Tax Implications, Exemptions For NRI Homeowners Selling House

Selling property is rarely a straight transaction, and for non-resident Indians (NRIs), it can turn into a legal and financial labyrinth. As India's taxman ups the ante on compliance, NRIs selling property in the country are struggling to understand tax implications for capital gains, TDS, refund delays and a host of paperwork, which is far more complex than what resident sellers face.

Who Can Buy from an NRI?

NRIs can sell residential or commercial property to a person resident in India, to a person resident outside India or to a person of Indian origin resident outside India. However, agricultural land, plantation property, and farmhouses can only be sold to Indian citizens. That restriction stems from the Foreign Exchange Management Act (FEMA), not the Income Tax Act.

Capital Gains Tax Depends on Holding Period

The critical dividing line in taxation is how long the property was held. If the asset has been held for less than 24 months, the gain is considered short-term and taxed according to the individual's applicable income slab. Hold it for more than 24 months, and it qualifies as a long-term capital asset, taxed at 20 per cent with indexation benefits.

Capital gain is calculated as:

Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvements + Transfer Expenses)

In the case of inherited property, the original owner's date of purchase becomes the reference point to determine whether the gain is short- or long-term. The original purchase cost is used for calculating the gain.

TDS: The Silent Cash Blocker

Tax Deducted at Source (TDS) is where things take an expensive turn for many NRIs. When an Indian resident buys property from an NRI, the buyer is legally obligated to deduct TDS on the entire sale value, not just the profit earned. If the sale qualifies as long-term (held for more than two years), the buyer deducts TDS at 20 per cent plus applicable surcharge and cess, which can drive the deduction to as high as 25 per cent - 37 per cent, depending on the transaction value.

Property Value and Effective TDS Rate

For properties valued up to Rs 50 lakh, the effective TDS rate is 20.8 per cent.

For properties valued between Rs 50 lakh and Rs 1 crore, the effective TDS rate is 22.88 per cent.

For properties valued between Rs 1 crore and Rs 2 crore, the effective TDS rate is 23.92 per cent.

For properties valued between Rs 2 crore and Rs 5 crore, the effective TDS rate is 25 per cent.

For properties valued above Rs 5 crore, the effective TDS rate is 37 per cent.

This can cause a major cash-flow hit for sellers.

Illustrative Example

Consider this: Mr X, a Dubai-based NRI, decides to sell his property in India for Rs 3 crore. He purchased it six years ago. After applying indexation, the adjusted cost of acquisition stands at  Rs 1 crore.

That makes his long-term capital gain Rs 2 crore. At 20 per cent, he owes Rs 40 lakh in capital gains tax. But the buyer, obligated by TDS rules, deducts 25 per cent on the full  Rs 3 crore, amounting to  Rs 75 lakh.

Effectively, Mr X has  Rs 35 lakh extra locked with the tax department, far more than his actual liability.

The buyer will pay Mr X Rs 2.25 crore after deducting TDS. But Mr X only owes Rs 40 lakh. The rest is recoverable in theory. But in practice, it could take months or more to get that refund.

There's a provision under Section 197 of the Income Tax Act that allows the seller to request a certificate for nil or lower TDS deduction by filing Form 13. Several state tax offices, such as those in Mumbai, Karnataka, and Tamil Nadu, now offer online filing of this form for quicker turnaround.

Once approved, the certificate can be shared with the buyer to justify either a reduced TDS or no deduction at all, based on the seller's projected tax liability. That way, funds aren't unnecessarily blocked.

Exemptions to Save on Capital Gains

NRIs selling such properties may also claim exemption from the capital gains tax in some cases. If the same gain is reinvested in another residential property in India within one year before or two years after the sale (or three years for an under-construction property), it shall be exempt under Section 54.

Another avenue is Section 54EC that permits NRIs to invest up to Rs 50 lakh of capital gains within six months of sale into specified bonds, like those issued by NHAI or REC. This bond comes with a lock-in period of five years.

Professional Guidance

The taxation related to NRIs is not only based on Indian laws but also as per the tax treaties or domestic laws of the country in which the seller is a resident. Legal representation or assistance from a chartered accountant, preferably one experienced in cross-border transactions, is often essential.