Capital Gain on Sale of Immovable Property by NRI

There is always a doubt in the minds of NRIs about the taxability of gain arising from the sale of immovable properties in India. According to Indian tax law, any income or gain arising from the sale of immovable property is subject to tax in India. After are the relevant provisions of the Income-tax act regarding taxation of income or gain from the sale of Immovable assets. Find the best tax-saving option for NRIs.

1. What is an Immovable Property?

The immovable property involves Land, buildings, or both. The NRI might have acquired right or ownership over the immovable property in the following ways

1. Inherited: Inherited from the ancestral property or by way of family partition or by way of gift
2. Acquired when he/she was resident in India using earnings in India
3. Acquired after becoming an NRI using earnings from a foreign country.

Taxation is the same for all the above properties however it is relevant for specific purposes as explained below.

Further Land can be classified as Agricultural land and non-agricultural land and Building as Residential and commercial buildings. 

2. Long Term & Short Term Assets

The properties are categorized as Long-term assets and Short-term assets based on the period of allotment for tax purposes. Long-term asset: If the period of holding of an asset is more than 24 months, it is called Long term capital asset. In case of assets acquired by tradition or gift, the period of holding of the earlier owner shall also be included in the computation of the 24 months limit.

Short term asset: If the period of holding of an asset is 24 months or less, it is termed a Short term capital asset.

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3. Capital Improvement

A capital improvement is that the difference between sale concern and price of acquisition & Cost of improvement. It’s important to know the above terms. Sale consideration: Sale concern is that the value of cash received towards the transfer of the asset. However, the particular consideration shall get replaced by the rule value if the rule value of the asset on the date of transfer is quite the particular sale consideration.

Guideline value is that the value fixed by the govt for stamp tax purposes. Cost of acquisition: Cost of gaining consists of the gaining value, stamp tax paid at the time of buying, and payments incurred for purchase eg. Commission paid & Document writing charges paid if any.

When the asset was acquired by the taxpayer by way of Gift, Inheritance, or by way of family partition, the cost of such asset shall be cost invited by previous owners. The asset’s actual costs will be replaced to Guideline value as of 01/04/2001 on the subsequent situations.

1. When the asset was acquired by NRI before 01/04/2001
2. If the assets were acquired by way of Gift / Inheritance or family partition and the assets were acquired by previous owners before 01/04/2001

Cost of Improvement: Cost of improvement is capital expenses incurred relating to improving the quality of the asset. Expenses like Fencing or Compound wall construction, Land leveling expenses, road construction, and other facilities will be considered a cost of the improvement.

Expenses incurred on or after 01/04/2001 only will be considered as a cost of progress, expenses incurred before 01/04/2001 should not be considered. It is important to maintain proper evidence for the expenses incurred and submitted to claim the expenses. Not providing supporting documents may lead to disallowance of the claim and increase the capital gain resulting in more tax liability.

Indexed Charge: For long-term capital asset, to provide the benefit of inflation Government has provided the cost of inflation index from FY 2001-02. There is an index value for every year and the cost of gaining and cost of enlargement shall be planned using the rates provided. Following is the formula to apply indexation.

Indexed cost = Cost/index for the year of incurring * index for the Year of sale Calculation of Capital gain

4. Exemptions from Capital Gain

A taxpayer can avoid tax on capital gain on the sale of indicated assets if the Net sale attention or capital gain is invested in specified assets within the time limit identified.

1. Transferal of indicated assets
2. Residential house or plot
3. A long-term capital asset is other than a residential house
4. Necessary acquisition of Property & Construction or right over land & construction part of industrial responsibility
5. Investment in specified assets
6. Residential family
7. Indicated bonds
8. Invested in Land & Construction

Above exemptions are subject to fulfilling with assured situations, the taxpayer has to comply with the same, and non-complying of the situations at a later step will result in withdrawal of freedom and tax be paid in that year.

5. TDS

Each deal relating to the sale of immovable property by a Nonresident is topic to Tax deduction at source (TDS). Section 195 of the Income-tax Act mandates that any person making any payment to a Nonresident shall deduct tax before making payment.

Thus, the customer of the property is liable to deduct tax from the sale concern. The rate of TDS shall be considered after arriving at tax on a capital gain. The actual tax charge shall be deducted as TDS. However, the seller or buyer may method a jurisdictional assessing officer to reach the capital gain and decide the rate of TDS by creating an application.

The application should be submitted along with the following documents.

1. Sale agreement
2. PAN of seller
3. PAN of buyer
4. Proof of buying and cost of improvement
5. Calculation of capital gain
6. Calculation of whole income

The Assessing Officer after verifying the documents will reach the capital gain and provide a ratio of TDS. Based on the order of the Assessing Officer, TDS requirements to be deducted and paid to the government by the buyer. After creating the payment, the buyer will issue TDS documentation to the seller and it can be used while filing a return of income. It is compulsory to make an application to AO for deciding capital gain otherwise tax should be deducted at total consideration.

6. Capital Gain tax

Tax on capital gain is definitely based on the nature of capital gain, i.e. long term or short term; following is the rate of tax.

1. Long-term capital gain: Total long-term capital gain is taxed @ 20%. The slab rate of tax does not apply to long-term capital gain. This rate may change if the DTAA advantage is availed.

A non-resident is not qualified to claim a basic exemption limit of Rs.2, 50,000 for long-term capital gain; all gain is subject to tax @ 20%.

1. Short-term capital gain: Short-term capital gain is treated at par with other income and it is subject to tax as per slab rate of tax.

7. Filing Return of Income

The Nonresident is necessary to file his return of income in detail of income earned in India and pay applicable tax. What income of Non-Resident will be taxable in India?

However, he need not file a return of income in the next situation.

1. Has only long-term capital gain and has no other income
2. TDS at the applicable rate is deducted

8. DTAA

The Indian government has arrived at Double Taxation Avoidance Agreements (DTAA) with many countries to avoid double taxation of the same income in both countries. All DTAAs have tax rates; a taxpayer is at liberty to use the Tax rate as per the income tax Act or DTAA, whichever is more helpful to him.

For example, if the DTAA rate of tax is 10%, he can pay tax at 10% instead of 20% listed in the Income-tax act. To claim a DTAA advantage, the nonresident has to offer a Tax Residency certificate from the country in which he is a resident. The TRC needs to be found from the income tax department of the resident country.

9. Repatriation

An NRI can repatriate up to USD 1 million out of balances in NRO accounts or sell proceeds of assets. NRI must produce an undertaking by way of a certificate issued by an accountant. In the case of repatriation of sale continues of immovable property by NRIs/PIOs, ADs can permit repatriation thereof albeit the immovable property was held by the NRIs/PIOs for fewer than 10 years providing the cumulative period of holding of the immovable property in India and retention of the sale proceeds of the property within the NRO account isn’t but 10 years.

Source: Imperial Money Pvt. Ltd.