Are you an NRI looking to sell a residential property? Know everything about capital gains tax

Are you a Non-Resident Indian (NRI) who has settled abroad due to a job or business? You may want to sell a residential property in India that you may have inherited or bought. Before you move ahead with the sale of the property, you need to understand the tax implications of it. In this article, we will understand how to categorise the capital gain on an NRI-owned property, the capital gain tax application, and how to avail of tax exemption on the capital gains.

Categorisation of capital gains

Before we understand the application of the capital gains tax on an NRI-owned residential property, let us first look at how is capital gain categorised. It depends on the property holding period.

• a) Short-term capital gain (STCG): If the property is sold within 2 years of purchase, the capital gain earned is known as a short-term capital gain.
   
• b) Long-term capital gain (LTCG): If the property is sold after 2 years of purchase, the capital gain earned is known as a long-term capital gain.

Capital gains tax on residential property

Now that we understand the categorisation of capital gains, let us look at the application of capital gains tax on an NRI-owned residential property.

• a) Short-term capital gain (STCG) tax: The STCG is added to the NRI’s income and taxed at the income tax slab rate.
   
• b) Long-term capital gain (LTCG) tax: The LTCG is taxed at 20% with the indexation benefit.

Also Read: Are You An NRI? Here's What You Need To Know About Tax Residency Rules

TDS rate on the sale of property by NRI

The buyer of the property has to deduct the Tax Deducted at Source (TDS) as follows:

• a) Short-term capital gain (STCG): If the NRI is selling the property within 2 years of purchase, the buyer will have to deduct the TDS at the rate of 30%.
   
• b) Long-term capital gain (LTCG): If the NRI is selling the property after 2 years of purchase, the buyer will have to deduct the TDS at the rate of 20%.

TDS at a lower rate

Sometimes your tax liability can be lower than your TDS amount. In such cases, the buyer will deduct a higher TDS than your tax liability. Later, at the time of Income Tax Return filing or ITR filing, you will have to claim the excess TDS amount in the form of a tax refund. However, this is a time-consuming process.

As an alternative, you can apply for a lower TDS certificate. You will have to apply for the certificate before signing the property sale deed. The Income Tax Assessing Officer will calculate your capital gain tax liability and the TDS amount. If the TDS amount is higher than the tax liability, the Assessing Officer will issue the lower TDS certificate. You will get the benefit of TDS at a lower rate.

Long-term capital gain tax exemption

An NRI can get partial or full tax exemption on the long-term capital gain on the sale of a residential property under various sections of the Income Tax Act. Let us understand these.

Also Read: Looking For Ways To Save Tax On Long-term Capital Gains? Here Are Some Solutions

Section 54: Profit on sale of residential property 

An NRI selling property in India can get partial or full tax exemption on the long-term capital gain on the sale of a residential property. Section 54 of the Income Tax Act allows exemption, provided the NRI uses the LTCG from the property sold for:

a) Purchasing a new residential property within one year before the sale of the original property, or
b) Purchasing a new residential property within two years after the sale of the original property, or
c) Constructing a new residential property within three years after the sale of the original property

If the amount of the capital gain (for example, Rs. 40 lakhs) is less than the cost of the new property or equal to the cost of the new property (for example, Rs. 45 lakhs), the entire amount of the capital gain is exempted from taxation.

However, what if the amount of capital gain (for example, Rs. 45 lakhs) is higher than the cost of the new property (for example, Rs. 40 lakhs)? In this case, the difference between the capital gain and the cost of new property (Rs. 5 lakhs in our example) will be taxed. The NRI cannot sell the new property (whether purchased or constructed) for three years, or else the tax benefits on the original property sale will be reversed.

Also Read: Selling Your Property? Use These Strategies To Get The Best Price For Your Property

Section 54EC: Investment in bonds

If the NRI doesn't wish to invest in a new residential property, they can still avail of the exemption from LTCG tax by investing in certain bonds. Within six months of the original property sale, the NRI can invest the LTCG amount in the specified bonds issued by the National Highways Authority of India (NHAI) and the Rural Electrification Corporation (REC).

If the value of the bonds purchased is more than the capital gain amount, the entire capital gain is exempt from taxation. In a financial year, the maximum investment limit in these bonds is Rs. 50 lakhs. The tenure of these bonds is 5 years. If the NRI sells the bonds before 5 years, the capital gain exemption availed on the original residential property sale will be reversed.

To sum up, NRIs can avail of an exemption on the capital gain tax from the sale of residential property by either investing in another residential property or purchasing specified NHAI/REC bonds.