The sale of property in India by Non-Resident Indians (NRIs) is governed by specific tax regulations under the Indian Income Tax Act, 1961. Whether it’s capital gains tax or compliance with Tax Deducted at Source (TDS), understanding these rules is critical for NRIs to ensure a smooth and tax-compliant transaction.

Types of Taxes on Property Sale by NRIs

NRIs are subject to capital gains tax when they sell property in India. The tax liability is determined based on the duration of property ownership:

1. Short-Term Capital Gains (STCG)

   • If the property is held for 2 years or less, any profit made is categorized as STCG.
   • STCG is added to the NRI’s total income and taxed at their applicable nri tax on property sale.

2. Long-Term Capital Gains (LTCG)

   • If the property is held for more than 2 years, the profit qualifies as LTCG.
   • LTCG is taxed at a flat rate of 20% with the benefit of indexation, which adjusts the purchase price for inflation.

Additional Charges

Surcharge and health and education cess (4%) apply over and above the basic tax rates, depending on the total taxable income.

Capital Gains Tax Calculation

Short-Term Capital Gains Formula

STCG = Sale Price - (Purchase Price + Cost of Improvements + Sale Expenses)

Long-Term Capital Gains Formula

LTCG = Sale Price - (Indexed Cost of Acquisition + Indexed Cost of Improvements + Sale Expenses)

Example:

• Sale Price: ₹1 crore
• Indexed Cost of Acquisition: ₹60 lakhs
• LTCG: ₹1 crore - ₹60 lakhs = ₹40 lakhs
• Tax on LTCG (20%): ₹8 lakhs (excluding surcharge and cess)

TDS on Property Sale by NRIs

Under Section 195 of the Income Tax Act, buyers of property from NRIs must deduct Tax Deducted at Source (TDS):

• 20% on LTCG
• As per income tax slab rates for STCG

Key Points on TDS

• TDS is deducted on the entire sale value, not just the profit, unless the NRI seller provides a lower or nil TDS certificate.
• The buyer must obtain a Tax Deduction and Collection Account Number (TAN) to deposit the TDS with the government.

Steps to Obtain a Lower or Nil TDS Certificate

NRIs can apply for a lower or nil TDS certificate if their actual tax liability is less than the TDS calculated on the sale value.

1. File Form 13 with the Income Tax Department.
2. Submit necessary documents, including:
   • Sale deed
   • Purchase agreement
   • Proof of capital gains calculation
3. Obtain the certificate and share it with the buyer to deduct TDS accordingly.

Exemptions to Reduce Tax Liability

NRIs can minimize or eliminate tax on LTCG by claiming exemptions under specific sections:

1. Section 54: Reinvestment in Residential Property

   • Reinvest the capital gains in another residential property in India within 2 years (or construct within 3 years) to claim exemption.

2. Section 54EC: Investment in Capital Gains Bonds

   • Invest up to ₹50 lakhs in government-approved bonds like REC or NHAI within 6 months of the sale.

3. Section 54F: Sale of Non-Residential Property

   • Reinvest the entire sale proceeds in a residential property to claim exemption on gains from non-residential property sales.

Filing Income Tax Returns (ITR)

Filing an Income Tax Return is mandatory for NRIs in the following cases:

• If TDS deducted exceeds the actual tax liability.
• To claim exemptions under Sections 54 or 54EC.
• To report the property sale and capital gains.

Documents Required for ITR Filing

• Sale deed and purchase agreement
• TDS certificate (Form 16A) issued by the buyer
• Proof of reinvestment (property purchase or bonds)
• Indexed cost of acquisition and improvement calculations

DTAA Benefits for NRIs

India has signed Double Taxation Avoidance Agreements (DTAA) with several countries, allowing NRIs to avoid double taxation on income. Benefits include:

• Reduced TDS rates.
• Claiming credit for taxes paid in India in the NRI’s country of residence.

Steps to Claim DTAA Benefits

1. Obtain a Tax Residency Certificate (TRC) from the resident country.
2. Submit Form 10F and relevant documents to the buyer.
3. Provide proof of residency, such as a passport or utility bills.

Challenges Faced by NRIs in Property Transactions

1. Higher TDS Deduction
   Buyers often deduct TDS on the full sale value, leading to excess tax payments. Applying for a lower TDS certificate in advance helps address this issue.

2. Complex Taxation Rules
   Navigating capital gains, exemptions, and DTAA benefits can be overwhelming without expert guidance.

3. Delayed Refunds
   NRIs may experience delays in receiving refunds for excess TDS. Filing accurate ITRs with proper documentation expedites the process.

Best Practices for NRIs Selling Property

1. Calculate Capital Gains Tax
   Determine whether the gains qualify as STCG or LTCG and plan tax payments accordingly.
2. Plan Reinvestment Strategies
   Explore exemptions under Sections 54 and 54EC to minimize tax liability.
3. Educate Buyers
   Inform buyers about their TDS obligations to avoid non-compliance issues.
4. Seek Expert Advice
   Consult tax professionals specializing in NRI taxation to ensure compliance and optimize tax savings.

Conclusion

Selling property in India as an NRI involves understanding and adhering to tax regulations, including capital gains tax and TDS requirements. By leveraging exemptions, claiming DTAA benefits, and seeking expert advice, NRIs can reduce their tax burden and ensure a smooth transaction.

For professional guidance on NRI property taxation and compliance, consult with firms like Dinesh Aarjav & Associates, experts in NRI tax solutions, ensuring a seamless experience for every property sale.