Earning in dollars, buying in rupees. The life of a Non-Resident Indian (NRI) might appear plus plush and easy to many. But the reality in realty is never so. Many NRIs find it awfully confusing to understand the specific tax implications of trying to buy or sell a property in India. This is largely due to lack of adequate information as well as misleading information circulating on the Internet. We can’t correct all that misinformation but let’s try. In our feature focus on NRIs, we will highlight the important tax implications for NRI clients who wish to sell properties in India.
About TDS
One of the major differences between resident Indians who sell a property vs. NRIs is that Tax Deducted at Source or TDS of 1% is deducted for residents, but this is not the same for NRIs. There are many NRIs who unknowingly lose a lot of money as they are unaware of the TDS rules.
When any property is sold by an NRI, it is mandatory to reduce 20.66% TDS from its selling price if this is a long-term capital gain. Long-term capital gains tax is a tax paid on property held for more than 24 months. On the other hand, when the property has been kept for less than 24 months, it is termed as short-term capital gain. In this case, the TDS becomes 33.99% of the income tax of the NRI, irrespective of his or her income tax slab.
TDS is applicable irrespective of whether the property is valued above or below INR 50 lakhs. Resident Indians pay 1% only when the property value is greater than INR 50 lakhs.
Now here is an anomaly. An NRI should be paying capital gains tax only when there is capital gain from the sale of the property, but instead, TDS is calculated upon total sale value of the property. Since there is no gain, the NRI usually incurs a loss from the sale of the property if a TDS refund is not claimed. Therefore they must approach the Income Tax department for TDS refunds.
Who pays TDS?
A question now arises – Who will be the one held responsible for paying TDS? If a property is sold to an individual, is he the one who deducts TDS and pays to the Government? The answer is yes. This individual will need to get a Tax Deduction Account Number (TAN) and will need to obtain a TDS certificate for the same.
Reinvesting the capital gains
Here is a way to save yourself from paying capital gains tax. Long-term capital gains, which are obtained from the sale of property, can be put into tax-exempt bonds, which will help save you from paying long-term capital gain tax. In such a case, the NRI can apply for a Tax Exemption certificate from the Income Tax department as per section 195 of Income Tax Act, 1961.
If the long-term asset is sold and the capital gains amount is subsequently invested in REC and NHAI bonds within six months of the date of sale, then you will be exempted from capital gains tax. Bonds will remain locked for three years.
Tax implications also exist for NRIs on property they have inherited. In such cases, one will have to calculate the date of purchase of the property from the original owner to determine whether it’s long-term capital gain or short-term capital gain.
