Tax Implications for NRIs

Thu, 09/08/2022 - 07:01

Author: JLL



Non-resident Indians are one of the major investors in the Indian real estate market. With an expectation of gaining a high return on investment, NRIs invest their hard-earned money to convert it into a lucrative source of income. It is well-known that on selling any kind of property, NRIs are taxed in India based on capital gains. However, you will be amazed to know that you can save tax on capital gains under different sections of the Indian Income Tax Act.

Here’s how you can save on tax levied on your capital gains:

NRI capital gains taxation in India

There are many instances where NRIs desire to sell their inherited property or property of their own bought for self-occupancy or for renting out. They must remember that when property bought in India is sold, it is taxable to Indians and NRIs on capital gains. The capital gain is the profit earned against the value of the purchase by selling the property, which is categorised into two: short-term capital gain and long-term capital gain.

The selling of any property within two years from the date of purchase (reduced to three years in the Budget 2017), which is taxed based on the total income taxable in India following the appropriate income tax slabs, is known as a short-term capital gain. However, when the property is sold after two years from the date of ownership, there is a long-term capital gain which is taxed at 20 percent.

In the case of an inherited property, the cost paid by the first owner to purchase the property will be considered as the current cost of the property. Therefore, it is paramount to know the cost and date of purchase by the original owner. Besides, the purchaser of property sold by an NRI is required to withhold 20% tax at source (TDS) and if the property has been sold before two years, the TDS is higher at 30 percent.

Ways to save tax on capital gains

There are different sections listed under the Income Tax Act that can help you save on tax capital gains. However, knowing those sections completely and understanding their terms and conditions are important to get the benefits with ease. Let’s find out more about it!

Exemption under section 54

The exemption under section 54 is available only on long-term capital gains from the sale of residential property. There are high chances that the new house would have cost more than the amount of capital gain made from the sale, therefore, the exemption is limited to the total capital gain on the sale. The seller or taxpayer can claim the exemption under section 54 on buying or constructing residential property according to the below terms –

  • Buying residential property one year before the sale of the old house
  • Buying residential property after two years of selling the house
  • Completing the construction of property within three years from the date of selling the house

However, before claiming the exemption, one must know that it is applicable when the property is bought or constructed in India and not on foreign land. The exemption on capital gain is also available on the purchase of two residential properties, the total value of which should not exceed 2 crores in a lifetime. There are also chances that you may have sold an old property and may not have invested in capital gains before filing the return. Therefore, in such cases, the Capital Gains Account Scheme, 1988 permits NRIs to deposit their gains in the bank and claim this amount for tax exemption.

Exemption under section 54F

This section refers to the long-term capital gains that are earned from the sale of capital assets other than residential property. Under section 54F, the NRI must purchase residential property within one year before the date of transfer or two years after the date of transfer. In three years from the transfer date of a capital asset, one may build or construct a house property instead of buying one. This new home must be located in India and cannot be sold for three years after being bought or built.

Furthermore, this section does not permit NRIs to possess more than one house property (apart from the new house), nor should he or she buy within two years or build another house within the next three years. If the seller has more than one residential property on the date of transfer, the exemption cannot be claimed. To avail of the entire capital gains exemption, the entire selling receipt must be invested. Otherwise, the exception is permitted proportionally.

Exemption under section 54 EC

Instead of purchasing, building, or depositing capital gains in a bank, NRIs can invest in specific bonds issued by the National Highway Authority of India or Rural Electrification Corporation (REC) with a lock-in period of five years (three years before 2018) and should not be sold for five years (three years before 2018) from the date of sale of the residential property. Although the NRIs have six months to invest in these bonds, they must invest in them before filing the return to claim this exemption.

Additionally, NRIs are permitted to invest a maximum of Rs. 50 lakhs in bonds per fiscal year and must provide documents to ensure that the buyer does not deduct TDS. If the same is deducted, the tax return can be used to claim a refund for the excess TDS deducted.

Now that you have all the required information on saving capital gains, you can plan properly and utilize the capital gains by investing in another property. In case of any further assistance, reach out to our experts and ease your process of selling and buying a new property.