Summary of this article
Higher TDS reduces liquidity for NRIs
Indexation benefits restricted for NRIs
LTCG rules revised under Finance Act 2024
Recent changes to India’s tax framework have significantly altered how non-resident Indians (NRIs) are taxed when they sell their properties in India. While the tax implications may seem lower, the removal of key benefits, rebates, and differences in treatment compared to resident Indians leads to a higher effective tax outgo for NRIs.
Says Ravikant, co-founder, Elegance Enterprises & Infra: “Many NRIs are often surprised to learn that selling property in India can involve a much heavier tax and compliance burden than a similar transaction for resident Indians. The biggest reason is that buyers purchasing from an NRI are required to deduct tax at source (TDS) at significantly higher rates, which immediately impacts the seller’s liquidity even before the final tax liability is assessed. In addition, changes in long-term capital gains (LTCG) taxation and the reduced benefit of indexation for older assets can increase the effective tax outgo for those who bought property years ago at much lower values.”
At the core of this taxation change is the capital gains changes. Capital gains are the profits earned from selling a property.
Just like for resident Indians, NRIs are also taxed on capital gains that arise from property sales in India. These gains are classified in two categories –short-term capital gains (STCG) and long-term capital gains (LTCG), depending on how long the property is held. If the property is sold within 24 months, the gains are treated as STCG and are taxed at slab rates, which can go up to 30 per cent. If the property is held for any duration longer than 24 months, the gains are treated as LTCG.
The changes came after the enactment of the Finance Act 2024, where LTCG on property is taxed at 12.50 per cent. According to the new rule, for any property transferred or bought after July 23, 2024, one can choose the option that results in lower tax liability, be it 12.50 per cent without indexation or 20 per cent with indexation.
However, this is where the disparity comes in: resident Indians are allowed to choose between the old regime and the new one, depending on which one results in lower tax. However, NRIs do not have this option; they lose the benefit of indexation. This increases their taxable gains significantly, especially in cases where the property has been held for long periods or has been inherited. “The broader objective behind these reforms appears to be simplification of the tax system, uniformity across asset classes, and stronger compliance tracking. From a policy standpoint, that makes sense,” adds Ravikant.
Another implication that factors in is TDS. When any non-resident Indian sells their property, they can receive a TDS of around 12.50 per cent for long-term gains and up to 30 per cent for short-term gains. This is not the case for resident Indians, where the TDS is just 1 per cent of the transaction value. This means NRIs may have to wait until filing their income tax return to claim refunds on excess TDS. While there exists an option for them to apply for a lower TDS certificate, that adds another compliance layer. “These changes are necessary to prevent tax leakage, and to improve transparency in the real estate sector, so that it is aligned with global taxation norms and to reduce speculative investments to help and stabilise pricing,” says Somesh Mittal, co-founder, One Prastha.
The removal of indexation benefits and stricter TDS provisions essentially means that NRIs end up paying more tax than resident Indians in similar situations. For many, having long-term holdings or inherited properties, this means an effective tax burden. One must plan carefully and in a timely manner in order to make the best of the tax policies.
