The proper transfer of an immovable asset is a complex procedure, yet a crucial step to undertake for owners.
Understanding how to transfer ownership rights regardless of the property’s value, is a task that is easier to understand on paper than its actual execution, especially when you happen to be a Non-Resident Indian.
When it comes to tax and other financial implications related to a transfer, regulations and laws are different for NRIs as compared to that of an Indian resident.
The recent times have witnessed an interesting new trend in the whole NRI property debacle – NRIs from North America and Europe are coming back to India to sell off their purchased or inherited real estate to gain surplus money or rather provide some gains from an otherwise, what they consider – a dead asset.
While this is not a trend that has been broadly examined, it does make perfect sense. Keeping real estate is not always feasible especially if one is unable to manage it. Therefore, as an NRI, you might have stayed abroad for many years and are now contemplating selling your property in India.
Looking for a buyer while being in another country is an enormous task, the greater challenge is being well versed with Tax Implications and other procedural requirements.
Transfer of property in India with Respect to Non-Resident Indians
The process for acquisition and transfer of immovable property with respect to a Non Resident Indians and Overseas Citizen of Indians given in the Master Direction titled Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999.
As per the master direction, a NRI/OCI who holds a valid Indian passport is permitted by the Reserve Bank of India (RBI) to acquire immovable property in India, by way of purchase. Such a person can also transfer any immovable property as per the law.
In such cases, the investor/purchaser is not required to acquire RBI’s special permission.NRIs/OCIs do not have to inform the RBI about buying commercial or residential property in India.
A non-resident Indian can buy as many properties as they want under the aforementioned categories as per the regulations issued by the RBI and the income tax laws.
Under the general permission of RBI, a NRI can buy a property individually or jointly with another NRI. They are also authorized to gift or sell such immovable properties to another NRI/OCI or any Indian resident.
If the NRI/OCI investor cannot come to India, then the purchase can be executed by his agent who is given a legally binding power of attorney.
An agent can be any person who the NRI/OCI can rely upon, family member or even a friend.
The exception to the aforementioned transactions, however, is that an NRI/OCI can neither purchase nor transfer agricultural land, plantation property nor a farmhouse.
However, an NRI can transfer agricultural land, plantation property or a farmhouse which is obtained by way of inheritance – only to permanently residing citizens of India. This means that without prior permission from the RBI an NRI/OCI cannot invest in farmhouses.
The RBI considers such applications on a case to case basis.
Tax Implications for NRIs/OCIs
NRIs/OCI selling property in India must pay tax on the Capital Gains.
The tax that is payable on the gains depends on its nature, whether it is a short term or a long term capital gain. When a property is sold, after 2 years from the date it was owned – it is a long term capital gain and if it held for 2 years or less – it is a short term capital gain.
In inherited property, the date and cost of purchase for purposes of computing the period of holding as well as the cost of purchase is taken to be the date and cost to the original owner.
In simple words, the amount of long term capital gains together with the cost to the previous owner (i.e. from whom the property is inherited) would be considered as the cost of purchase.
Long Term v Short Term Gains
Long term capital gains (LTCG) if any are taxed at 20% and short term capital gains (STCG) if any shall be taxed at the applicable income tax slab rates for the NRI based on the total income which is taxable for a NRI in India.
When a NRI sells the property after 2 years, the buyer is liable to deduct TDS @ 20%. In case the property is sold before 2 years, a 30% TDS shall be applicable.
An asset kept for 24 months or less is a short-term capital asset. This condition applicable on immovable properties such as land, building and house property. An asset that is kept for more than 24 months is a long-term capital asset.
Tax on NRIs for the gift of property
Gifts in the form of immovable property, shares and securities etc. in India, in excess of Rs 50,000 received by an NRI become taxable, as it satisfies the condition of income received in India. This condition does not apply on gifts from specified relatives given under section 56 of Income tax act and gifts on marriage.
Tax benefits for NRIs selling property
While there are exemptions for NRI sellers to avail under various sections of the Income Tax law, they can also claim rebates but only on their long-term capital gain (LTCG) liability.
Tax deduction under Section 54
Section 54 of the Income Tax Act provides the seller of a residential property with relief from capital gains tax. The section allows taxpayers to get relief from capital gains tax only if the proceeds from the sale are used to purchase another residential property.
Owners of residential property in many cases sell their property only to purchase another property due to various reasons like moving from jobs, retirement, and so on. In such a case, a property is sold by a taxpayer not for gains from the proceeds, but for the purpose of changing the residence.
Hence, when a taxpayer sells a residential property and purchases another property, the taxpayer is exempt from capital gains under Section 54 of the Income Tax Act.
The entire amount NRI shells out as LTCG liability can be claimed as a refund under Section 54 of the Income Tax Act. However, this can only be done if he/she invests an equal amount in the purchase of another property.
Note that only the profits made from the sale have to be invested and not the entire proceeds. This investment must be done in a time-bound manner – one year before or two years after the sale of the previous property – to get the benefit.
Thus, in case you buy land using the profits and are planning to build a house, the construction must be completed within three years of the sale, to get the rebate. (The exemption under this section is capped at the whole LTCG amount. Any additional money you put in your new investment will not get you any additional rebate.)
Terms and conditions
- From the assessment year 2014-15, only one house property can be purchased or constructed from the capital gains, to get exemption under Section 54.
- From the assessment year 2015-16, the government clarified that the new house property must be located in India, for the NRI seller to get the rebate. NRIs cannot invest the proceeds on the sale of a property in India, for foreign property.
- The rebate would stand retracted if the new property is sold in less than three years of its purchase.
Tax deduction under Section 54EC
Under this section, if an NRI sells a long-term capital asset and invests the amount of capital gains in bonds of the National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC), within six months of the date of sale, they will be exempted from capital gains tax. The bonds will be locked in for five years.
Terms and conditions
- You cannot get this investment under any other deduction.
- To get this rebate, you will have to invest before the due date for filing the tax returns.
- The Budget 2013-14 has capped a max limit of Rs 50 lakh in a financial year, in these bonds.
Tax deduction under Section 54F
Where NRI has created long-term gains on any asset other than a residential property, they can save taxes by investing in a residential property in India. This could be done by way of buying one house/property one year before or two years after the profit was generated.
In case of construction, the NRI taxpayer has the time of three years, after the date of transfer of the capital asset, to claim the deductions. The rebate would stay retracted if the house property is sold within three years of its purchase or construction.
Terms and conditions
- The wholesale proceeds and not just the profit amount must be invested. If only a part of the proceeds is invested, the tax liability would be in proportion to the non-invested part.
- The NRI should not purchase any property, except the one he has bought. He also should not do any new purchases within two years of buying or three years of constructing the new house.
Section 54 v. Section 54F
As per the provisions in the Income Tax Act, a taxpayer can obtain tax exemption benefits against capital gains that will reduce the total tax outgo. The main tax exemptions are available under Sections 54F and Section 54 of the Income Tax Act. Tax benefits on Long-term Capital Gains are under Section 54 on a House/Residential Property. Tax benefits on Long-term Capital Gains under Section 54F are on assets other than House/Residential Property.
As one of the fastest-growing economies, now is the time for NRIs to invest in the Indian real estate market, especially with favourable laws, tax benefits and a plethora of options to choose from.
NRI can save on TDS by taking wise steps at the time of sale of property and even after receiving the proceeds. It is important to stay informed and check income tax regulations related to long term and short-term capital gain tax before making any sale.