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Tax Implications for NRIs Selling Property in India

The taxation implications surrounding the sale of house property in India for non-resident Indians (NRIs) have become a source of considerable confusion. 
 

The sale of property by NRIs in India entails various tax obligations and regulatory considerations that must be understood to ensure compliance with the prevailing tax laws. 
 

To understand the tax* implications thoroughly, let us read about the tax payable and the necessary deductions for TDS on the sale of property by NRI in India.

TDS on Sale of Property by NRIs

Taxation on gains from property sales for non-resident Indians (NRIs) depends on whether the gains are categorised as short-term or long-term capital gains.
 

When an NRI sells a house property situated in India, the NRI property sale tax liability is determined based on the duration of ownership. If the property has been owned for a period exceeding two years (reduced from three years in Budget 2017), it is classified as a long-term capital gain.
 

On the other hand, if the property has been held for two years or less, it is considered a short-term capital gain. It is important to note that these tax implications also apply in the case of inherited properties.
 

  • For non-resident Indians (NRIs), long-term capital gains are subject to a flat tax* rate of 20%. 

  • Short-term capital gains are taxed at the applicable income tax slab rates based on the NRI's total taxable income in India.

When dealing with inherited properties, it is crucial to consider the original owner's date of purchase to determine whether it qualifies as a long-term or short-term capital gain. In such instances, the cost of the property will be calculated based on the cost to the previous owner.
 

During the sale of property by an NRI, the buyer is responsible for deducting Tax Deducted at Source (TDS). The standard NRI TDS on property sale is 20%. However, if the property is sold before two years (as calculated from the date of purchase), a higher TDS for NRI property sale (30%) will be applicable.

Tax Savings on Capital Gains for NRIs

When it comes to tax* implications for non-resident Indians (NRIs), there are provisions in the Indian Income Tax Act that allow them to claim exemptions on long-term capital gains from the sale of house property. These exemptions can significantly help in reducing the tax burden.
 

Exemption under Section 54

Under Section 54 of the Income Tax Act, NRIs can claim an exemption when selling a house property and incurring long-term capital gains.
 

  • Only the capital gains can be invested to avail Tax Exemption. It is possible to purchase a new property at a higher price, but the exemption is limited to the total capital gains earned.

  • The NRI can buy a new property one year before or two years after the sale. Alternatively, they can invest the capital gains in property construction, which must be completed within three years from the sale date.

  • Only one house property can be purchased or constructed using the capital gains for this exemption, as per the 2014-15 budget.

  • Properties outside India are not eligible, and if the new property is sold within three years, the exemption may be revoked.

If the NRI cannot invest the capital gains by the tax return filing deadline (usually July 31st) of the financial year, they can deposit the gains in a PSU bank or designated banks under the Capital Gains Account Scheme, 1988. This amount can be claimed as an exemption from capital gains, deferring immediate tax liability.
 

Exemption under Section 54F

Under Section 54F of the Income Tax* Act, NRIs can claim an exemption when there is a long-term capital gain from selling any capital asset except a residential house property.
 

  • To avail of this exemption, the NRI must purchase a house property within one year before the transfer date or two years after the transfer date. Or, they can construct a house property within three years after the transfer.

  • The new house property must be situated in India and should not be sold within three years of its purchase or construction.

  • The NRI should not own more than one house property apart from the new house and should not purchase or construct any other residential house within two or three years, respectively.

For this exemption, the entire sale receipt needs to be invested. The capital gains are fully exempt if the entire sale receipt is invested. Otherwise, the exemption is allowed proportionately based on the investment made.
 

Another important investment an NRI can make in India is purchasing NRI insurance. While an NRI insurance policy is more or less similar to regular life insurance policies, the former includes certain features and benefits that are suitable for the needs of Non-Resident Indians.
 

With a life insurance policy from Tata AIA Life Insurance company, you can choose from a range of online NRI insurance policies to avail of life cover, make investments and savings, plan your retirement, and also obtain health cover!

How to File TDS on Sale of Property by NRI?

To file TDS on the sale of a property by an NRI, buyer of the property has to follow these steps:
 

  • Verify TDS: Determine if TDS is applicable based on the transaction value. The buyer is responsible for deducting TDS in property sales by NRIs.

  • Calculate TDS: Calculate the TDS amount to be deducted, typically 20% of the total sale value.

  • Obtain TAN: Get a Tax Deduction and Collection Account Number (TAN) by submitting Form 49B to the Income Tax Department if not already obtained.

  • Pay TDS Amount: Deposit the TDS amount deducted with the government by the specified due date. This can be done online or at authorised banks.

  • File TDS Return: File a TDS return (Form 26QB) within the specified due date. Include details of the buyer, seller, property, transaction value, and TDS amount deducted.

  • Get TDS Certificate: After filing the TDS return, provide the seller with a TDS certificate (Form 16B) within 15 days from the return filing due date. Download the certificate from the TRACES portal as proof of TDS deduction.
     

Filing of ITR

The NRI seller should include the property sale and TDS details in their income tax return for the relevant assessment year.

Conclusion 

Non-Resident Indians can sell their property in India and avail of tax benefits under Sections 54 and 54F of the Income Tax Act, as shown above. However, it is important to know the applicable tax rate on the property sale and file your TDS as per the correct process.

Your Life, Your Legacy: Life Insurance Inquiry for Indians Abroad

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

What is Form 27Q?

Form 27Q is a statement that provides comprehensive information on the Tax Deducted at Source (TDS) withheld from payments (salaries not included) made to Non-Resident Indians (NRIs) and foreigners.

What is the difference between Form 26Q and Form 27Q?

The deductor submits form 27Q on a quarterly basis as per Section 200(3) of the Income Tax Act of 1961. It is specifically used for reporting Tax Deducted at Source (TDS) on payments (not salaries) made to Non-Resident Indians (NRIs) and foreigners.

Form 26Q is meant for TDS on supplementary income, including interest, bonuses, or any other amounts owed to NRIs or foreigners.

Disclaimers

  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  • Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.