Tax Implications for NRIs who want to Sell Property in India

An owner must pay taxes to the government while selling their immovable property under Indian income tax (IT) laws, based on the holding period and profit earned (known as capital gains). The same rule applies to non-resident Indian (NRIs) property sales. There is confusion about property tax management for NRI who want to sell their property in India. Thus, this blog will let you know how much tax is payable and how much TDS is deductible when an NRI sells property in India.
However, one must understand the term "Non-Resident Indian." An NRI is a citizen who has spent more than 182 days in the current fiscal year abroad on business, for a job or any other reason.

All NRI property transactions must comply with FEMA rules

Before we go any further, it is worth noting that all property transactions involving an NRI must abide by the guidelines established by the Foreign Exchange Management Act (FEMA), 1999. The Act defines the rules and procedures for all foreign exchange transactions in India. The Enforcement Directorate (ED) is in charge of enforcing the FEMA.

RBI approval is mandatory

As ruled by the Supreme Court of India, the sale or gifting of a property by a foreign national, such as an NRI (non-resident Indian), requires prior approval by India's banking regulator RBI. As a result, it affects the property tax management for NRIs because of the capital gains.
Section 31 of the Foreign Exchange Regulation Act of 1973 requires non-Indian citizens and companies not incorporated in the country to obtain prior permission from the RBI before acquiring, holding, transferring, or disposing of immovable property in the country.

To whom can an NRI sell his property?

While resident Indians have more freedom in this regard, the rules of property tax management for NRI governing the sale of immovable property to non-resident Indians are slightly stricter. For example, an NRI cannot sell his farmhouse, agricultural land, or plantation property to a non-resident or person of Indian origin (PIO). But in the case of residential and commercial properties, an NRI may sell his residential or commercial property to an Indian resident, another NRI, or a PIO.

Implications of Property Taxes

Being a non-resident Indian knowing property tax management for NRI is vital if you plan to invest in real estate in India. Let's take a closer look at them.

The tax depends on income, and income from property can come from two sources:

• Selling a Property
  
• Renting/Leasing/ a Property
  

Capital Gain From Property Sale

NRIs who sell a property in India must pay a charge on the Capital Gain. The tax is payable on the gain as per the rules of Income Tax under property tax management for NRI. It also determines whether it is a long-term or short-term capital gain. 
There is a long-term capital gain (LTCG) if you sell a property after two years from the date of its possession. The tax on this income will be at a rate of 20%, plus a surcharge and cess.
If the possession of the property was for two years or less, it is considered a short-term capital gain (STCG). The tax on this income will be according to the NRIs income tax slab.

Rental Income On Property

As far as the property tax management for NRI is concerned, the tax on rental income in India is taxable under the House Property Act. Here, the tax charged for NRIs will be the same as the other Indian nationals.

Taxation benefits for NRIs selling property

While NRI sellers are entitled to exemptions under various sections of the IT law, they can only claim rebates on their LTCG liability as per the property tax management for NRI.

Tax Exemption Under Section 54

If the NRI invests an equal amount in the purchase of another property, he may be able to claim a refund on his LTCG under Section 54 of the Income Tax Act. It is worth noting that you can only invest your profits, not the entire sale proceeds. This investment should be made within a specific time frame to claim the benefit – one year before or two years after the sale of the previous property. If you use the profits to buy a land parcel and plan to build a house, the construction must be completed within three years of the sale to qualify for the rebate. 
However, the exemption under this section is limited to the entire LTCG amount. Any extra money you put into your new investment will not result in a rebate under property tax management for NRI.

Terms and Conditions

• From 2014, only one house property needed to be purchased or constructed with capital gains to claim Section 54 exemption.
  
• The government clarified that the new house property must be located in India for the NRI seller to claim the rebate from 2015. NRIs are not permitted to invest the proceeds of the sale of Indian property in foreign property.
  
• The rebate will be forfeited if the new property gets sold within three years of its purchase.
  

Tax Exemption under Section 54EC

Under this section, if an NRI sells a long-term asset and invests the capital gains in NHAI and REC bonds within six months of the sale date, they are exempt from the capital gains tax of property tax management for NRIs. It will lock the bonds for three years.

Terms and Conditions

• You cannot deduct this investment in any other way.
  
• To be eligible for this rebate, you must invest before the tax return filing deadline.
  
• The Budget 2013-14 set a limit of ₹50 lakhs on these bonds per fiscal year.
  

Tax Exemption under Section 54F

If the NRI has long-term gains on assets other than a residential property, they can save taxes by investing in a residential property in India. It could be possible by purchasing one house or property one year before or two years after you generate the profit. In the case of construction, the NRI taxpayer has three years from the date of capital asset transfer to claim the deductions. If you sell the house within three years of its purchase or construction, the property tax management for NRIs will forfeit the rebate.

Terms and Conditions

• You must invest the entire sale proceeds, not just the profit. If you invest only a portion of the proceeds, the tax liability is proportional to the non-invested part.
  
• The NRI should not purchase any other property than what he has already purchased. He should also refrain from making any new purchases within two years of buying or three years of constructing the new house.
  

How PropertyAngel can help you

Is this property tax management for NRI too complicated for you? At PropertyAngel, we handle all your documentation and tax filing requirements. You can now own, rent, or sell property in India without hassle. If you want to learn more about us, visit our website.