Tax saving guide for NRIs selling property in India

Life isn't easy when you are a Non-Resident Indian (NRI) managing and
undertaking transactions connected to your Indian assets, from outside India.
One such transaction may be selling your real estate property situated in India.
As if the commercial aspects of selling the property (valuation, finding a broker,
finding a buyer, executing a power of attorney, documenting the sale deed, price
negotiations, etc) are not overwhelming enough, your tax obligations are also
reasonably complex and these extend not only to you but also to the buyer. The
tax complexities can be deal breakers for NRI sellers.

So, when you do sell your property in India, what are the tax obligations? Read
on.

Any income arising from sale of property is taxed under the head 'Capital Gains'
and is calculated by deducting the following from the sale consideration:

1. expenditure incurred wholly and exclusively in connection with such sale

2. cost of acquisition and

3. cost of improvement.

Indexation benefit is available for cost of acquisition and cost of improvement in

case of long-term capital gains.

Further, if you had held the property for more than 2 years, then the capital gain
is considered as long-term and if you had held the property for 2 years or less,
then the capital gain is considered as short-term. This is important since the tax
rates are different for long-term and short-term capital gains. Also, indexation
benefit is not available for short-term capital gains.

The tax rate for long-term capital gains is 20% plus additional surcharge (at
applicable rates if your aggregate taxable income exceeds Rs 50 lakh) plus health
and education cess at the rate of 4%. Short-term capital gain is taxed on the basis
of the slab rates applicable to you (depends on your total income) plus similar
surcharge and cess.

If your property was inherited, the date of purchase by the previous owner is
considered for determining whether the capital gains is to be classified as long-
term or short-term (the date of inheritance is not relevant). Similarly, the cost of
the inherited property will be that of the previous owner. Indexation benefit is
also available as per judicial precedents from the date of acquisition by the
previous owner.

So, do you want to save on your taxes as well as continue to invest in India?
There are these options:

Invest the capital gains in a residential house property in India

In case you have long-term capital gain on the sale of your residential house
property, you can claim exemption from taxes if you purchase another residential
property in India. The exemption is limited to capital gain made by you on the
sale. The new property needs to be acquired either 1 year before, or 2 years (3
years for construction) after the sale of your property. But note that the
exemption can be taken back if you sell the new property within 3 years of its
purchase.

Do also note that effective financial year 2019-20, the benefit of this exemption is
available for investment made in two residential house properties, provided the
amount of long-term capital gain does not exceed Rs 2 crore. This is a once-in-a-
lifetime benefit.

Invest in specific bonds

You could invest whole or part of capital gains in specific bonds issued by the
National Highway Authority of India or Rural Electrification Corporation. These
bonds have a lock-in period of 5 years. The investment needs to be made within 6
months of sale of property to be able to claim the exemption. You can invest a
maximum of INR 50 lakh in a financial year in these bonds.

No time? Deposit the capital gains in a special scheme

If you have not been able to invest your capital gains until the date of filing of a
tax return, you can temporarily deposit the capital gains in a public sector bank
or other banks as per the Capital Gains Account Scheme, 1988, and use it for the
above investment. The exemption can be taken back if the amount deposited in
such an account is not utilised for reinvestment in another residential property in
a timely manner.

Assuming the capital gains are taxable, the buyer needs to deduct tax at source
(TDS) at the applicable rates -- 20% on long-term capital gains or 30% for short-
term capital gains. The buyer has to take a call on your eligibility to claim capital
gains exemption if you have not made reinvestment till the date of his payment to
you. He has to furnish information of the transaction in Form 15CA to the Tax
Department along with CA certificate in Form 15CB (barring a few exceptional
cases). If he is required to deduct and pay TDS, buyer is required to obtain Tax
Deduction/Collection Account Number, pay TDS to the Government, furnish
quarterly TDS statement and issue TDS certificate in Form 16A to you.

Once all the applicable taxes are paid (by way of TDS, advance tax or self-
assessment tax), you will need to file a tax return in India reporting such capital
gains and taxes paid. While determining the tax liability and filing of the tax
return, an important consideration would be of the applicable Double Taxation
Avoidance Agreement (DTAA) between India and your country of residence. The
DTAA usually provides for a tax exemption/relief in one of the countries, thereby
mitigating a risk of double taxation of the capital gains.

Written by

  Shalini Jain
Shalini is Tax Partner, EY India. Vijayalakshmi PG, Senior Tax Professional, EY
India has also contributed to the article.