Capital Gains on land and property inherited by an NRI

Capital Gains, nrihelpinfo
Understanding capital gains tax on property inherited by an NRI

During a situation when the NRI sells the property, and the individual who buys the property will have to deduct income tax under the Section 195 of the Income Tax Act, on the taxable price of capital gains at the rates appropriate.

If the combined holding period of the inheritor and the deceased surpassed 24 months, the profits made on such sale shall qualify as the long-term capital gains. For the objective of computation of capital gains, the amount for which the property was purchased through any of the previous holders, shall be taken as the price of acquisition if the property was obtained after April 1, 2001.

In case the property was obtained prior to April 1, 2001, the seller has the choice to get the market value of the property as on April 1, 2001, as the price and apply the indexation on this, for calculating the capital gains.

The NRI has the options to either pay the tax on such long-term capital gains (LTCG) at 20 percent or avail of the tax benefits under the Section 54 and 54F, by investing in a new residential house.

Top legal aspects of NRIs Selling Property in India

Taxation: NRIs who sell their property within 3 years of its purchase have to acquire capital gains tax(CGT) at 20 percent.

  • In case of inherited property, while computing the long-term capital gains(LTCG), the cost to the former owner (i.e. the individual from whom the property and land are inherited) would be acknowledged as the cost of purchase.
  • Although NRIs are subjected to a TDS (Tax Deducted at Source) of 20 percent on the long-term capital gains, there are several instances when an NRI can get a waiver. One such instance would be if the NRI is thinking to re-invest the capital gains in different property or tax-exempt bonds.
  • If an NRI sells the property prior to 3 years of purchase, a short-term capital gain tax is imposed at a TDS rate of 30 percent. However, he can apply to the income tax (I-T) authorities, from where he holds the PAN, for a tax exemption certificate under the Section 195 of the Income Tax Act, along with the evidence of reinvestment of capital gains.
  • An NRI gets two years’ time to invest in another property and up to 6 months if he wishes to invest in bonds. If the NRI is thinking to buy another house, the payment receipt or allotment letter requires to be produced, and an affidavit is required if capital gains bonds are bought.

Tax exemptions: In a situation, an NRI sells a residential property after 3 years of purchase and reinvests the funds in another residential property within 2 years from the date of sale, the interest generated is exempted to the extent of the amount of the new property.

For instance, if the capital gains are Rs 15 lakh but the new property costs Rs 10 lakh, the left Rs 5 lakh is treated as long-term capital gains. Nevertheless, NRIs can’t use the proceeds of the sale of property in India on a foreign property and yet claim the exemption.

Moreover, Section 54EC of the Income Tax Act (I-T Act) states that if an NRI sells a residential property after 3 years and spends the number of capital gains in bonds, he will be exempted from CGT. Though, the bonds will remain locked in for three years.

Repatriation of the sale transactions of the inherited property

A general permission is given to PIOs (persons of Indian origin) and NRIs (non-resident Indians) to repatriate the sale proceeds of property inherited from an Indian resident, subject to certain conditions. If these requirements are met, the NRI need not seek the Reserve Bank of India’s (RBI) permission.

But, if the NRI has inherited the property from an individual who is not residing in India, he needs to seek specific permission from the central bank. The conditions to take such funds back are easy, i.e. the amount per financial year should not exceed $1 million, provided it is done through authorised dealers.

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Capital Gains on land and property inherited by an NRI

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