Capital Gains Tax Guide For NRIs

Are you an NRI? Want to sell your property in India? Confused about capital gains? Don’t know whether you can take the money abroad? Then this is for you.

With rising Indian real estate prices, it is very common nowadays for Non-Resident Indians (NRI) to sell off their property in India. But often, there is a lot of confusion regarding the taxation on capital gains and whether the sale proceeds can be taken back abroad. We’ll try and clarify a few of your doubts regarding capital gains.

What are Capital Gains?

When you sell your asset for a value that is higher than the amount you purchased it for, you incur a capital gain. In this article, we will look at capital gains arising from the sale of property.

Additional Reading: How To Calculate Long Term Capital Gains (LTCG)

First, let’s understand the types of capital gains.

Short-term Capital Gains

When you sell a property within three years of purchasing the same, the gain arising from the sale is classified as a short-term capital gain. In the case of NRIs, short-term capital gains are taxed as per the Income Tax slab of the NRI. The short-term capital gain on which you need to calculate tax will be the cost of the sale minus the cost of purchase.

Long-term Capital Gains

When you sell a property three years after purchasing it, the gain arising from the sale is classified as a long-term capital gain. In the case of NRIs, long-term capital gains are taxed at 20% with indexation benefit. The long-term capital gain on which you need to calculate tax will be the cost of the sale minus the cost of the indexed value. Let’s take an example.

Suppose you purchased a property in 2000 for Rs. 30 lakhs and are selling it in 2016 for Rs. 90 lakhs. The Cost of Inflation Index for the year 2000 is 406 while for 2016 it is 1125. So the indexed cost of your property will be 1125/406 * 30,00,000 = Rs. 83.13 lakhs. Therefore your capital gain will be Rs. 6.87 lakhs and the capital gains tax will be Rs. 1.37 lakhs. For inherited property, the date of purchase will be the same as the one on which the property was purchased by the original owner. The same is the case for the purchase value, that is, the cost the original owner paid for the property will be taken as the cost of purchase.

Is TDS applicable?

Yes. Unlike Resident Indians, NRIs need to pay TDS on the capital gains they make in India. For short-term capital gains, the TDS will be 30% while it is 20% for long-term capital gains. This is regardless of your tax slab.

Additional Reading: How To Save Tax On Long-Term Capital Gains

Tax Exemption

NRIs can get their TDS waived for long-term capital gains. This is possible if they invest in another property or if they invest in capital gains bonds. You will need to invest in another property within two years of selling the old one. In the case of capital gains bonds, the investment needs to be made within six months.

Under Section 54, NRIs can invest in another property to get an exemption on long-term capital gains within two years of the sale but the cost of the new property needs to be equal to the capital gains made. If the value of the new property is lower than the capital gains made, the difference will be considered as long-term capital gains and tax needs to be paid. Also, the new property needs to be held for three years. Even though experts say that you can invest in properties outside India and still claim an exemption, it is best to consult a tax expert before doing it.

Under Section 54EC, NRIs can invest in capital gains bonds issued by REC and NHAI to get a capital gains exemption. However, investment in these bonds will be locked in for three years.

How to claim an exemption?

Under Section 195 of the Income Tax Act, an NRI can apply for a tax exemption certificate. One needs to write to the Income Tax authorities to apply for this certificate. The application needs to be sent to the authorities who handle the same jurisdiction where the NRI holds his/her PAN. If you are purchasing a property to get a tax exemption, you need to submit the allotment letter to the tax authorities. If you don’t have the allotment letter, give them a copy of the payment receipt. If you invest in capital gains bonds, you need to create an affidavit stating the amount and date of your investment.

Additional Reading: Tax Planning And Saving Tips For NRIs

Can I take the money abroad?

NRIs can repatriate the proceeds from the sale of the property in India to their resident country. There are certain terms and conditions that need to be looked into if the property is inherited. The total amount per financial year is restricted to USD $ 1 million. NRIs also need to give document proof for the sale along with a certificate from a chartered accountant.

It is best for NRIs to take the advice of an Indian tax expert (read chartered accountant) before dealing with financial transactions in India. Also, always keep a copy of the transactions and leave a copy with a trusted relative in the country so that any issues can be clarified without the need to travel to India.