It’s summer and many non-resident Indians (NRIs) are visiting India. For some, the to-do list may include selling a property. One must remember that when a property in India is sold, the gains earned are taxed for resident Indians as well as NRIs. The tax payable on depends on whether the gains are classified as short-term or a long-term.
“When a house property is sold after a period of two years (reduced in Budget 2017 from three years) from the date of ownership–there is a long-term capital gain. In case it is held for two years or less, the capital gain is short term,” says Archit Gupta, founder and CEO of tax portal Cleartax.in. “NRIs would also have to pay tax if the property is inherited,” he adds.
In case of an inherited property, it is important to know the date of purchase by the original owner. This helps in calculating the tenure of ownership and hence the classification of the capital gain. “In case of an inherited property, the cost to the previous owner will be considered as the current cost of the property,” says Gupta.
Short-term gains are taxed at the applicable income tax slab rates for the NRI based on the total income taxable in India. Long-term capital gains are taxed at 20 per cent.
When an NRI sells a property, the buyer is liable to deduct 20 per cent tax at source (TDS). If the property has been sold before two years (reduced from the date of purchase), the TDS is higher at 30 per cent.
There are various exemptions also available for NRIs on long-term capital gains made from selling a house property in India.
Exemption Under Section 54: Such an exemption is available when there is a long-term capital gain from the sale of the property, which may be self-occupied or let out. For such cases, you need to invest just the amount of capital gains, and not the entire sale receipt. If you are buying a new house, it may be that the new house costs more than the amount of capital gains made from the sale of. The exemption, however, will be limited to the total capital gain on sale.
“You can purchase the (new) property either one year before the sale or two years after the sale of the older property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within three years from the date of sale,” says Gupta. If you see the new property within three years of buying it, this exemption will be taken back.
In Budget 2014, it was clarified that only one house property can be purchased or constructed from the capital gains to claim this exemption. Also, the new house has to be located in India (this rule came into being at the beginning of assessment year 2015-16 or financial year 2014-15). The exemption under Section 54 of the Income-tax Act, 1961 is not available for properties bought or constructed outside India.
However, it may be that while you have sold the older property, you have not been able to invest the capital gains until the date of filing of return (usually July 31) of the financial year in which you have sold your property. In such a case, you can deposit the gains in a bank as per the Capital Gains Account Scheme, 1988. In your tax return, this amount can be claimed for tax exemption.
Exemption Under Section 54F: This comes into play when the long-term capital gain is from the sale of any capital asset other than a residential house property. To claim this exemption, the NRI has to purchase a house property within one year before the date of transfer or two years after the date of transfer. Instead of buying, one can also construct a house property within three years from the date of transfer of the capital asset. This new house property must be situated in India and should not be sold within three years of its purchase or construction.
Also, the NRI should not own more than one house property (besides the new house) and nor should he or she purchase another house within two years or construct one within three years. “The entire sale receipt has to be invested for the capital gains to be fully exempt. Otherwise, the exemption is allowed proportionately,” adds Gupta.
Exemption Under Section 54 EC: Apart from buying or constructing a house or depositing the capital gains with a bank, the NRI also has the option to use that to invest in certain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These can be redeemed after five years (prior to 2018, this was three years) and must not be sold before five years (the limit was three years prior to 2018) from the date of sale of the house property.
This investment cannot be claimed under any other deduction. The NRI has six months to invest in these bonds, though to be able to claim this exemption, you will have to invest before the return filing date.
Moreover, the NRI can use a maximum of Rs 50 lakh in a financial year in these bonds. To ensure that the buyer does not deduct TDS, the NRI will have to show relevant proof to the buyer. Use the tax return to claim a refund for excess TDS deducted.