NRI Immovable Property Sale Taxation
Who is an NRI?
Residential Status of an Individual (Resident or Non Resident) is determined by the period of stay of that individual in India. It is determined as per section 6 of the Indian Income Tax Act.
Broadly, if a person has stayed in India during a fiscal year (Apr-Mar) for 182 days or more (single stretch or in parts), he is a resident.
If he has stayed in India during a fiscal year for 60 days or more AND has also been in India collectively for 365 days of more during previous 4 fiscal years, then also he is a resident. This condition is not applicable for PIO or OCI. However, if PIO or OCI has Indian Income exceeding Rs. 15 Lakh during the fiscal year, then this condition is applicable to him with a modification (120 days instead of 60 days).
The above is an overview of a lengthy section. Individual case has to be studied and determined with proper parameters at hand.
Taxability of the Property Sale Transaction by NRI
When as NRI, you sell a property located in India, you have to pay income tax on the capital gain arising out of that sale. Capital gain is basically the profit earned as a difference between the sale consideration received and the cost of acquiring and constructing the property.
There are two types of capital gains - Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG)
If the property has been held by you for 2 years or more, the capital gain arising from sale of such property is called LTCG. And in case the property was held for less than 2 years, the capital gain that will arise from sale of the property is called STCG.
The tax rate on LTCG is flat 20% basic tax plus surcharge and education-cess, whereas the tax rate of STCG is as per the individual taxation slab.
Surcharge is a variable percentage (of basic tax) depending upon the total income whereas education cess if flat 4% (of basic tax plus surcharge).
In case of LTCG, there is an indexation benefit given while computing the capital gains. The indexation basically means that the cost of acquiring and constructing the property is increased by inflation index so as to arrive at a lower LTCG and consequently a lower tax amount.
Also, there are multiple options under section 54, 54EC and 54F of the Income Tax Act wherein re-investment out of sale proceeds in certain specified assets can be done to save the tax on LTCG.
What is TDS?
TDS stands for tax deduction at source. Government does not want the NRI seller to take away the sale consideration money without paying the income tax applicable on it. So, as per rules the buyer of that property has to deduct the tax of the NRI seller from the sale price to be paid and deposit the same to the Government.
But the catch here is, the TDS will be deducted as per tax rate applied on the full amount and not just the capital gain amount.
For example, if the property is being sold by NRI to the buyer for Rs. 5 crores and the NRI had acquired that property at an (indexed cost) of Rs. 3 crores, then the LTCG is Rs. 2 crores only and the tax applicable is 20% of Rs. 2 crores which is Rs. 40 lakh plus surcharge and education cess. However, the buyer will deduct TDS as 20% of entire Rs. 5 crores which calculates to Rs. 1 crore plus surcharge and education cess.
The extra Rs. 60 Lakh + S+ EC will be refundable to the NRI seller upon filing of Income Tax Return in the following fiscal year, which essentially means that a huge amount of money gets blocked.
HOW TO SAVE DEDUCTION OF THIS EXTRA TDS
The NRI seller can apply for a LOWER DEDUCTION CERTIFICATE (LDC) in form-13 to the income tax officer giving detailed computation of the capital gains arising from the transaction along with the supporting documents. The officer, upon satisfaction, will issue the LDC directing the buyer to deduct the TDS equal to the actual tax applicable on the sale.
The buyer must hold/(apply for) a TAX (Tax-deductor Account Number) which is mandatory for deducting TDS of NRI.
The time required for obtaining LDC from the tax officer is around 4 weeks.
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