Income Tax Requirements For NRIs Selling Real Estate in India
When selling property in India, an NRI is required to pay a TDS in accordance with income tax regulations. Learn how to compute tax and how much tax NRIs selling property in India must pay.
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Many NRIs hold real estate or other assets in India. Many people eventually decide to sell their home. However, one must keep in mind that the Indian government levies tax on nearly everything before selling a property. An NRI must pay taxes when they sell their property in India. Taxes that must be paid vary depending on whether the gain was short- or long-term.
Let’s learn more about the application of income tax regulations on NRIs.
Rules for NRI Capital Gains Income Tax
An NRI who sells a property in India is subject to capital gains tax. Gains from the sale of a property that are subject to taxation are known as capital gains. Long-term and short-term capital gains are separated into categories. NRIs who inherited the property are likewise subject to tax consequences. The original owner’s purchase date must be recalled in this scenario in order to determine whether a capital gain is long- or short-term.
Short-Term Capital Assets (STCA): Immovable property, such as houses, buildings, or land, can be sold for short-term capital profits. The property must be less than 24 months old. Prior to the financial year 2017–18, 36 months was regarded as the short-term capital asset tenure.
Long-Term Capital Assets (LTCA): Assets that have been kept for longer than 36 months are considered long-term capital assets. Such a property’s sale profit is regarded as a long-term capital gain.
NRI income tax guidelines for taxable income
The following methods are required under NRI income tax regulations for payment of tax: –
| Type of capital gain | Tax to be paid |
| Short term capital gains (property sold whose age was less than 24 months) | As per income tax slab rates |
| Long term capital gains (property sold whose age was more than 24 months) | 20% |
NRI Income Tax Regulations Regarding TDS Deductible
In India, a buyer who purchases a home from an NRI is required to pay TDS (Tax Deductible at Source) at a rate of 20%. A TDS of 30% is imposed if a property is sold before two years have passed.
Income Tax Regulations for NRIs for Property Capital Gains Tax Calculation
One needs to be familiar with a few phrases in order to calculate the capital gain tax under the NRI income tax regulations. The calculations also depend on the tenure of the property, or how long it was owned.
Final Value Consideration: A sum paid by the seller in return for his capital asset is taken into account when determining final value.
Purchase Cost: This represents the asset’s value at the time of sale.
Cost of Improvement: When a seller upgrades or modifies a capital asset, there are charges involved.
Cost of Transfer: The transfer cost includes any expenses paid in connection with the sale of the asset, including registry, brokerage, and other costs.
Indexed Cost of Acquisition: This cost is calculated by utilizing the Cost Inflation Index (CII) to adjust the inflation values over the years that the asset was held. Additionally, the ratio of the years in which the seller bought or sold an item can be seen in this cost.
Indexed Cost of Improvement: The cost of the necessary improvement is multiplied by the cost inflation index for the year to arrive at the indexed cost of improvement, which is then divided by the CII for the year the improvement was made.
Short-Term Capital Gains for NRI Calculation Formula
If you sell a property, use the following formula to determine your short-term capital gains.
Short-term capital gain is calculated as the final sale price minus the sum of the acquisition, home improvement, and transfer costs.
Long-Term Capital Gains for NRI Calculation Formula
You must use the following formula to determine long-term capital gains:
The final sale price less the total of the indexed purchase, improvement, & transfer costs is the long-term capital gain, where:
Indexed cost of acquisition is equal to the purchase price multiplied by the cost inflation index of the transfer year and the cost inflation index of the acquisition year.
Indexed cost of improvement is calculated by multiplying the improvement cost by the cost inflation ratio of the transfer and improvement years.
How to Reduce Tax on Capital Gains Under NRI Income Tax Regulations
If an NRI sells a property in India, they may be able to avoid paying taxes. Sections 54 and 54EC of the tax code provide the exemptions for long-term capital gains.
NRI Income Tax Regulations: Section 54 Exemption
An NRI can use the capital gains money to invest in other properties, which will lower their tax obligations. A person who sells a residential property may qualify for a capital gains tax exemption if the proceeds are reinvested in residential property, according to Section 54 of the Income Tax Act. It could be the buying of a property that is ready to move into or the building of the property. Keep in mind that investing all of your capital gains is not required. On the other hand, the total amount of capital gains will be excluded. As previously stated, investments can be made in the building of a home, but the project must be finished within three years of the property’s sale. The Indian government has also made it clear that capital gains can only be used to buy one residential property in order to qualify for an exemption.
All NRIs must be aware that the second property must be located in India in order to qualify for the exemption; homes purchased outside of India are not eligible. If new property is sold within three years, the income tax authorities may return the money.
If you have not invested capital gains as of the income tax filing date, the seller may deposit the capital gains amount in the Capital Gains Account Scheme of 1988. It is not subject to taxation.
NRI Income Tax Regulations: Section 54 EC Exemption
If you invest your capital gains in Capital Gains Bonds within six months after selling a property, your income tax will be lowered. The National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC) may issue the gain bonds. After five years have passed since the property was sold, the bonds can be redeemed. Don’t forget to purchase the capital gains bonds prior to the ITR (filing deadline for income tax returns).
Reminders Regarding NRI Income Tax Regulations:
The following points should be kept in mind if you are an NRI and hold property in India:
- When the value of the moveable property exceeds Rs. 50 lakhs, Tax Deducted at Source (TDS) must be paid.
- The purchaser must be sure to deduct the TDS from the purchase price of the property. At the time of property registration, evidence of the paid taxes must be provided.
- If the seller of the property is an NRI and they are purchasing it, they must account for this TDS amount or they may be required to pay it themselves.
- For those who have a Tax Deduction Account Number (TAN), a TDS receipt is given. Therefore, in order to issue a TDS receipt to the owner of the withheld TDS, the party must first apply for and get a TAN from the tax department.
- It is important for NRIs selling property in India to obtain a TDS receipt. Having a TDS receipt will be sufficient evidence for the NRI regarding the tax payment in the event that the buyer fails to deposit the TDS deducted with the Indian tax authorities.
- NRIs who sell real estate in India must pay 20% in long-term capital gains taxes. If the property is held for a longer period of time, indexation will reduce the capital gains amount.
- NRIs are not permitted to deposit funds from property sales in India into NRE accounts. Therefore, the only choice is to deposit the money in an NRO account, which stands for Non-Resident Ordinary. Any sum may be transferred to an NRO account as long as it complies with all applicable regulations and includes documentation indicating it is solely the proceeds from the sale of the specified property in India, such as a CA certificate attesting to the payment of taxes.
Conclusion Regarding NRI Income Tax Regulations
Everyone, whether an NRI or an Indian citizen, must pay taxes. If an NRI sells a property in India, they must pay taxes. Taxes are paid on capital gains in India in accordance with the income tax regulations for NRIs. These profits come from either the short-term or long-term sale of a property. 20% of taxes are paid on long-term capital gains, while income tax slab rates are used to determine taxes on short-term capital gains. We hope your questions about the NRI income tax rules have been answered.
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