Selling property in India? Don't miss these NRI tax essentials

Capital gains taxation rules for NRIs: Are you an NRI planning to sell your property in India? You can easily get confused with the complex web of taxation rules surrounding this process. Capital gains, the profits made from property sales, are subject to different tax rates based on whether the property was held for a short term or a long term, say experts.

"The Indian real estate market has long been a magnet for investments from the global Indian diaspora, with Non-Resident Indians (NRIs) actively participating in purchasing residential and commercial properties across the country. However, while buying property in India has been an enticing prospect, selling these assets comes with intricate tax implications that require careful planning and understanding to ensure compliance and optimise profits," said Gunjan Goel, Director, Goel Ganga Developments.

Taxation rules for NRIs: Capital gains and TDS

Short-Term Capital Gains (STCG) tax rates are applied if the property is sold within two years of acquisition and are calculated according to the NRI's income tax slab rates. On the other hand, Long-Term Capital Gains (LTCG) tax at a rate of 20 per cent applies if the property is sold after two years.

The calculation of these gains involves taking into account several variables, including the property's final sale price, cost of acquisition, home improvement costs, and cost of transfer. For long-term gains, indexed costs of acquisition and improvement are factored in, reflecting the impact of inflation.

Tax Deducted at Source (TDS) is another critical aspect. While Indian residents face a 1 per cent TDS rate while selling property, NRIs encounter a higher rate. Within two years of purchase, a 30 per cent TDS rate is applicable for STCG, whereas a 20 per cent TDS rate applies for LTCG if the property is sold after two years. However, it is important to note that TDS rates are calculated on the property's sale value, not the capital gains.

Strategies to manage TDS and tax saving

"To manage the TDS and potentially lower it, NRIs can apply for a TDS certificate from the Income Tax Department before the property sale transaction is executed. This certificate will determine the TDS rate based on the calculated capital gains, allowing for smoother compliance and potential savings," said Amit Gupta, MD, SAG Infotech.

"Obtaining an operational Permanent Account Number (PAN) is a prerequisite for significant transactions in India. An operative PAN is necessary for applying for a lower TDS certificate, ensuring NRIs can benefit from tax return advantages," Gupta added.

Tax saving opportunities

"A savvy approach to reduce capital gains tax is reinvestment. NRIs can reinvest the sale proceeds in another property, thereby deferring or eliminating the tax liability. Under Section 54 of the Income Tax Act, if the entire capital gain is invested in a residential property within two to three years of the sale, the gains can be exempted from tax. This exemption is available for one residential property purchase in India," said Arpit Suri, CA and personal finance expert.

Additionally, Section 54EC offers an opportunity to save tax by investing capital gains in specific bonds issued by entities like the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC). "These bonds have a lock-in period, and the gains remain untaxed if the investment is made within six months of property sale," Suri added.

Given the complexity of the country's real estate taxation landscape, experts advise NRIs to seek guidance from tax consultants. Factors such as property value, holding period, and reinvestment play pivotal roles in NRI property sales. By partnering with experts, NRIs can navigate these challenges and ensure both profitability and regulatory compliance in their property transactions.