The income tax implications of selling your property in India for the NRI’s residing in the US

Indian real estate market is the third largest in the world. Attractive real-estate opportunities, RBI’s general permission and falling rupee value against dollars in recent times have created more interest among Non-resident Indians to invest in immovable properties in India. Along with buying a property of their own, many NRI’s may even have inherited properties in India. When it comes to dealing in property transactions for NRIs, taxation is one of the vital aspect to be considered. Let’s take a look at the income tax implications of selling property in India for NRI residing in the US.

Tax implications of selling property in India

Under the Income Tax Law in India, income from selling property is taxed under the head ‘capital gains’. Taxability on capital gains will be based on the period of holding of the property. Capital gains are taxable in the year of property transfer irrespective of receipt of sale consideration. Here are the tax treatment for capital gains arising out of selling of property in India.

• Short-term capital gains: If you are selling the property before 24 months from the date of property purchase, gains are treated as short-term capital gains which are taxable at the normal tax slab applicable for you as an NRI. The buyer is liable to deduct TDS (tax deducted at source) at 30% rate irrespective of the tax slab.
•  Long-term capital gains: If you are selling the property after 24 months or two years from the date of property purchase, gains are treated as long-term capital gains. For which, tax will be applicable at the rate of 20% with applicable surcharge and cess.

Capital gains are calculated as the difference between the sale value and cost of purchase. In case of inherited property, date and cost of purchase to the original owner (from whom the property is inherited) need to be considered for computing capital gains. In case of long-term assets, cost of purchase is indexed to adjust for inflation.

Tax exemptions to reduce tax-outgo

NRIs can claim tax exemptions under Section 54 and section 54EC on long-term capital gains arising out of sale of residential property in India.

• Section 54: As an NRI if you sell a long-term residential property, you can claim tax exemption on the gains if you acquire another residential house either one year before the sale or two years after the sale of property. Exemption can also be claimed if you construct another residential house within a period of three years from the date of transfer of such property. However, exemption claim is limited to the lower of total capital gains on sale of property or cost of purchase/construction of new property. And, no exemption can be claimed in respect of property purchased or constructed outside India.
• Section 54EC: As an NRI, you can also save tax on your long-term capital gains by investing in tax saving bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). To claim the tax exemption on long-term capital gains on sale of property, you need to invest in these bonds within six months from the date of transfer of property. Maximum of Rs. 50 lakhs is allowed to invest in these bonds which are redeemable after three years.

In order to avoid the deduction of TDS, it’s important to produce the relevant proofs or certificate of exemption to the buyer. However, you can claim refund of excess TDS deducted at the time of filing income tax return.

NRIs residing in US needs to keep in mind the tax implications applicable for them in US (country of residence) while selling property in India. It’s important to report the income and related details without any errors. Erroneous tax returns can land you in trouble. IRS sends out more than 9.1 million of notices every year to tax payers for erroneous tax returns. Failing to respond to notice can attract penalties.

Conclusion

Selling property for NRIs is not really a complex thing if taxation and legal aspects are dealt properly. Seeking professional help can smoothen the process and help in saving the tax liability to certain extent.