How can NRIs Save Tax on Sale of Property by NRI?

NRIs usually get confused while selling a property they have in India as it has specific tax implications that must be understood before undertaking such transactions.

It is crucial for NRIs to be aware of these rules and regulations to fulfill their tax obligations and avoid any penalties or legal issues.

In this blog we will cover:

1. What is the TDS on sale of property by NRI in India?
2. Who has to pay TDS while selling property?
3. How is the sale of immovable property taxed in India?
4. How can NRI save taxes on capital gains while selling a property?
5. What if the capital gains are also taxable in the country of residence for the NR?
6. What happens if you don’t pay the TDS?
7. How to File TDS on Sale of Property by NRI?
8. Money Repatriation by NRI Outside India
9. (LAST) How to Lower your TDS Rate?

What is the TDS on sale of property by NRI in India?

TDS i.e. (Tax Deducted at Source) on the sale of property by Non-Resident Indians (NRIs) in India is a method implemented by the government to collect taxes at the time of property transfer.

Who has to pay TDS while selling property?

The buyer of the property is responsible for deducting TDS from the sale proceeds and depositing it with the income tax department within the time prescribed. After deducting the TDS the buyer is required to file deduction and payment details in Form 27Q.

How is the sale of immovable property taxed in India?

An individual who does not trade in sale/ purchase of immovable properties may incur capital gain or capital loss on sale of his/her immovable property.

This gain/ loss needs to be disclosed under the head ‘income from capital gains’ when filing the ITR since the immovable property qualifies as a ‘capital asset’ for such an individual.

Such gain is calculated by reducing the cost of acquisition of the immovable property and eligible expenses from the sale consideration receivable on sale/ transfer of such immovable property.

In case of long-term gains, benefit of indexation is available which helps to enhance the cost of acquisition by applying government defined cost of inflation index factors which essentially helps to lower the amount of capital gains and thus lower the tax liability for the taxpayer.

Further, where the immovable property is sold after 24 months from date of purchase, gain/ loss on sale will be treated as long-term whereas if the immovable property is sold within 24 months of purchase, gain/ loss will be treated as short-term.

As per the Act, long-term gains and short-term gains are taxed at different rates and the rules for computing cost of acquisition and set-off of losses and carry forward of losses to future years are also different.

For example, an NR individual will have to pay taxes at 20% (plus applicable surcharge and cess) on his/her long-term capital gains without allowing the benefit of tax slabs and eligible deductions available under the Act. Whereas, in case of short-term capital gains, taxes will be calculated at applicable slab rates after allowing the benefit of eligible deductions under the Act

How can NRI save taxes on capital gains while selling a property?

When it comes to tax implications for non-resident Indians (NRIs), there are provisions in the Indian Income Tax Act that allow them to claim exemptions on long-term capital gains from the sale of house property. These exemptions can significantly help in reducing the tax burden.

Exemption under Section 54

This section provides an exemption from long-term capital gains tax on the sale of a residential property of the NRI, if the proceeds are reinvested in another residential property. The key points to note are:

• Eligibility: The exemption is available to both residents and NRIs.
• Applicability: The exemption applies to long-term capital gains arising from the sale of a residential property held for a minimum of 24 months.
• Reinvestment: The taxpayer must utilize the proceeds from the sale to purchase another residential property within the specified timeframes.
• Conditions: The exemption is available for one residential property only. The new property should be purchased within one year before or two years after the date of sale or constructed within three years from the date of sale. it is mandatory that this new house property must be situated in India. The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. (Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase).
• Exemption Amount: The amount of exemption is the lower of the long-term capital gains or the cost of the new residential property.

Exemption under Section 54EC

This section allows an exemption from long-term capital gains tax if the gains are invested in specified bonds. The key points to note here are

• Eligibility: The exemption is available to both residents and NRIs.
• Applicability: The exemption applies to long-term capital gains arising from the sale of any asset, including residential and non-residential properties.
• Investment in Bonds: The taxpayer can invest the capital gains in specified bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months from the date of sale.
• Exemption Amount: The exemption amount is limited to the investment made in the specified bonds subject to a maximum of INR 50 lakhs in a financial year.
• Lock-in Period: The specified bonds have a lock-in period of five years.

Exemption under section 54F

Section 54F provides an exemption from long-term capital gains tax on the sale of any asset other than a residential property if the proceeds are invested in a residential property. Here are the key points to note:

• Eligibility: The exemption under Section 54F is available to individuals and Hindu Undivided Families (HUFs), including NRIs.
• Applicability: The exemption applies to long-term capital gains arising from the sale of any asset, such as land, building, or other capital assets, except for a residential property.
• Reinvestment: To avail the exemption, the taxpayer must invest the net sale proceeds in purchasing or constructing a residential property.
• Timeframes for Investment: a. Purchase: The new residential property should be purchased within one year before or two years after the date of the sale of the original asset. b. Construction: If the taxpayer chooses to construct a new residential property, it should be completed within three years from the date of the sale. This new house property must be situated in India
• Conditions: a. Ownership: The taxpayer should not own more than one residential house, other than the new property, on the date of sale of the original asset. b. Lock-in Period: The new residential property must be held for at least three years from the date of its acquisition. If it is transferred within three years, the exemption claimed under Section 54F will be revoked, and the capital gains will be taxed.
• Exemption Amount: The amount of exemption is determined based on the proportion of the investment made in the new residential property compared to the net sale proceeds. The long-term capital gains will be tax exempted if the entire net sale proceeds are invested. If only a portion is invested, the exemption will be calculated proportionally.

What if the capital gains are also taxable in the country of residence for the NRI?

In addition to taxability under the Act, the NR may be liable to pay taxes on capital gains in his/her country of residence as per domestic tax laws of such country which may lead to double taxation in the hands of the NR. To mitigate double taxation, India has entered into double taxation avoidance treaties with multiple countries which may provide different circumstances of taxability in the country of residence or may prescribe a beneficial tax rate on capital gains vis-à-vis the Act. Therefore, NR must also analyse taxability in the country of residency and explore if any benefit can be claimed under the applicable tax treaty before filing the ITR in India and payment of taxes on the capital gains.

What happens if you don’t pay the TDS?

In situations where the buyer fails to adhere to the prescribed TDS (Tax Deducted at Source) rates applicable to Non-Resident Indians (NRIs) or neglects to deduct TDS for any reason, they expose themselves to significant legal consequences.

When a buyer neglects to deduct TDS at the designated rates, they become liable for penalties equal to the TDS amount not deducted. Moreover, interest accrues on the defaulted sum.

Non-deduction of TDS also impedes the seller’s ability to repatriate the sale proceeds to their foreign bank account or NRE (Non-Resident External) account. Additionally, if the transaction comes under the scrutiny of the Income Tax Department and it is revealed that TDS was not deducted appropriately, the seller may face prosecution for misrepresenting their tax residency status.

How to File TDS on Sale of Property by NRI?

To file TDS on the sale of a property by an NRI, buyer of the property has to follow these steps:

• Verify TDS: Determine if TDS is applicable based on the transaction value. The buyer is responsible for deducting TDS in property sales by NRIs.
• Calculate TDS: Calculate the TDS amount to be deducted, typically 20% of the total sale value.
• Obtain TAN: Get a Tax Deduction and Collection Account Number (TAN) by submitting Form 49B to the Income Tax Department if not already obtained.
• Pay TDS Amount: Deposit the TDS amount deducted with the government by the specified due date. This can be done online or at authorised banks.
• File TDS Return: File a TDS return (Form 26QB) within the specified due date. Include details of the buyer, seller, property, transaction value, and TDS amount deducted.
• Get TDS Certificate: After filing the TDS return, provide the seller with a TDS certificate (Form 16B) within 15 days from the return filing due date. Download the certificate from the TRACES portal as proof of TDS deduction.

Money Repatriation by NRI Outside India

To repatriate the money outside India obtained from property sales in India, the NRI needs to submit Form 15CA & Form 15CB to the Bank. the same forms need to be made from the income tax website and then furnished to the bank.

NRI might generate Form 15CA himself or his CA will do it for him but Form 15CB would only be made by the CA. A sign and stamp are also needed in Form 15CB.

In the same forms, different circulation along with the fund source is to be repatriated including the declaration that all the taxes furnished on these funds are in India.

NRIs are permitted to repatriate a maximum of $1 Million (USD) outside India per calendar year.

Are there any other challenges related to sale of immovable property?

As per the Act, where the NR sells an immovable property in India, the buyer of such property is required to withhold TDS as per provisions of Section 195 of the Act. Such TDS is usually deducted on the sale value of the immovable property and not on the actual capital gains amount. On sale of long-term capital asset, TDS is deducted at 20% (plus applicable surcharge and cess) and in case of short-term capital asset, TDS is deducted at 30% (plus applicable surcharge and cess), even though the final capital gains amount on which taxes are payable may be much lower than the sale value of the property. This leads to higher deduction of taxes from the seller which later needs to be claimed as refund by the NR in his/her ITR. To mitigate such blockage of funds, the NR may make an online application in Form 13 to the jurisdictional tax officer for issue of lower withholding certificate. If the application is accepted by the tax authorities and certificate is issued, the buyer of the immovable property can deduct TDS as per the lower tax rate which is mentioned in the certificate issued by the tax authorities.

FAQs

1. What is the current TDS rate on the sale of property by NRIs in India?
   – The TDS rate is 20% for long-term capital gains and 30% for short-term capital gains, plus applicable surcharge and cess.
2. Can NRIs claim deductions under Section 80C on capital gains from property sales?
   – No, deductions under Section 80C are not applicable to capital gains from property sales.
3. Is it mandatory for the buyer to obtain a TAN for deducting TDS?
   – Yes, the buyer must obtain a Tax Deduction and Collection Account Number (TAN) to deduct TDS.
4. Can an NRI repatriate the entire sale proceeds of a property outside India?
   – NRIs can repatriate up to $1 million (USD) per calendar year outside India, subject to certain conditions.
5. What documents are required to file Form 15CA and Form 15CB?
   – The documents include the sale deed, proof of payment of taxes, and a certificate from a CA for Form 15CB.
6. How can an NRI avoid double taxation on capital gains?
   – NRIs can avoid double taxation by taking advantage of the Double Taxation Avoidance Agreements (DTAA) between India and their country of residence.
7. What is the penalty for not deducting TDS on the sale of property by an NRI?
   – The penalty is equal to the TDS amount not deducted, along with interest on the defaulted sum.
8. How long does it take to get a lower withholding certificate from the tax authorities?
   – It usually takes about 30-45 days to get a lower withholding certificate from the tax authorities.
9. Is the TDS deducted on the sale value or the capital gains amount?
   – TDS is deducted on the sale value of the property, not on the capital gains amount.
10. Can an NRI claim a refund for excess TDS deducted on property sale?
    – Yes, an NRI can claim a refund for excess TDS deducted by filing their income tax return and providing necessary documentation.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.