How are NRIs Taxed on the Sale of a Property?

NRIs who want to sell their Indian houses are generally confused about the tax implications. This article discusses how much tax is payable and how much TDS is deductible when NRIs sell property in India.

How are capital gains from property sales taxed to NRI?

An NRI who wants to sell residential property in India must pay Capital Gains Tax. The tax payable on capital gains depends on whether the gain is short-term or long-term.   

When a house property is sold after 2 years (reduced from 3 years to 2 years in Budget 2017), there is a long-term capital gain (LTCG). There is a short-term capital gain (STCG) if it's held for less than 2 years. In the case of inheritance, NRIs face tax implications as well. 

How much tax is payable

For NRIs, LTCG is taxed at 20%, while STCG is taxed at the applicable income tax slab rates based on total income taxable in India.

TDS deductible

When NRIs sell property, a TDS of 30% is applicable if the property is sold within two years from the date of purchase. Similarly, a TDS of 20% is applicable if the house property is sold after 2 years.  

NRIs can claim exemptions under Sections 54 and 54EC on LTCG from the sale of residential property in India. 

Exemption Under Section 54

It's available when NRIs make a long-term capital gain on the sale of their house property. The house may be self-occupied or rented. Please remember that you only need to invest the amount of capital gains, not the entire sale receipt. Of course, the cost of the new property may be greater than the amount of capital gains. However, your exemption will be limited to the total capital gain on the sale.  

You can also buy this property 1 year before the sale/2 years after the sale of your property. You may also invest the gains in the construction of a new house property, but the construction of that property must be completed within 3 years from the date of sale. 

Also, to claim this exemption, the 2014-15 Budget clarified that only ONE residential house property can be purchased or constructed with capital gains.

In addition, starting from the assessment year 2015-16 (or fiscal year 2014-15), this new house property must be located in India. The exemption under section 54 will not be available for properties purchased or built outside of India. (Remember that you can't claim this exemption if you sell this new house property within 3 years from its purchase). 
                     
Exemption Under Section 54F

It's available when there is a long-term capital gain from selling any capital asset other than a residential house property. To qualify for this exemption, the NRI must construct one house property within 3 years of the date of transfer or purchase one house property within 1 year from the date of transfer of the capital asset. Also, this new house property must be in India and can't be sold within 3 years of purchase or construction.

Also, apart from the new house, the NRI shouldn't own more than one house property, nor should the NRI purchase within 2 years or construct within 3 years any other residential house. 

In this case, the NRI must invest the entire sale receipt. Capital gains are fully exempt If the entire sale receipt is invested. If not, the exemption is allowed proportionately.

Exemption under section 54 EC

You can save the tax on your LTCG by investing them in certain bonds. Bonds issued by the Rural Electrification Corporation (REC) or the National Highway Authority of India (NHAI) have been specified for this purpose. These are redeemable after 5 years (3 years before 2018) and must not be sold before 5 years (3 years before 2018) from the date of sale of the house property.

It's important to note that you cannot deduct this investment under any other circumstances. You have 6 months to invest in these bonds. However, to claim this exemption, you must invest before the return filing date. 

In a financial year, you can invest a maximum of Rs 50 lakhs in these bonds as per the 2014 Budget. To avoid TDS on capital gains, the NRI must make these investments and provide relevant proof to the buyer. The NRI can claim a refund for excess TDS deducted when filing their return.  

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