Tax Implications for NRIs Selling Property in India
Selling property in India as a Non-Resident Indian (NRI) can be an exciting but complex process, especially when it comes to understanding the tax implications. The Indian tax system has specific rules and regulations that apply to NRIs when they decide to sell property, and navigating these rules can be daunting. From capital gains tax to TDS (Tax Deducted at Source), understanding the tax liabilities is crucial to ensure compliance and optimize returns.
In this article, we will break down the key tax implications for NRIs selling property in India, helping you comply with the legal and financial aspects seamlessly.
Table of content
What is the TDS on selling property by NRI in India?
TDS on property sales by NRI in India is a process implemented by Indian tax authorities. To collect the tax at the time of property transfer. The property buyer is responsible for a TDS deduction from the sale. It needs to be deposited with the income tax department within the deadline.
After the TDS deduction, the buyer is needed to file the deduction and payment details in form 27Q. The TDS amount deducted depends upon the residential status of the seller.
For the resident Indian sellers, the TDS on the NRI property sale rate is fixed at 1%. This means that the buyer deducts 1% of the sale price from the amount to be paid to the seller. And deposit it with the income tax department.
For non-resident Indian sellers, TDS on the property sale rate depends upon the amount the seller receives from the transaction. Usually, the rate is higher for NRIs as compared to resident sellers. The fixed rate varies based upon many factors like total sale price and the seller’s total income from Indian sources.
How are Gains from the Sale of Property in India taxed by NRI?
NRIs who sell houses in India are needed to pay capital gains tax. The tax amount payable depends upon whether the gains are short-term capital gains or long-term ones. When the property is sold after holding it for more than 2 years. The gains arising from such property will be treated as LTCG.
STCG refers to where property is sold within 2 years of its acquisition. The gains arising from such property are treated as STCG. If the property is inherited, then tax implications also arise. In that case, you should keep in mind that the date of purchase of the original owner needs to be considered. When the calculator is done then it is decided whether it is LTCG or STCG. In such cases, the property cost may be the previous owner's cost.
Income Tax Rules for NRI on TDS Deductible
If you are an NRI, you need to know about certain income tax rules regarding TDS. So, below are some of them listed-
TDS on income
TDS is applicable to various types of income earned by NRIs in India. It includes salary, rent, interest capital gains, etc. An NRI can file the taxes and claim an extra TDS refund.
TDS rates vary depending upon the income nature and applicable tax rates.
NRIs are needed to offer PAN to the deductor for complete TDS deduction.
TDS on interest income
For the interest income earned by NRIs on fixed deposits, saving accounts, and so on, the TDS deduction is 30% by the payer.
But for example, NRI qualifies for any lower tax rates under the DTAA between India and the resident country. In that case, necessary documents are required to be submitted like a Tax residency certificate to claim the lower TDS rate.
TDS on capital gains
NRIs are subjected to TDS on the capital gains that arise from property sales, shares, and any other capital assets in India.
TDS rates for capital gains vary depending on asset type and holding time.
NRIs can claim the refund for the excess TDS deducted while filing their income tax return.
TDS exemptions
NRIs apply for a low TDS rate through a certificate of lower deduction from a chartered accountant.
This certificate is needed for particular transactions and helps to reduce the TDS liability for NRIs.
How can NRI Save Taxes on Capital Gains While Selling a Property?
NRI can save the tax according to NRI tax rules through the sale of property under various sections like Sections 54, 54EC, and 54F.
Exemption under Section 54
This section offers exemption from long-term capital gains tax on the sale of NRI residential property. It also includes proceeds that are reinvested in another residential property. The important points related to it are given below-
Eligibility: The exemption is available for both residents and NRIs.
Applicability: The exemption applies to the long-term capital gains that arise from the sale of residential property. This property should be acquired for a minimum of 24 months.
Reinvestment: The taxpayer should use the proceeds from the sale to purchase another residential property within the deadline mentioned.
Conditions:
The exemption is available for one residential property only
New property must be purchased within one year before to 2 years after the sale date or constructed within 3 years from the date of sale. New house property must be located in India. The exemption under section 54 may not be available for properties purchased or constructed outside India to claim this exemption. The exemption can be taken back if the new property is sold within 3 years of its purchase.
Exemption amount: The amount is lower than long-term capital gains or the cost of new residential property.
Exemption under Section 54EC
This section enables an exemption from long-term capital gains tax. If the gains are invested in particular bonds. The important points are listed below-
Eligibility: The exemption is available to both residents and NRIs
Applicability: The exemption applies to the long-term capital gains arising from asset sales. It includes residential and non-residential properties.
Bonds Investment: The taxpayer can invest in capital gains specified in the bonds issued by the National Highway Authority of India within 6 months from the sale date.
Exemption Amount: The exemption amount is limited to investments made in particular bonds. These bonds are subjected to a maximum of INR 50 lakhs during the financial year.
Lock in Period: The particular bonds have a lock-in period of 5 years.
Exemption under Section 54F
Section 54F offers an exemption from long-term capital gains tax. On the asset sale other than residential property if proceeds are invested in residential property. Below are some key points to remember-
Eligibility: Exemption under section 54F is available to individuals and Hindu undivided families that include NRIs.
Applicability: The exemption applies to the long-term capital gains that arise from asset sales. Like land, buildings, and other capital assets except for the residential property.
Reinvestment: To claim the exemption, taxpayers need to invest in net sale. To proceed in purchasing a residential property.
Investment Timeframe: The new residential property must be purchased within 1 year before or 2 years after the date of original asset sale. In terms of construction, the taxpayer chooses to construct a new residential property, it must be completed within 3 years from the sale date. This new house property should be located in India.
Conditions: It includes ownership. The taxpayer should not own more than one residential property. The lock-in period should be at least 3 years from the acquisition date. If it is transferred within 3 years, the exemption claimed under section 54F will be stopped and capital gains will become taxable.
Exemption Amount: The exemption amount is checked based on the investment proportion made for new residential property. As compared to the net sale proceeds. The long-term capital gains can be exempted from tax if the complete net sale proceeds are invested. If some portion is invested, then the exemption is calculated proportionately.
Consequences of not paying TDS
Sometimes the buyer can deduct TDS at a rate applicable to residents rather than to NRI. In such cases, the buyer has to face the consequences. The buyer is legally responsible for the TDS deduction and deposit according to the TDS rate for the NRI seller.
When the buyer does not deduct TDS as per the rates prescribed, he or she is liable for a penalty equal to the TDS amount not deducted. The buyer is also liable to pay the interest on the default amount. Also when TDS is not deducted properly, the seller cannot recover the sale consideration amount received in this foreign bank account or NRE account.
How to File TDS on the Sale of Property by NRI?
To file the TDS on property sale by NRI, the property buyer has to follow these steps-
Verify the TDS: Check if the TDS is applicable based on transaction value. The buyer is responsible for TDS deduction in property sales by NRIs.
TDS calculation: Calculate TDS amount gets deducted usually from 20% of the total sale value.
Obtain TAN: You need to get a Tax deduction and collection account number. Through Form 49B submission to the income tax department if not obtained already.
Pay TDS amount: Deposit the TDS amount deducted from the government by the specified due date. This can be done through an online method or at an authorized bank.
TDS return filing: File TDS return within the deadline mentioned. Include information on the buyer, seller, property, transaction amount, and TDS amount to be deducted.
Get the TDS certificate: After filing the TDS return, provide the seller with a TDS certificate. Within 15 days of filing the return due date. You can download the certificate from the portal as TDS deduction proof.
Conclusion
Non-resident Indians( NRI) can sell their property in India. To claim the tax advantages under sections 54 and 54F of the Income Tax Act. However, it is essential to know the applicable tax rate on property sales and file the TDS according to the relevant process.
FAQs
Q1. Is PAN mandatory when NRIs sell their property in India?
Yes, PAN is mandatory for NRIs who sell their property in India. For TDS deduction on property sale.
Q2. Is TDS on property applicable for NRI?
When the NRI sells the property, the buyer is liable to deduct the 20% TDS. It should be deducted when making the payment to NRI.
Q3. How can NRIs lower the TDS on property sales?
The NRI can lower the TDS by applying low deductions. If there is no capital gain in it. Various documents are needed to file along with the application in Form 13.
Q4. Do NRIs need Aadhar to sell their property?
No, an Aadhaar card is not required to sell the property.
Q5. Who is responsible for deducting TDS on the sale of property by NRIs?
The property buyer is responsible for the TDS deduction.
Q6. Is it necessary for an NRI to file an income tax return in India for the year in which the property was sold?
To file an ITR is important for NRIs for one year. In which property is sold. If the total income is higher than the basic exemption limit according to the income tax slab rates. Also, eligible deductions need to be claimed to comply with Indian tax laws.
Q7. Is there any difference in TDS rates if the property is held for a short-term or long-term duration?
Yes, there is a difference in the TDS rates. For short-term capital gains, the TDS deduction is applicable according to income tax slab rates. And for long-term capital gains, the TDS rate is 20%.
Q8. Can an NRI claim a refund on excess TDS deducted on the sale of the property?
Yes, NRIs can claim the refund through income tax return filing. To attach the necessary TDS certificates.
Q9. Is there a penalty for failing to deduct TDS on the sale of property by an NRI?
Yes, if the buyer fails to deduct the TDS, then he is liable to pay the interest and penalties according to the Income Tax Act.
Q10. Can NRI sell agricultural land in India?
NRI cannot purchase agricultural land in India. But if you have owned it before the change of residential status, then only NRI can sell it to an Indian resident.
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