The Indian real estate market has always been a magnet for investments from the global Indian diaspora. NRIs have significantly contributed to the Indian real estate sector by investing in residential and commercial properties across the country. In recent years, numerous investment opportunities have arisen to cater to the growing needs of NRIs. Among these, real estate investment in India stands out as a particularly lucrative option.
However, while buying property in India is an appealing prospect for NRIs, selling these assets can be a complex process. It demands a deep understanding of the intricacies involved, especially concerning NRI tax implications in India.
1. Taxation Rules for NRIs
NRIs are subject to taxation on the capital gains they earn from selling property in India. The tax rates depend on the duration of ownership:
Short-Term Capital Gain (STCG):
- Applicable if the property is sold within two years of purchase.
- Taxed according to the income tax slab rates of the NRI.
Long-Term Capital Gain (LTCG):
- Applicable if the property is sold after two years.
- Taxed at a fixed rate of 20%.
Calculating capital gains is relatively straightforward. For STCG, subtract the total acquisition cost, home improvement expenses, and transfer costs from the final sale price. For LTCG, subtract the indexed cost of acquisition and improvement, along with transfer costs.
2. Tax Deducted at Source (TDS)
TDS is a crucial aspect of property transactions in India. For Indian residents, a 1% TDS rate is applied when selling property. However, for NRIs:
- Within two years of purchase, a 30% STCG TDS rate is applicable.
- After two years, a 20% LTCG TDS rate is applicable.
It’s important to note that TDS rates are calculated based on the property’s sale value, not its capital gains. Additionally, there are surcharges and education/health cess, which can increase the effective TDS rate.
NRIs can apply for a TDS certificate to lower their TDS rates, avoiding the refund process. This application should be made before the sale deed’s execution. The agreed-upon TDS rate will be determined after calculating capital gains, and the buyer will deduct TDS accordingly.
3. Operational PAN
Having an operative Permanent Account Number (PAN) is essential for significant transactions in India, including property sales. NRIs must obtain an operative PAN to apply for a Lower TDS certificate. Ensuring you have an operative PAN is vital to avail of tax return benefits.
4. Strategies for Tax Saving
To reduce capital gains tax, NRIs can reinvest the proceeds from property sales in another property. The capital gains amount can be invested in residential property in India within two years (or three years for under-construction property) from the sale date. NRI can buy a residential or commercial property in India and hire a property management company to manage their property, it would increase source of income. Property management company will manage the property and rent out the property so investor can get return on his investment. Alternatively, NRIs can invest in Capital Gains bonds issued by NHAI and Rural Electrification Corp, with a maximum investment limit of Rs. 50 lakh per seller.
While the Indian real estate market offers promising opportunities for investors, NRIs must stay informed about the latest tax regulations and property market trends. Factors such as property value, holding period, and reinvestment choices significantly impact property sales for NRIs. It is advisable to consult a tax expert for guidance and clarity on these matters, ensuring that your property transactions in India are not only profitable but also compliant with all regulations.