Rules on Property Sale by NRI
There has been an interesting new trend in the NRI (non-resident Indian) property rules in recent times - Indian expats coming to India to sell their purchased or inherited real estate. This is not a trend that has been extensively examined, but it makes perfect sense. Holding on to a house is not always feasible if one is unable to manage it.Selling such property is usually not the biggest challenge. What can create confusion is the viability and ways and means of remitting the resulting funds back into the country of residence. There is, in fact, a fairly straightforward process.
As in the case of resident Indians, NRIs who sell purchased property after three years from the date of purchase will incur long term capital gains tax of 20 per cent. The gains are calculated as the difference between the sale value and the indexed cost of purchase. The indexed cost is the cost of purchase adjusted to inflation. Calculation of the indexed cost of purchase is easy - many websites provide a calculator or a chartered accountant can assist.
In the case of inherited property, the amount of long term capital gains together with the cost to the person from whom the property is inherited would be considered as the cost of purchase. NRIs are subject to a Tax Deducted at Source (TDS) of 20 per cent on the long term capital gains. But there are certain instances when NRIs can get a waiver of the TDS. One such case would be if the NRI is planning to reinvest the capital gains of the property in another property or in tax exempt bonds. In such cases, the NRI will be exempt from tax in India, and no TDS will be deducted either.
If the NRI sells the property within three years of the date of purchase, short term capital gains tax at his or her tax bracket is incurred. Short term capital gain is calculated as the difference between the sale value and the cost of purchase (without the indexation benefit). The NRI will be subject to a TDS of 30 per cent irrespective of his or her tax bracket.
NRIs selling their properties can apply to the income tax authorities for a tax exemption certificate under section 195 of the Income Tax Act. They must make this application in the same jurisdiction that their PAN (permanent account number) belongs to and will be required to show proof of reinvestment of capital gains. If the NRI is planning to buy another house, the allotment letter or payment receipt will need to be produced; if capital gains bonds are chosen instead, an affidavit to this effect will have to be prepared. Usually, buyers withhold the last instalment of payment until the NRI produces a certificate of exemption. A NRI has up to two years from the date of sale to invest in another property, or up to six months to invest in bonds.
Section 54 of the Income Tax Act stipulates that if the NRI sells a residential property after three years from the date of purchase and reinvests the proceeds into another residential property within two years from the date of sale, the profit generated is exempt to the extent of the cost of new property. To illustrate - if the capital gain is 10 lakh rupees (1 million rupees) and the new property costs 8 lakh rupees (800,000 rupees), the remaining 2 lakh rupees (200,000 rupees) are treated as long term capital gains. The sold residential property may either have been self-occupied property or given on rent. The new property must be held for at least three years.
NRIs cannot invest the proceeds on the sale of a property in India in a foreign property and still avail the benefit of Section 54. However, some recent hearings with the appellate authorities have held that exemption can be claimed under Section 54 even if the new house is purchased outside India. However, this is not explicitly specified clearly under the law, and it is advisable for an NRI to consult a tax expert before making any investment decisions outside India to avail of tax benefits under Section 54.
Section 54EC of the Income Tax Act states that if an NRI sells a long term asset (in this case, a residential property) after three years from the date of purchase and invests the amount of capital gains in bonds of National Highways Authority of India and Rural Electrification Corp within six months of the date of sale, he or she will be exempt from capital gains tax. The bonds will remain locked in for three years.
General permission is available to NRIs and PIOs to repatriate the sale proceeds of property inherited from an Indian resident, subject to certain conditions. If those conditions are fulfilled, the NRI need not seek the Reserve Bank of India's permission. However, if the NRI has inherited the property from a person residing outside India, he or she must seek specific permission from the central bank.
The conditions for repatriation of such funds are not really complicated - the amount per financial year (April-March) should not exceed US$1m, and should be done through authorised dealers. NRIs must provide documentary evidence with regard to their inheritance of the property, and a certificate from a chartered accountant in the specified format.
What the region's NRIs must pay attention to is the income tax implications in the Middle East. The most important point to ponder is the income tax liability in the country of residence on the amount of gain, and whether claiming exemption under sections 54, 54F and 54EC is really worth it. The NRI may, in fact, be better off claiming only partial or no tax exemption on the capital gains in India.
Exemption under section 54:
It is available when there is a long term capital gain on sale of a house property of the NRI. The house property may be self-occupied or let out. Please note – you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains; however your exemption shall be limited to the total capital gain on sale. Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale. In the Budget for 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Also starting assessment year 2015-16 (or financial year 2014-15) 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).
If you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it.
Exemption under section 54F
It is available when there is a long term capital gain on the sale of any capital asset other than a residential house property. To claim this exemption, the NRI has to purchase one house property, within one year before the date of transfer or 2 years after the date of transfer or construct one house property within 3 years after the date of transfer of the capital asset. This new house property must be situated in India and should not be sold within 3 years of its purchase or construction. Also, the NRI should not own more than one house property (besides the new house) and nor should the NRI purchase within a period of 2 years or construct within a period of 3 years any other residential house. Here the entire sale receipts are required to be invested. If the entire sale receipts are invested then the capital gains are fully exempt otherwise the exemption is allowed proportionately.
Exemption is also available under Section 54 EC
If you can save the tax on your long term capital gains by investing them in certain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property. Note that you cannot claim this investment under any other deduction. You are allowed a period of 6 months to invest in these bonds – though to be able to claim this exemption, you will have to invest before the return filing date. The Budget for 2014 has specified that you are allowed to invest a maximum of Rs 50lakhs in a financial year in these bonds.
The NRI must make these investments and show relevant proofs to the Buyer – to make sure TDS is not deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.