NRIs Selling Property in India

When Non-Resident Indians (NRIs) decide to sell property located in India, they face a range of tax responsibilities shaped by current regulations. The manner and timing of the sale determine whether profits are categorized as short-term or long-term capital gains, with distinct rates and processes applying to each case.

Understanding Capital Gains

• Long-Term Capital Gains (LTCG): If the real estate is owned for more than two years, profits earned from its sale are treated as long-term.
• Short-Term Capital Gains (STCG): Selling property within two years results in profits being taxed as regular income, the gains are treated as STCG and taxed at applicable income tax slab rates.

Tax Rates Applicable

TDS (Tax Deducted at Source) on Property Sale

• The buyer must deduct TDS when buying property from an NRI.
• For LTCG on property sale by NRI, TDS is 12.5% + surcharge + cess (for sales on or after July 23, 2024) this rate was 20% + surcharge + cess (for sales before July 23, 2024).​
• STCG is subject to TDS at 30% plus applicable surcharge and cess.​
• TDS is deducted on the full sale consideration unless a lower/nil deduction certificate is obtained under Section 197, in which case TDS is deducted on the capital gain amount.

How a Lower Deduction Certificate (LDC) Helps

NRIs often face a significant withholding tax burden due to TDS being deducted on the entire sale consideration rather than profits. To manage cash flow better and reduce upfront tax outgo, NRIs can apply for a Lower Deduction Certificate (LDC) under Section 197 of the Income Tax Act.

• The LDC allows tax authorities to approve a reduced tax deduction rate based on the actual estimated capital gains of the transaction, which could be significantly lower than the flat TDS rates.
• NRIs must apply for the LDC online via the TRACES portal by submitting Form 13 along with relevant documents such as proof of purchase, sale deed, computation of capital gains, PAN card, and tax returns.
• Once approved by the Assessing Officer (AO), the buyer will deduct TDS at the lower rate specified in the certificate rather than the higher default rate.
• The process can takes up to 30 days , and the certificate’s validity is usually limited to a specific financial year.

Benefits of LDC

• Enables the NRI seller to receive a larger portion of the sale proceeds immediately, avoiding excessive TDS blocking funds unnecessarily.
• Prevents the need to wait for a refund of excess TDS deducted when filing the annual tax return.
• Aligns TDS deduction more accurately with actual tax liability based on capital gains calculations.

Important Considerations

• If no LDC is obtained, buyers must deduct TDS at the full rate, irrespective of actual gains, potentially causing cash flow issues for the seller.
• Failure to deduct TDS properly exposes the buyer to penalties and interest under the Income Tax Act.
• NRIs must still file income tax returns in India to report the sale and claim any refunds if excess TDS was deducted.

example:

Mr. A, an NRI, sells a property for ₹80 lakhs. He originally purchased the property for ₹50 lakhs.

• Capital Gain: ₹80L (sale price) – ₹50L (purchase price) = ₹30 lakhs.

Scenario 1: Without Lower Deduction Certificate (LDC)

• The buyer deducts TDS at the effective rate of 13% (12.5% plus 4% cess on TDS) on the entire sale amount of ₹80 lakhs.
• TDS deducted = ₹80L × 13% = ₹10.4 lakhs.
• Mr. A receives ₹69.6 lakhs immediately.
• However, the actual tax liability on the capital gain of ₹30 lakhs is much lower, say around ₹3.9 lakhs or even NIL if exemptions apply.
• The excess TDS of approximately ₹6.5 lakhs will have to be claimed later as a refund from the income tax department, causing a delay and cash flow inconvenience.

Scenario 2: With Lower Deduction Certificate (LDC) – Form 13

• A applies for an LDC under Section 197 and receives approval to have TDS deducted at 5% based on his actual capital gains.
• TDS deducted = ₹80L × 5% = ₹4 lakhs.
• A receives ₹76 lakhs immediately.
• This saves ₹6.4 lakhs upfront and eliminates the wait and hassle of filing and receiving a refund.

This example shows how an LDC can substantially reduce upfront TDS deduction for NRIs selling property in India, improving cash flow and simplifying tax compliance. Mr. A benefits by saving ₹6.4 lakhs immediately and avoids refund delays that come with the higher TDS deduction on the full sale price without LDC

How to Calculate Capital Gains:

When NRIs sell immovable property in India, the capital gains tax calculation varies depending on whether the sale took place before or after July 23, 2024. This date marks a key change in tax rules related to the long-term capital gains (LTCG) tax rate and the use of indexation benefits.

Capital Gains Calculation Before July 23, 2024

For properties sold before July 23, 2024:

• Long-Term Capital Gains (LTCG)applies if the property was held for more than 24 months.
• LTCG is taxed at 20%.
• Indexation benefit is allowed, which means the cost of acquisition and improvement can be adjusted for inflation using the Cost Inflation Index (CII), reducing taxable gains.
• This helps lower the overall capital gains tax by increasing the cost base.

Calculation steps:

1. Determine the cost of acquisitionand the cost of improvements.
2. Apply indexation using the CII for the year of purchase and improvement to adjust these costs to current values.
3. Calculate indexed cost= (Original Cost × CII of sale year) / CII of purchase year.
4. Capital Gain = Sale Price – Indexed Cost – Selling Expenses(like brokerage, registration).
5. Apply the 20% LTCG tax rate on the capital gains.

Capital Gains Calculation After July 23, 2024

For properties sold on or after July 23, 2024:

• • LTCG is taxed at a flat rate of 12.5%.
  • Indexation benefits are no longer available for LTCG calculation.
  • This simplifies tax computation but may increase taxable gains compared to the earlier regime.

Calculation steps:

1. Determine the actual cost of acquisitionand cost of improvements without any inflation adjustment.
2. Compute capital gain = Sale Price – Actual Cost – Selling Expenses.
3. Apply the 5% tax ratedirectly on this gain.

Short-Term Capital Gains (STCG) Calculation (Both Before and After July 23, 2024)

• If the property was held for 24 months or less, gains are short-term.
• STCG is taxed as per the applicable slab rates for income tax (up to 30%), without indexation.
• Calculation: Capital Gain = Sale Price – Actual Cost – Selling Expenses.

Example

Suppose an NRI purchased a property in FY 2015-16 for ₹50 lakhs and sells it:

• Before July 23, 2024, for ₹80 lakhs:
  • • Indexed Cost could rise to ₹60 lakhs (after applying CII).
    • Capital Gain = ₹80L – ₹60L = ₹20 lakhs.
    • Tax @ 20% = ₹4 lakhs.
• On/After July 23, 2024, for ₹80 lakhs:
  • Capital Gain = ₹80L – ₹50L = ₹30 lakhs.
  • Tax @ 12.5% = ₹3.75 lakhs, but no indexation benefit.

how the NRI save the tax on property sold in india

An NRI can save tax on property sold in India primarily by claiming exemptions on capital gains under specific sections of the Income Tax Act and strategic reinvestment options.

1. Capital Gains Exemption Sections

Section 54: If the property sold is residential and is held for more than 24 months (long-term capital asset), reinvest the proceeds in another residential property located in India to claim exemption. The new property should be purchased within 1 year before or 2 years after the sale, or constructed within 3 years of sale. The exemption is limited to the lower of the capital gain or the cost of the new property.

Scenario:
Mr. Amit, an NRI living in Dubai, sells his residential house property in India.

Note : If the transfer (sale) takes place on or after 23 July 2024, then indexation benefit is not available.

Long Term capital Gain in above example: 90 lac-40 lac i.e 50 lac

TAX ON LTCG : 12.5% OF 50 Lac plus (surcharge + cess)

i.e 6,25,000/- (surcharge + cess)

AMIT can save this 6.25 lac tax by investing it in new residential property  only in India amount need to be invested is Rs. 50,00,000/- NO need to invest 90lac full sale proceeds

Section 54EC: Invest the capital gains within 6 months of sale in specified bonds issued by NHAI or REC (maximum Rs 50 lakhs per financial year), to claim exemption. These bonds have a 5-year lock-in period.

Repatriation of Sale Proceeds by NRIs

NRIs can transfer or repatriate the sale proceeds received from selling property in India abroad, following rules set by the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA). Here is a simplified explanation of how an NRI can take property sale proceeds abroad in 2025:

1. Deposit in NRO Account:
   All sale proceeds from property sales in India must first be deposited into the NRI’s Non-Resident Ordinary (NRO) account. This account is used to manage income earned in India.
2. Annual Repatriation Limit:
   NRIs can remit up to USD 1 million per financial year (April to March) from their NRO account abroad without seeking special approval from RBI. This repatriation limit includes proceeds from:
   • Sale of property (up to two residential properties per lifetime can be freely repatriated).
   • Other income like rent, dividends, interest, etc.
3. Higher Amounts Need RBI Approval:
   If the amount to be repatriated exceeds USD 1 million in a financial year, or if more than two residential properties are sold, prior approval from RBI through an authorized dealer bank is required.
4. Properties Bought with Foreign Currency (NRE/FCNR):
   If the property was purchased using funds from NRE or FCNR accounts (foreign currency), NRIs can repatriate the full sale proceeds abroad without limits, but only for up to two residential properties in their lifetime.
5. Documents Required for Repatriation:
   To transfer funds abroad, NRIs need to submit:
   • Sale deed and proof of property sale.
   • PAN card and passport (self-attested copies).
   • Form 15CA (declaration of remittance) and Form 15CB (tax clearance certificate from a Chartered Accountant).
   • Copies of bank statements showing funds in the NRO account.
   • Tax payment proof and TDS certificates.
   • Repatriation application to authorized dealer (bank).
6. Tax Compliance:
   TDS (Tax Deducted at Source) on capital gains must be deducted and paid before repatriation. Filing an income tax return is essential to reconcile tax paid and get refunds if applicable
   
   

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