Did you buy a property in India that you now want to sell at a profit? Before you move forward with the sale process, make sure to learn about the different income tax rules applicable to an NRI looking to sell a property in India.
This blog discusses everything you need to understand about capital gains tax and tax exemptions.
How Much TDS Must an NRI Seller Pay on The Sale of Property in India?
TDS stands for Tax Deducted at Source. According to the law, the resident buyer must deduct 20% TDS as Long-Term Capital Gains Tax while purchasing a property from an NRI Seller if it has been held for over two years.
However, NRIs have to pay a TDS of 30% if they sell their property in India within two years of buying it. It should be noted that this tax is deducted as Short-Term Capital Gains Tax. Don’t forget that the deduction also includes TDS plus surcharge, education cess, and health.
The tax an NRI is liable to pay on the gains is determined by whether it’s a short-term (under 2 years) or long-term (over 2 years) capital gain. Interestingly, NRIs also need to pay the tax if they inherit property in India.
In that case, you can backdate the property to when it was purchased by the original owner to figure out if it’s a short-term or long-term capital gain.
How To Pay Less TDS?
You can ask for a refund if the tax deducted at source exceeds your total tax liability, or you can simply apply for a certificate to pay a lower TDS rate for efficiency. However, you must apply for this certificate before executing the sale agreement.
The TDS is determined after calculating the capital gains. As a result, you wouldn’t have to file for a refund and would get money in an instant. You are advised to consult a lawyer in this regard to seek expert counsel.
Exemptions Under The Law
An NRI may be able to reduce tax liabilities by availing certain exemptions under Sections 54, 54F, and 54 EC. Let’s take a quick look.
You can get tax exemption by reinvesting the capital gains earned from the sale of the property into purchasing another one in India.
That’s right; if you take the capital gains you made by selling a property and reinvest them to buy another one in India within 2 years of finalizing the sale, you become eligible for an exemption.
Here, it is paramount to note that you don’t have to invest the entire sale receipt to buy another property. You only need to reinvest the capital gains to get a tax exemption. Of course, if the price of your new property exceeds the capital gains, you would only get an exemption for the profit you reinvested.
You may also invest the capital gains to construct another property, but the construction needs to be completed within 3 years from the date of sale.
Tax exemptions under section 54F can be availed of in case there is a long-term capital gain on the sale of a capital asset apart from a residential property. All an NRI has to do is buy one house property within a year before the transfer date or 2 years after the transfer date.
You may also construct one house property within 3 years following the date of the transfer of your capital asset. However, you cannot sell this property for 3 years after buying or constructing it. Plus, the property should be located in India.
Most importantly, you are supposed to reinvest the entire sale receipt you received after selling your capital asset for complete exemption on capital gains. Otherwise, the exemption will be done proportionately.
Section 54 EC
Under Section 54 EC, an NRI can get an exemption by investing the capital gains earned from selling property in Capital Gains bonds within 6 months of finalizing the sale.
You have to fill out and submit forms 15CA and 15CB in order to repatriate the proceeds from the sale of the property. Plus, Form 15CB must be accredited by a chartered account. However, you can fill out the form 15CA yourself. An NRI can transfer USD 1 million a year from India to another country.
While you can learn plenty of information from the web and other sources, it’s always better to seek legal counsel to confirm the details based on your specific circumstances.
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