NRI selling Property in India: Taxation and Precaution

NRI selling Property in India: Taxation and Precaution




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NRI selling Property in India: Taxation and Precaution

There are lot of Indians who have migrated out of India and settled elsewhere in the world. But, they have a property in Indian which they wish to dispose off and repatriate the money to the country of their present residency.
With this arises the question of taxability of such money. Let us know about it.
As per section 2(42A) of the Income Tax Act-1961, immovable property is short term capital asset (STCA) if it is held by assesse for up to 24 months.
So if the assesse has held property for more than 24 months, immovable property is a long term capital asset (LTCA).
The bifurcation between long term and short term is important as the tax rates on gains of both assets are different.
Section 48 provides for the mode of computation of capital gain. As per the section, the computation of capital gain on immovable property shall be as under:
  1. Higher of Sale Price or stamp duty valuation (Technically referred to as the Full Value Consideration)
  2. Less: Expenditure incurred exclusively for sale of property (Like brokerage etc)
  3. Less: Purchase cost of immovable property in case of Shor term assets or indexed purchase cost of immovable propertyin case of Long term capital assets
  4. Less: Cost of improvement in case of STCA or indexed cost of improvement in case of LTCA.
  5. The resultant figure would beCapital Gain which will be (1-2-3-4)
Question is often asked as to whether there is no distinction between an NRI and a non NRI as far as benefits of indexation on residential property is concerned. It may be noted that all the taxpayers are entitled to avail the benefit of indexation of a residential house property if the same is sold after 24 months as it is treated as long term capital asset after 24 months. Any profits made on such long term capital asset are to be taxed as long term capital gains which is arrived at after indexation benefits only.
How much Tax is payable on Capital Gain:
It depends upon whether the gain is a long term or short term capital gain:
  1. Tax Rate for Long Term Capital Gain (LTCG)
    As per section 112, long term capital gain arising to NRI shall be taxable in India @ 20% plus surcharge wherever applicable plus health and education cess @4%.
  2. Tax Rate on Short Term Capital Gain:
    Short term capital gain is taxed as per slab rates applicable to individuals plus surcharge wherever applicable plus health and education cess @4%.
Income Slab
Rate of Income Tax
Up to Rs. 2,50,000
–
Rs. 2,50,000 to Rs. 5,00,000
5%
Rs. 5,00,000 to Rs. 10,00,000
20%
Above Rs. 10,00,000
30%
Apart from these exemptions, NRIs should also refer to the tax treaty between India and their country of tax residence. If the tax rates in tax treaties are less than rates defined in Income Tax Act, 1961 then rates as per tax treat will prevail.
Precaution from the angel of the buyer while purchasing the property form NRI:
Buyer is under an obligation to do the Tax Deduction at Source (TDS) in case he purchases the property from NRI.
TDS has to be done irrespective of the fact that the payment is done in Indian account or foreign bank account. Failure to do TDS by buyer will make them “assesse in default” and the amount of TDS with interest could be recovered from the buyer.
Rate of deduction of tax depends on the category of capital asset i.e. whether it is short term or long term and the rate is as under:
  1.  If capital gain is long term then Buyer has to deduct tax @20%.
  2. If capital gain is short term then Buyer has to deduct tax at maximum marginal rate of tax @30%.
Apart from above tax, buyers have to deduct health and education cess @4% on tax plus surcharge as per slabs mentioned in finance Act. In addition to this, Surcharge may also be applicable if total income of NRI exceeds Rs.50 Lakhs.
The question now remains on which amount the TDS should be done, on gross amount of purchase or only on the element of profit. This issue is highly controversial and section 195 requires TDS on “any sum”. There are judgement which says that the TDS is to be done on the gain only and there are similary judgment which says that the TDS should be done on the gross amount. As a conservative mode, tax should be done from the gross amount paid to NRI and not on the amount of capital gain.
Buyer has to deposit the tax deducted with the exchequer by 7th of the next month in which tax is deducted. For example, if tax is done on 01st November then tax has to be deposited with the treasury by 7th December. Failure to deposit tax by due date attracts interest @1.5% per month.
Though buyer may insist on TDS on full amount of sale consideration, seller can approach Assessing Officer for getting lower deduction certificate. For example, sale value of property by NRI is Rs.100 Lakhs, cost of acquisition of property is Rs.70 Lakhs and considering the property as short term capital asset buyer has to deduct tax on Rs. 100 Lacs @31.2% and so the TDS amount shall be Rs.31.20 Lakhs. It may be noted that the net short term capital gain to NRI is Rs.30 Lakhs and he has to pay tax as per slab rates. If assesse doesn’t have any other income in India then the tax on short term capital gain comes to Rs.7.41 Lacs as per slab rates for AY 2021-22. As a result, tax deducted is Rs.31.2 Lakhs whereas tax payable by NRI is only Rs.7.41 Lacs resulting in liquidity and funds blockages of Rs.23.79 Lakhs.
To avoid this, there is a remedy under section 197. As per this section, NRI can apply for a certificate of no deduction or lower deduction with the income tax department. This application can be done online with all the required documents and papers. It has to be done in form No. 13. Assessing officer after considering the application in form 13 may issue a certificate authorizing the buyer to deduct tax at NIL or as per rate mentioned in the certificate. In short, this certificate may help NRI to get more funds in their pocket on sale of property.
Furnishing of transaction with income tax department
  1. It may be noted that after deduction of tax, buyer is mandatorily required to furnish the transaction with income tax department in form 27Q.
  2. For furnishing of this statement the buyer must have a Tax Deduction Account Number (TAN).
  3. Due date for filing of this form is 30th of the month following the quarter in which tax was deducted.
  4. Failing to file this statement by the due date attracts late fees @ Rs.200 per day till the default continues.
  5. To claim refund of tax deducted by buyer, NRIs have to file their tax return in India and to file tax return PAN is mandatory. Further to apply for a certificate of NIL/lower deduction of tax under section 197, PAN is mandatory and without PAN, application under section 197 can’t be filed. So NRIs must have PAN in India to claim refund of their excess tax deducted
Tax Saving options for NRI’s
Like Residents, there are two ways to save tax for NRI as well:
  1. Exemptions under section 54:
    NRIs can save their capital gain tax by taking benefit of exemptions available under section 54. For this, taxpayers have to purchase or construct another house property in India within the prescribed time frame.
  2. Exemptions under section 54EC:
    NRIs can save their capital gain tax by taking benefit of exemptions available under section 54EC which provides for investment in the specified bonds issued by NHAI/REC. These bonds have a lock-in period of 5 years and the maximum amount of investment is restricted to Rs. 50 Lakh.




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