Buying or selling property in India? Know all about the tax implications

There is a fair amount of confusion about tax implications for NRIs who want to sell any house property that they may have in India. This article explores how much tax is payable and TDS deductible in the case of NRIs who want to sell property in India.

How are gains from property sales taxed to NRI?

NRIs selling house properties in India have to pay tax on the Capital Gains. The tax payable on the gains depends on whether it’s a short term or a long term capital gain.

When a house property is sold, after a period of 2 years (Reduced from 3 years to 2 years in Budget 2017) from the date it was owned – there is a long term capital gain. In case it is held for 2 years or less – there is a short term capital gain. Tax implications for NRIs are also applicable in the case of inheritance.

If the property has been inherited, remember to consider the date of purchase of the original owner to calculate whether it’s a long-term or a short-term capital gain. In such a case, the cost of the property shall be the cost to the previous owner.

How much tax is payable

Long term capital gains are taxed at 20%, and short term gains shall be taxed at the applicable income tax slab rates for the NRI based on the total income taxable in India for the NRI.

TDS deductible

When an NRI sells the property, the buyer is liable to deduct TDS @ 20%. If the property has been sold before 2 years (reduced from the date of purchase), a TDS of 30% shall be applicable.

How to save tax on capital gains

NRIs are allowed to claim exemptions under section 54 and Section 54EC on long term capital gains from the sale of house property in India.

Exemption under section 54

It is available when there is a long term capital gain on the sale of house property of the NRI. The house property may be self-occupied or let out. Please note – that you do not have to invest the entire sale receipt but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains. However, your exemption shall be limited to the total capital gain on the sale.

Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale.

Exemption under section 54F

It is available when there is a long term capital gain on the sale of any capital asset other than a residential house property. To claim this exemption, the NRI has to purchase one house property within one year before the date of transfer or 2 years after the date of transfer or construct one house property within 3 years after the date of transfer of the capital asset. This new house property must be situated in India and should not be sold within 3 years of its purchase or construction.

Also, the NRI should not own more than one house property (besides the new house) and nor should the NRI purchase within 2 years or construct within 3 years any other residential house.

Here the entire sale receipt is required to be invested. The capital gains are fully exempt if the entire sale receipt is invested. Otherwise, the exemption is allowed proportionately.

Exemption is also available under section 54EC

You can save the tax on your long term capital gains by investing them in certain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified. These are redeemable after 5 years (Before 2018, it was 3 years) and must not be sold before the lapse of 5 years (Before 2018, it was 3 years) from the date of sale of the house property.

Note that you cannot claim this investment under any other deduction. You are allowed 6 months to invest in these bonds – though to be able to claim this exemption, you will have to invest before the return filing date.

The Budget for 2014 has specified that you can invest a maximum of Rs 50 lakhs in a financial year in these bonds. The NRI must make these investments and show relevant proof to the Buyer to ensure TDS is not deducted from the capital gains. The NRI can also claim excess TDS deducted at return filing and claim a refund.