NRIs tend to invest funds in real estate in India. However, Most of the NRIs are not aware of the tax implication of their properties and land in India. There are 2 types of sources from where one can attain property income in India. Either by renting out the property or by the sale of the property in India.
Income tax on Rent income received by NRIs is taxable under the head House Property and is imposed the same way as it is for Resident Indian.
- Out of the total amount of rent received by the NRI, Municipal taxes are first allowed to be reduced.
- After that, from the rest balance amount – 30% is allowed as standard deduction as well as a deduction for interest paid on home loan is allowed.
- In case, if NRI have more than one property and land but neither from them is let out nor is used for the residential purposes, then one can be challenged as self-occupied but current market rent or notional rent is calculated, and tax is applied on that the remaining properties.
Profit gains to the NRIs will be either long-term capital gains or short-term capital gains that are based on the period of holding of the asset (property). In the case of capital gains, the cost of the property and land is the cost to the previous owner.
- When the property is sold off within the period of 2 years (from budget 2017-2018) of purchase, it is named as short-term capital gains and chargeable to tax as per the income tax slabs applicable to Non-resident Indians.
- When the asset that can be other than immovable property and shares is sold off after completing three years, it is categorised as long-term capital gains and is taxed at 20% plus cess and surcharge after indexation. However, in the case of immovable property, it is termed as long-term capital gains if it is held for more than two years.
Tax Exemptions on a sale of the property in India
NRIs can also enjoy exemptions on their capital gain income from the sale of the property in India. Understand the below tax exemptions available to an NRI:
- Section 54 – Under this section 54, if NRI person sells a residential property after two years from the date of investment and then reinvests the profits into another residential property within 2 or 3 years from the date of sale, the profit generated is exempt to the extent of the cost of new property. Though, NRIs cannot invest the proceeds on the sale of property in India in an alien property and still can avail the benefit of section 54. The exemption shall be restricted to the total capital gain on sale of the property and land. The property may be bought 1 year prior to the sale or two years after the sale. However, in the case of construction, the period becomes three years.
- Section 54EC – In case, if an NRI sells off a long-term asset, i.e. a residential property and finances the number of capital gains in bonds of REC and NHAI within the 6 months from the date of sale, he/she will be free from capital gains tax. These are redeemable after five years (earlier the lock-in time was for 3 years). A time period of six months is permitted to invest in these bonds. The NRI need to show proofs to these investments to the property buyer to ensure that TDS doesn’t get deducted.
- Section 80C – In case, if the home loan has been taken then NRIs are eligible as per the section 80C for repayments of the principal amount of the loan. Stamp duty, as well as registration charges paid on buying of property, can also be claimed u/s 80C. Deduction towards property tax paid and benefit on home loan deduction is also allowed to be deducted u/s 24(b).
According to the income tax act, when a payment is made to Non-resident Indians, TDS must be deducted at the applicable rate which depends on the nature of income. Thus, when an NRI sells a property following TDS is applicable in the case of sale of property by NRI, if the capital gain is long-term, the buyer must deduct a TDS of 20% on the sale amount of the property. Likewise, in the case of short-term capital gains, TDS at the rate of 30% is deducted. Moreover, the TDS chargeable to NRIs is higher than that chargeable to resident Indians. In case the income amount exceeds the prescribed limit (say 50/100 lakhs) surcharge also needs to be collected. The deducted taxes are must to be paid to the Income Tax Department along with a duly filled Challan 26QB.
We recommend you to hire a professional CA or property lawyers to calculate what tax exemptions you can have on sale of property in India.