project on the various aspects of selling a property by an NRI.

To whom NRI can sell the Residential Property?
NRI can sell their residential property to the following:

  • Person residing in India
  • Another NRI
  • PIO (Person of Indian Origin)

NRI can also transfer their property to an Authorised Dealer or Financing Institution in India through mortgage. However, they shall be required to take prior approval of the Reserve Bank of India if the property is mortgaged to a party abroad.

Tax Implications for Selling a Residential Property

When it comes to implying taxes on a Non Resident, FEMA (Foreign Exchange Management Act), 1999 and Income Tax Act, 1961 come into force. NRI will only have to pay tax for the Capital Gains on Sale of Property situated in India. The main factors contributing to the same are enumerated below:

  • Nature of Capital Gain/Loss as determined from the Date of Sale of Property
  • Amount of Capital Gain/Loss as determined from the Value of Agreement to Sale
  • Transfer Charges to the Society
  • Legal Charges
  • Outstanding Loans (if any)

If the property is being sold within 2 years from the date of purchase then, it shall be regarded as Short Term Capital Gain/Loss. Otherwise, it shall be considered as Long Term Capital Gain/Loss.
 
Capital Gain/Loss on Sale of a Property shall be computed as follows:

Sale Consideration xxx
    Less: Selling Expenses incurred
xxx
Net Sale Consideration xxx
Less: Cost of Acquisition (indexed if Long Term) xxx
Less: Cost of Improvement (indexed if Long Term) xxx
Capital Gain/Loss xxx

Short Term Capital Gain shall be liable for tax as per applicable tax slab rates based on the total income. On the other hand, Long Term Capital Gain shall be taxed at a fixed rate of 20% irrespective of the tax slab rates.

Such calculations might be complex and intricate. Hence, consulting an Indian Chartered Accountants Firm may reduce the possibility of any defaults in computation of Capital Gain/Loss and allied tax liability.

TDS Implications

As per the provisions, it is the primary responsibility of the purchaser to make sure that before purchasing a property an appropriate amount of TDS as applicable is deducted and paid to the government well within time.

In case of a Non Resident, TDS shall be deducted under section 195 of the Income Tax Act. It shall depend upon the nature of capital gain and total income of the NRI irrespective of the value of the property.

The below presented table summarizes the TDS deductible under section 195 on sale of property by an NRI:

Particulars Where Income of the NRI Seller is below Rs. 50 Lakhs Where Income of the NRI Seller is between Rs. 50 Lakhs to Rs. 1 Crore Where Income of the NRI Seller is between Rs. 1 Crore to Rs. 2 Crore Where Income of the NRI Seller is above Rs. 2 Crore
TDS Rate 20% 20% 20% 20%
Add: Surcharge NIL 10% on above Rate 15% on above Rate 25% on above Rate
Total Tax 20% 22% 23% 25%
Add: Health & Education Cess 4% on above Rate 4% on above Rate 4% on above Rate 4% on above Rate
Total TDS Rate 20.8% 22.88% 23.92% 26%

Note: The above TDS rates are applicable on the entire Sale Value/Agreement Value and not to the Capital Gain Value.

Besides the above, an NRI also has an option of claiming deduction of TDS at a Lower Rate. In this option, the NRI will have to apply for a certificate for deducting TDS at a Lower Rate from the Jurisdictional Assessing Officer, International Taxation for allowing the Resident Buyer to deduct TDS at a rate lower than the TDS rate as mentioned above.

Availing such certificate, reduces the amount of refund and since claiming of refund is a more tedious process it is always advisable to apply for such NIL or Lower Tax Deduction Certificate.

The certificate shall be granted subject to the provisions of section 195 and the conditions as specified in the notification of the Official Gazette. It shall be issued by the Assessing officer within 30 working days.

Added to the above, it must be noted that such application should be made before composing the agreement to sell and not after. Also, any advance or token money received before submitting such application shall be bound for deduction of TDS on normal rates rather than lower rates as per the certificate provided.

For such matters advisory from an experienced tax consultant firm may be more beneficial as grant of the application may vary from case to case depending upon the convenience of the assessee and interest of the revenue. Also it requires some intelligent planning and proactive approach to reduce the TDS on sale of property.

Penalty for Non-Compliance of TDS
Since, the liability to deduct TDS and to deposit the same with the government lies with the buyer. Therefore, if the above provision is not complied with, the penalty shall be borne solely with the buyer and not the NRI seller.

Repatriation of Sale Proceeds
Repatriation here refers to the conversion of capital funds to the currency of the country in which the NRI is residing and taking the funds to that country. NRI can repatriate the sale proceeds of a property sold in India, without obtaining permission from RBI, subject to the following general conditions:

  • The property should have been inherited from an Indian Resident.
  • The amount per Financial Year should not exceed $1 Million.
  • The sale should have been made via an Authorised Dealer.

 
In order to comply with the above, the NRI shall have to provide the following documents:

  • Self-Declaration in electronic format via FORM 15CA.
  • Documentary Evidence with regard to Inheritance of Property.
  • Certificate of Chartered Accountant via FORM 15CB.

If any of the above conditions are not satisfied, the NRI shall have to obtain prior permission from RBI before repatriation of funds.

Exemptions from Tax
NRI can also claim various exemptions available under Income Tax with regard to Sale of Property. It can help them to reduce the tax liability to great extent if used wisely. Some communal Tax Exemptions on Long Term Capital Gain on Sale of Residential Property, are explained as below:

  • Exemption under Section 54

Under this, the NRI shall have to invest the amount of capital gain in a new residential property within India. Such investment should satisfy one of the following two conditions:

  • Property should be purchased either one year before or within two years from the date of sale of property.
  • Property should be constructed within three years from the date of sale of property.

 
If the amount of capital gain does not exceed two crore rupees, he may have the option to purchase or construct two residential houses in India instead of investing the whole amount in one property.

If the NRI is unable to invest the amount of capital gain until the due date of filing of return of the financial year in which the property has been sold, then he shall have to deposit such unutilised funds in an account in any authorised bank or institution as specified or utilised in accordance with the notification of the Official Gazette in order to avail the exemption of tax.

Such exemption is not available if Sale Proceeds are utilised for purchasing a property outside India.

Exemption under Section 54EC

Another way to avoid tax liability is to invest the capital gains in certain bonds within 6 months from the date of sale of property or before the filing of return whichever is earlier. The bonds as specified by the central government for such exemption are:

  • National Highway Authority of India (NHAI) Bonds
  • Rural Electrification Corporation Limited (RECL) Bonds

 
However, it must be noted that the NRI can neither sell such bonds nor use them as security for obtaining a loan for a period of 3 years from the date of acquisition.

Note: such investments can be made up to a maximum limit of Rs. 50 Lakhs during a financial year irrespective of whether the capital gains are arising from transfer of one or more assets.

The NRI must present proof of such investments made, in order to avoid deduction of TDS, otherwise he will have to claim such TDS while filing his return of income and therefore obtain a refund.

Conclusion

An NRI shall have to hire an Authorised Dealer or Brokerage Company for valuation of the property and carry out the necessary paperwork for the sale of the property.

Thereafter, he shall have to understand the tax liabilities attracted to the capital gain on the sale of property for the purpose of TDS deduction as well as filing of return. All the necessary papers related to sale, obtaining lower rate of certificate, making further investment of capital gains are required to be submitted before the Assessing Officer, International Taxation etc. should be preserved by the Assessee.

This can become an easy task if assistance obtained from an experienced tax consultant in India and can also help in reducing the tax liability up to the maximum possible extent as per the circumstances of case.

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